Be Warned Of Bias
On any given Saturday in the fall, it’s not uncommon to see 60,000+ college football fans packed into stadiums across the country. Michigan Stadium, home of the University of Michigan football team, the biggest stadium by capacity in the country, can pack up to 107,601 fans.
I recently came across a close game on the radio in the car that I listened to for a few minutes before stopping for lunch. As I listened, the announcers called out the officials for bad calls and accused the officials of influencing the outcome of the game in favor of the other team. I wondered to myself if it was that obvious that the referees were siding with the other team.
At lunch, I was meeting up with friends to catch up, and the game I was listening to on the radio was now playing on the restaurant tv. My friends were fans of the other team and saw the game in a completely different light than the announcers on the radio. When I mentioned what the radio announcers were griping about, my friends scoffed and argued that the refs were making calls against their team and not in their favor.
You should know that college football radio is not unbiased in the least. Each major football team has its own sponsored radio broadcast. So if you listened to the broadcasts for each team, you would hear completely different perspectives. It’s understandable. It’s like parents cheering for their children. The point is that everyone has biases and, in some cases, a plan.
Recently, I came across one such group with an agenda. As you know from all the advertising, the milk industry wants you to believe that milk is essential for strong bones. It turns out that’s a bunch of bunk. Calcium can be found in other sources. The National Dairy Council recognizes that foods like kale, bok choy, and broccoli have higher calcium absorption rates than milk. Two tablespoons of dried ground basil have almost the same amount of calcium as a glass of milk.
But the milk industry has too much to lose, so it has created a whole food group dedicated to dairy and the perception that milk is essential to strong bones when it’s not true. Belluz, Julia, “How we got duped into believing milk is necessary for healthy bones.” vox.com (Apr 19, 2015).
Everyone has an agenda and biases. Everyone has something to gain and nowhere is this more apparent than on Wall Street and the financial services industry. Everywhere you turn, whether on podcasts, cable news, social media, the internet, and YouTube, there is no shortage of “expert” advice about this or that investment strategy or asset class.
Lately, there’s been endless news about one side of the coin or the other about Wall Street volatility. One faction is pointing out that “there’s a rally just around the corner,” while the other faction is advocating that “we’re in for a long bear market.” Those advocating a rally want you to stick with stocks. Those emphasizing a bear rally may be steering you away from stocks and maybe more towards fixed-income assets like treasuries, corporate bonds, or annuities. Like college football announcers, everyone has a favorite, and nobody is entirely objective.
Before making hasty decisions based on the news, blog posts, or “expert” opinions, consider the factors that savvy investors consider when making sound investment decisions and avoid bias.
If you wanted to see if refs were biasing one team or another, you could rewatch the game on your DVR with the sound off and look at what you see with your own eyes. In other words, you can do your homework and watch certain plays frame by frame to separate fact from opinion. Smart investors do the same thing with their investments. They look at the facts, data, numbers, and metrics to make up their minds.
To overcome behavioral biases when it comes to investments and to ignore the crowds, smart investors start by investing in alternative asset classes that are influenced very little by mass media. By concentrating on private assets uncorrelated to Wall Street and buffered from broader market volatility and herd behavior, smart investors can judge the merits of investment opportunities standing on their own and not by what the so-called experts think about them. That’s because investors would never invest in private alternatives if it were up to those who control the airwaves. Why?
Because mainstream investment talking heads consider private alternatives high risk. Savvy ultra-wealthy investors know better. That’s why they allocate most of their portfolios to private alternatives while the average investor allocates nearly their entire portfolio to stocks.
What do the ultra-wealthy know about private alternatives that the average investor doesn’t?
Risks can be mitigated by looking at the facts, data, numbers, and projections to determine the viability of a particular investment. By drowning out the noise and doing proper due diligence, the risks of private alternatives can be reduced to the point that above-market returns can be achieved at lower risk. The wealthy allocate more than half their portfolios to private alternatives. The gains are better than public options and, in the right hands, at lower risk.
Ultra-wealthy investors are good at looking beyond institutional biases that influence the average investor’s investment decisions and making up their minds based on facts and data.
They’ll lean on numbers, metrics, and analytics and often listen to other smart and experienced investors when making investment decisions. That’s how they can achieve above-market risk-adjusted returns.