Why the Myth of the Wall Street Expert Endures

Two high-profile Wall Street strategists recently lost their positions. Marko Kolanovic of JPMorgan Chase JPM, the chief global markets strategist and co-head of global research, is leaving the bank to explore other opportunities. Mike Wilson of Morgan Stanley MS is still the firm’s chief U.S. equity strategist, but is no longer its chief equity strategist.

These gentlemen have had very successful careers and made many accurate predictions. Still, both have been wrongfully bearish for a couple of years and have been subject to ridicule and criticism.

Did these investment professionals suddenly lose their mojo? Did they forget all they have learned about the market over decades? They are key employees at two of the biggest investment banks in the world, but are they now incompetent?

The problem is that they both suffered bad luck and failed to change their positions quickly to adapt to the price action. The strategists who made bullish predictions weren’t any more competent or knowledgeable, but they had luck on their side. None of them predicted the extreme narrowness of the market, and most of them were wrong about how the average stock would perform, but Wall Street has always played the game of predicting the indexes a year ahead, even though no one has ever had a sustained record of success. Mike Wilson was celebrated as the best analyst on Wall Street a couple of years ago, but now social media views him as incompetent, and there are endless jokes about him being a contrary indicator.

The most important thing to understand about the major Wall Street firms is that their primary business is accumulating assets. Predicting what the market or an individual stock is going to do in the future is secondary. It helps their business if they can create the impression of having some special insight into how the market will act, but they are wildly wrong all the time. They deal with that by making even more predictions and forecasts, and they are right enough to create the impression that they are skilled rather than lucky.

Wall Street is good at doing research, mainly because it has access to management and information that ordinary individuals do not have. They can pick up the phone and call the CEO and receive some insight into the business. That is valuable information and can be helpful in picking individual stocks.

What Wall Street can’t do very well is economic forecasting or predicting the twists and turns of the indexes. Even economists at the Fed have a tremendously hard time forecasting the economy, and Wall Street firms aren’t any better.

The problem with stock market predictions is that it is impossible to separate luck from skill. There are dozens of high-profile Wall Street experts who made one very great and timely call but never did it again. Those calls were promoted as a product of great insight, but in most cases, it was just a matter of lucky timing.

Once you embrace the idea that no Wall Street Expert has special insight into what the market might do, it makes it much easier to focus on the most valuation information that any investor has, which is the price action. Ultimately, price action is the only thing that matters, and it can be extremely irrational and random for long periods of time. No one knows what will happen, but those who react aggressively have the best chance of performing at their best.

Wall Street experts are very good at many things, but predicting what the economy or the indexes might do isn’t one of them.

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At the time of publication, DePorre had no position in any security mentioned.