“When the facts change, I change my mind. What do you do, sir?” – John Maynard Keynes, prominent ecnomist in the 20th century

An article in our October 2009 newsletter titled The Trouble With Experts outlined some of the problems with following investment advice from someone you see on TV or read about in the paper.  Point #4 was “You won’t find out when they change their minds”.  That guy recommending stock XYZ on CNBC right now might come across new information next week that changes his opinion, but you’re not going to know that unless he gets a lot of media coverage AND he willingly admits that he flip-flopped on his last recommendation.  Flip-flopping is not good for building a reputation, so the odds of that happening are fairly low.

Nonetheless, we did come across one example recently where a professional investor’s flip-flop was timely reported.  On July 2, Bloomberg reported that hedge fund manager Barton Biggs “reduced the proportion of bullish bets in his hedge fund by up to 40 percentage points on speculation the withdrawal of government spending will turn a ‘soft patch’ into a recession.”

Just a few weeks later on July 26, Bloomberg followed up with Biggs, who said “that signs the U.S. economy will avoid a recession spurred him to build the stakes back up.”

Hurray!  We have an investment manager disclosing, in almost real-time, that he has changed his mind.  Great news, isn’t it?

Well, there’s just one small problem.  On July 2, when Biggs was reported as a pessimist, the Dow Jones Industrial Average stood at 9686.  By July 26 when he had regained his optimism, the Dow had already advanced to 10,525.  That’s an 8.7% gain in just 3 weeks.  That’s not far from the historical annual return of about 10% on U.S. stocks.  So taking your cues from Biggs in July could have cost you Bigg-time!

So if your investment strategy is to follow what you hear and read in the media, then you don’t really have an investment strategy at all.  Relying on second-hand opinions leaves you open to unknown risks that you will only learn about when it’s too late.  Also, sometimes the mind can change without a change in the facts.

Modus Advisors develops and manages investment portfolios that seek to provide consistent returns in all market environments, without making dramatic position changes that can end up being a big mistake.

P.S.  We previously followed up on The Trouble with Experts point #1, “The experts DO NOT agree” with a blog post titled He Said/She Said.