Smart People can be Wrong

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Submitted by bgates on August 28, 2006 - 3:28am

Some excerpts:
"Lee DeForest has said in many newspapers and over his signature that it would be possible to transmit the human voice across the Atlantic before many years. Based on these absurd and deliberately misleading statements, the misguided public ... has been persuaded to purchase stock in his company ..." -- a U.S. District Attorney, prosecuting American inventor Lee DeForest for selling stock fraudulently through the mail for his Radio Telephone Company in 1913.

"To place a man in a multi-stage rocket and project him into the controlling gravitational field of the moon where the passengers can make scientific observations, perhaps land alive, and then return to earth - all that constitutes a wild dream worthy of Jules Verne. I am bold enough to say that such a man-made voyage will never occur regardless of all future advances." -- Lee DeForest, American radio pioneer and inventor of the vacuum tube, in 1926.

"Heavier-than-air flying machines are impossible." -- Lord Kelvin, British mathematician and physicist, president of the British Royal Society, 1895.

"A rocket will never be able to leave the Earth's atmosphere." -- New York Times, 1936.

"There is no likelihood man can ever tap the power of the atom." -- Robert Millikan, American physicist and Nobel Prize winner, 1923.

"Fooling around with alternating current is just a waste of time. Nobody will use it, ever." -- Thomas Edison, American inventor, 1889 (Edison often ridiculed the arguments of competitor George Westinghouse for AC power).

"That virus is a pussycat." -– Dr. Peter Duesberg, molecular-biology professor at U.C. Berkeley, on HIV, 1988.

"The death rate will increase until at least 100-200 million people per year will be starving to death during the next ten years." -- Paul Ralph Ehrlich, 1970.
----
The next time you want to assert you know with absolute certainty what's going to happen in the future, ask yourself, "Do I know my subject better than these guys knew theirs?"

Submitted by barnaby33 on August 28, 2006 - 7:52am.

Ok, ok, I get it. Smart people can be wrong. Now what about the rest of us?

Josh

Submitted by LookoutBelow on September 4, 2006 - 10:43am.

Smart people by definition are NOT people who commonly make bad decision and being wrong.

This is "Orwellian" doublethink and or Black/White.

Submitted by Bugs on September 4, 2006 - 11:23am.

As far as I can tell, nobody here has ever made any predictions about the limitations of technology.

You do bring up an excellent question, though:

"The next time you want to assert you know with absolute certainty what's going to happen in the future, ask yourself, "Do I know my subject better than these guys knew theirs?"

You possibly should have asked the bulls this excellent question when they were making their wild and unsupportable predictions up until just a year ago.

Submitted by Diego Mamani on September 4, 2006 - 2:19pm.

Excellent post bgates! A dose of humility certainly benefits all, but especially bloggers who routinely claim 20/20 foresight.

Submitted by frank on September 4, 2006 - 3:14pm.

Smart People can be Wrong

Has it crossed your mind that the 'smart people' were the one's touting real estate as being an asset class that has never lost value that might be wrong.

Or was it the "smart guy" Federal Reserve Chairman Alan Greenspan who stated people are better off with adjustable rate mortgages over a 5.25% 30 year fixed rate loan who definitely was wrong.

All investments go in cyles. Trees don't grow to the sky.

I still beleive that Real Estate is an incredible investment because of its tax advantages and inflation protection, but we have now entered a cyclical downturn.

Submitted by vcguy_10 on September 4, 2006 - 4:40pm.

Has it crossed your mind that the 'smart people' were the one's touting real estate as being an asset class that has never lost value that might be wrong.

I never considered them smart. They are just sales people (realtors, mortgage bankers) or their spokespeople (Lereah) looking after their own interests.

Or was it the "smart guy" Federal Reserve Chairman Alan Greenspan who stated people are better off with adjustable rate mortgages over a 5.25% 30 year fixed rate loan who definitely was wrong.

All Greenspan said is that if you're going to live in a house for less than 5 years, then you're better off with an adjustable mortgage that resets not earlier than 5 years. For young professionals who work in industries with high labor turnover (high tech, pharmaceuticals), this advice is actually smart.

I agree with you that the RE market is cyclical, that it probably peaked in 2005, that this last peak was unusually high by many measures, and that we are about to enter a downturn that may last many years. The point of this thread is that, as reasonable as I think my observations are, I may still be wrong.

Submitted by technovelist on September 4, 2006 - 4:52pm.

I don't agree that "if you're going to live in a house for less than 5 years, then you're better off with an adjustable mortgage that resets not earlier than 5 years." There is no way on earth that anyone can guarantee that you will be able to sell the house when you are planning to.

If you're planning to live in a house for less than 5 years, you should rent rather than buy.

Submitted by Raybyrnes on September 4, 2006 - 5:12pm.

I am surprised by this broad generalization that if you are planning to live in a place less than 5 years you should rent. I might have become accostomed to the people on this forum focusing on running the numbers and making an educated decison based on a combination of quantitative and qualitative factors. This type confirmation bias limits your ability to process all the data available. It is like saying you ar always better to buy term life than whole life or to pay cash for a car rather than finance or lease. In all circumstances each decision might vary based on that particular buyers needs and each decision might equally maximize the value of the transaction.

Submitted by vcguy_10 on September 4, 2006 - 5:23pm.

Ray: I agree with you. Techno: I think you missed my point. Buying and holding a house for 5 years may or may not be a good idea; there are financial and sujective criteria to consider, and the point of my post was not to recommend one option over the other.

Instead, the point made by Greenspan and others is that if (for whatever reason, right or wrong) you decide to buy and hold for less than 5 years, then you're better off with an ARM that doesn't reset before those 5 years are up.

Such recommendation is essentially based on actual purchase patterns: it can't be denied that a sizable percentage of homeowners relocate every 4 to 7 years. Whether that's advisable or not, is of course a different matter altogether.

Submitted by PD on September 4, 2006 - 5:56pm.

Buying real estate NOW is not smart. Buying real estate four years ago was very smart. Getting an ARM NOW is not smart because we are entering a down cycle and it increases your risk because adjustments may force a sale at a loss. Getting an ARM four years ago was neither smart nor stupid. It depended very much on your situation.

Renting is the smart play for 2006 - 2008. Beyond that, it might be smart to buy again.

Submitted by bgates on September 5, 2006 - 12:02am.

Fascinating.

I didn't provide much context here, but my initial post was in reaction to another thread started by a commenter who characterized anyone who disagreed with her as to the extent and timing of the correction as 'delusional', and stated that anyone who held another opinion must be motivated by some combination of greed, fear, and jealousy (of what I'm not sure - her intellect?)

I don't post much, so I wouldn't expect anyone to know my expectations for the housing market. For the record, I wouldn't be at all surprised by a 30% correction by 2010. It's just that I get annoyed by the attitude of, "I'm mystified as to why you mouth-breathing troglodytes are bothered by my 100% guaranteed, obviously correct predictions of housing prices several years in the future. You would recognize my wisdom if it weren't for your own vanity."

Anyway, that's my position, and the little back story behind my post. I think it's funny that two of the responses to my post about the dangers of making assumptions themselves assumed - incorrectly - that I'm bullish about the market.

Submitted by technovelist on September 6, 2006 - 9:07am.

My point was that since you cannot know with certainty that you will be able to sell before your ARM resets, it is very hazardous to assume that you will be able to do so, regardless of your intention to do so.

To take your examples: Leasing a car makes sense only if it is a deductible business expense. Financing a purchase makes sense if you get a favorable rate.

As for the life insurance example, it always is better to buy term than whole life, with the very rare exception that if you have a very large estate, there can be estate planning reasons to buy whole life at very advanced ages when term is not available. And even this exception will probably go away if they get rid of the death tax.

By the way, I do know something about life insurance, having passed a couple of the actuarial exams many years ago.

Submitted by davelj on September 6, 2006 - 9:29am.

bgates, for what it's worth (which isn't much), I'm in 100% agreement.

Submitted by Nancy_s soothsayer on September 6, 2006 - 10:20am.

If the gist of this thread is to personally attack those who make bold predictions, then I totally disagree with the mean intent.

I admire those people who stick their necks out and make their strong opinions/predictions heard. If we live in a world dominated by "chickens" and cowards, how boring and backward the world would be.

A few seem to speak from both sides of their mouths like some slick politicians with long verbose paragraphs. I get frustrated reading their long posts but essentially NOTHING was really said. They say, "on the one hand, blah..blah.. and then, on the other hand, blah..blah.. and then NOTHING. No strong or bold preditions, conclusions, or opinions to separate them from the mundane or mediocre. Then they have the gall to criticize those who do.

"The right side of the fence is this and the left side of the fence is that, but I am so superior I can point that out. Meanwhile, I am sitting pretty stuck on the fence.

"This is white, this is black and I am so smart I know the difference. Personally I will stick with the gray area because I am chicken and I might get slammed if I have a strong opinion."

Get over it.

Submitted by masayako on September 6, 2006 - 10:54am.

bgates,

For what it's worth (also, not much), I want to tell you I appreciate your post. It makes sense to me.

Masayako

Submitted by siamcat on September 6, 2006 - 2:47pm.

nancy_s
i read most of these posts and haven't noticed what you're talking about. which posters do this? i'm curious.
i agree with gates, the dogma gets laid on pretty thick here at times. lots of underinformed ranting and raving masquerading as informed opinion.

Submitted by powayseller on September 6, 2006 - 10:43pm.

bgates, are you referring to me saying, "I am 100% certain that this asset bubble will revert to its mean" Fascinating, it you have any doubts it will....Anyone who believes this asset bubble will not revert to its mean is clearly delusional. But hey, it's different this time, it's San Diego, we're running out of land, the air is great, the sun always shines, the Fed will save the housing market...

San Diego's housing bubbles go back t the late 1880's. Read on :
"It was the coming of California Southern's trains in 1885 which touched off the Great Boom of the Eighties. Buildings spread over the landscape, with "gingerbread" at every turn. San Diego's population rocketed up to 40,000 in 1887. The price of downtown lots doubled and tripled over and over again.

In the spring of 1888 credit tightened and numbers of land speculators had to offer their holdings for sale, to pay off creditors on whose capital they had been operating. Their need to sell forced prices down, and shattered land values which had been artificially inflated by unrealistic speculation. A great "bust" followed the Great Boom. Ten thousand people left town in the first few months after the bubble broke. Houses stood deserted all over town. Public and private improvement works were suspended, making unemployment a pressing problem."

So if you think at all, that this time is different, you are clearly deluded. The masses fall for it every time: on the way up, they think the prices will keep going up, or they will fall only a little bit and then stabilize and rise again. Finally, at the bottom, they are afraid to buy, fearful of further declines. They fail to use data and history to truly understand the market. I've spent enough time explaining asset bubbles, and given resources for exploring this further. It's all in the archives, so I'm done with this topic. I'm done debating that this bubble will revert to a mean of 7x per capita income or 10-15 x annual rents... that's a closed chapter. Anyone who thinks it won't, probably owned tech stocks in 1999 or 2000.

The examples in your post were predictions, and of course they are often wrong. But don't confuse predictions with economic and business and housing cycles which are repetitive and cyclical and don't need predicting; they only need to BE UNDERSTOOD. Don't confuse predicting with understanding market cycles.

nancy-soothsayer, you described perfectly the posts by davelj.

Submitted by davelj on September 7, 2006 - 10:44am.

Poway, if I didn't know any better I would think you just enjoyed constantly being proven wrong in a public forum.

So, since it's the gist of your criticism, I challenge you to find one single discussion that we've had where I didn't state a clear opinion or conclusion on the issue at hand. One.

As an aid in your sure-to-be-dogged efforts, among the issues we've recently addressed include:

Real estate prices: My long-standing prediction has been a 30%-35% decline in the median price from peak to trough here in San Diego. I've mentioned this a few times along with a possible time line (which will almost certainly be wrong, but nevertheless...).

Stock prices as an economic indicator: You incorrectly stated (and then argued) they're a lagging indicator; I pointed out correctly that they're a leading indicator.

Option ARM mortgage defaults: I suggested that they would be far below 50%; you stated that they would be more than 50%. Moreover, you never did respond to my offer to make a bet on this issue. Thus, how do we really know how YOU feel on this issue? How deliciously ironic given your criticism of me in this thread! File under: "Pot calls kettle black."

Market efficiency: I stated that I believed in the strong form of market efficiency in the short-term, and the weak-to-semi-strong form over the long-term. You stated that you didn't believe the stock market was efficient without specifying pesky details regarding degree or time horizon.

WAMU short: I clearly stated that I would not short WAMU because its short-term price movements were basically unknowable to me based on my lack of unique information about the company. I acknowledged that its price could fall at some point in the future but that I wasn't interested in "taking a swing" – so to speak – at that particular investment because I have more promising opportunities in other areas where I have a competitive advantage.

All that being said, let me come out in favor of NOT ALWAYS having an opinion. Despite the fact that I've pointed out in this post areas where I HAVE stated my opinion, having an opinion merely for the sake of having an opinion (something quite popular on this site) is not a particularly admirable trait. In fact, the three most important words that any good investor (and human) learns to utter early in his or her career (life) are: "I don’t know." The know-it-alls who can't say "I don’t know and therefore I don't have an opinion" often end up as President, have ridiculous stock picking shows on CNBC, or run companies like Enron into bankruptcy. And often when you put forth a strong opinion regarding something you don't really know about you just end up being revealed as a buffoon. As Winston Churchill once observed, "It is better to remain silent and be thought a fool than to open one's mouth and remove all doubt."

Because of my profession, however, I do hold opinions regarding a number of the issues on this site, many of which I've stated. So, with reference to your particular criticism, indulge me by giving me one issue we (that is, both of us) have discussed in which I did not state a clear opinion or conclusion. One. I encourage you to enlist nancy's help. Best of luck!

Submitted by Nancy_s soothsayer on September 7, 2006 - 11:10am.

davelj--

ok..ok.. you win. You are Warren Buffett, I am not. I have few words, you have tons! You are editor of Wall Street Journal, I am unknown blogger. You Tarzan, me jane. You win. Enough with your obsession with Powayseller. It is getting boring.

Submitted by bigtrouble on September 7, 2006 - 12:05pm.

davelj

Spot on. Other piggington favs:

"I have no problem affording a $4200/mo mortgage on my six-figure income...." or

"Having timed the market, I sold in 2005 and now have 500k in the bank...." or

"Does buying an Audi instead of a 7-Series make my penis look bigger...."

Submitted by powayseller on September 7, 2006 - 12:30pm.

davelj, I'm not interested in debating your writing style or assailing your character. I think that often your posts come across as condescending and both-sides-of-the-coin, so the above summary on your positions was helpful. I value your and your contributions to this forum.

Submitted by davelj on September 7, 2006 - 12:32pm.

Nancy, my obsession is with reaching conclusions through the use of proper facts and logical thought and processes. Sometimes when I see the opposite used to further an opinion, even one I might agree with, I feel the need to point out the factual or logical flaw - it's a personality flaw of my own. But if it's all so boring to you then... why... do you keep reading it all? Hmmm...

Submitted by bob007 on September 7, 2006 - 12:39pm.

real estate is not tech stocks. The only way I see a 50% loss in housing prices is a combination of interest rate hikes (hikes would be contain inflation), bad employment situation and actions by foreign countries. It is simply too hard to predict macro-economics. I can see 10% interest rates sometime between now and 2020. I couldn't tell you when. Real estate is safer than stocks if you do not have any leverage.

Submitted by sdduuuude on September 7, 2006 - 1:47pm.

Powayseller, your overconfidence is highlighted by this comment:

"... who believes this asset bubble will not revert to its mean is clearly delusional"

While you are arguing about whether or not the bubble will revert to the mean, the real question is "What is the mean?"

Mean of what? What variable will revert to the mean? The growth, the price, the median, a ratio? Not every measurable variable can revert to the mean. And do you take the mean between for the last 100 years? the last 10 years? The 4 years before 2004? the 3 years before 2001?

Will it revert to the mean in a month or in 50 years? Will it revert to the 50 year mean in a year? or the 10 year mean in 50 years?

Here you are certain that your analysis is correct, when it isn't. And, when you are called on it, you argue the wrong point.

I have had classes where we spent a week or two learning when regression to the mean analysis is just plain useless.

There are many, many ways to use it incorrectly, and you have found one of them.

Yes, the bubble will revert to the mean.
A truly meaningless point.

Submitted by sdduuuude on September 7, 2006 - 2:14pm.

"But don't confuse predictions with economic and business and housing cycles which are repetitive and cyclical and don't need predicting; they only need to BE UNDERSTOOD. Don't confuse predicting with understanding market cycles."

This is a truly astounding, naive comment. I'd say it is the oversimplification of the century and the ultimate proof that you really don't get it. An academic simplification by a non-academic. Amazing.

I'm not even going to critique it. I'm just going to let it sit there, for all to see how easy economic analysis really is in your eyes.

Submitted by bgates on September 7, 2006 - 5:20pm.

Yes, PS, this was for you.

I think it's remarkable the way you can call some posters condescending and others delusional in the same thread.

Your point on housing returning to 7.5x median income is a good guess, based I think on Rich's graph of housing:income ratios over the past 25 years. If someone had chanced on that data in 2002, a cautious reasoned response would have been, "the housing:income ratio is very near the peak of previous cycles. Since prices have a cyclic element, there is a growing risk of housing price decline (relative to income) over the next year."

I imagine your response had you seen the graph in 2002 would have been to say that housing:income is GUARANTEED to fall 30% from 2002 levels by 2008 because THE DATA shows that's how long peak-to-trough takes and if you can't see that you're DELUSIONAL and living in FEAR.

You didn't just say prices would drop, you said 30-50% by 2010. That's pretty specific, and much better than I could do, but I don't understand the business cycle as well as you.

A year is a long time, though. Could you name the day we'll reach 30% decline for the county? The month? Maybe you think it would take someone absurdly overconfident to make such a specific prediction, and you'd like to stick to just the year.

Submitted by powayseller on September 12, 2006 - 6:14am.

bgates and sduuude, your rebuttals are worthy of another post, and I will put that as one of the first stories to do on my new website.

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