Accountability

In June, Goldman Sachs, the most highly acclaimed brokerage firm and investment bank (which has since become a commercial bank), predicted that oil prices could rise to $200/barrel by the end of 2008. One month later in July, the bank reduced its oil prediction to $150/barrel.

Well since this time, the economy has continued to weaken with the potential of lower demand for oil and consumers are beginning to reduce their consumption given high gasoline prices, thus reducing oil prices from their high earlier this year. In response, the noble Goldman Sachs has revised their estimate and now predict oil prices will only average $123 in 2009.

Now one can make the argument that it was nearly impossible to see the full impact the mortgage crisis would have on financial institutions, rendering their balance sheets essentially worthless, which has reduced the economic demand for oil. But that's exactly my point - it IS nearly impossible to make accurate predictions. So why do the so-called experts insist on making such claims. This goes back to "The Black Swan" idea from a book worth reading. The scariest people are those who think they can foresee the future.

A few arguments against my viewpoint. First, these experts may offer advise or predictions that exceed the value of any other sources (it's better than nothing). This may be true, but it goes the same debate between active vs. passive investment. Sure some fund managers will beat the market, and a smaller percentage on a regular basis. Is this successfull investing or simply the law of statistics that someone will be on the tail-end of the normal curve?

Second, if these experts don't offer valuable information, then a free-market advocate would argue that the market will no longer listen to these sources and they will become obsolete. So if they are as inaccurate as I believe them to be, then why does the market continue to place such a high stake in their word? And yes, the market does listen to these sources. Some argue the current meltdown was perpetrated by the bond ratings agencies, Moody's and S&P, as they degraded the credit rating (albeit too late) of the financial institutions they follow. Institutions and individuals rely on these agencies to make investment decisions.

These sources and other investment analysts constantly provide their "target price" or "portfolio strategy" for stock choices. Often less-savvy investors use these reports as a crutch, but even sophesticated investors will review these reports. Now, as a free-market advocate, there is no way to prevent companies from producing this data and analysis (free speech is the first amendment after all), which to some extent can produce a significant amount of value. No, the change needs to come on the demand side.

Goldman and other banks have built a prominent brand and garnered the respect of the market with their insight. But what other options exist? How can any new or small entrants, even with all the information on the Internet, create a name to compete with these guys? Well one solution might be complete transparency and easy-to-compare results.

I've always wanted to create a website along these same lines in the sports industry. How many of us have followed the expertise (and big hair) of Mel Kiper Jr. during the NFL draft? Do we know how his predictions panned out five years later? Or any of the other so-called experts who grade team performances of a draft, the day after? This extends down to picks of individuals games. I mean we might be listening to Kirk Herbstreit pick college football winners every Saturday, when his percentage is less than the majority of fans (I don't mean to single out Herbstreit who is actually one of my favorite ESPN commentators). So create a website that illustrates all expert results side-by-side in a very clear format. (In the not so serious world of sports would this reduce the supply of picks as more experts fear their potential record, or would it increase competition?).

Well I think we could have similar solution in the financial world. If we created a transparent set of results of all analysts in a centralized site, it might provide the information investors need to allow the market to function efficiently in how to best leverage available target prices and reports. After all, the only reason markets are perfectly efficient is that we really don't have all the information we need. Any way to increase objective information and improve the communication of this information would be positive for the rational functioning of the market.

It would also begin to flatten the playing field for all participants and allow the "best" experts to float to the top of the list for most investors. Alternatively, it may also demonstrate that it is nearly impossible to truely predict the future beyond simple company/commodity analysis. Either way, let's just get some accountability from financial experts. After all, anyone influencing our finances should be held to the same standard as the government experts influencing our policies.

Again, I'm in a position to suggest all analysis isn't helpful or passive investment is by far the better option. I'm suggesting it's possible.