Please ensure Javascript is enabled for purposes of website accessibility

Nassim Nicholas Taleb: Independence Should Be a Required Minimum for Finance Journalists... But It's Not

By Brian Stoffel - Apr 3, 2018 at 12:33PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you don't have skin in the game, there's no filtering for the system to improve.

Few critics are as vocal in their distaste for a certain class of economists, statisticians, and finance journalists than Nassim Nicholas Taleb. But his aversion isn't without reason -- nor is it without proof.

Recently, I sat down with the best-selling author, trader, and professor to talk about a wide range of topics.

When it came to this class of professionals, Taleb laid out his thinking succinctly.

birds on a wire alone against mass

Independent thinking should be required. Image source: Getty Images

On the consequences of finance journalists not having skin in the game -- or owning stocks that they are bullish on

In The Black Swan, I noticed a a metric about forecasters -- or, securities analysts. They're basically in the same situation -- they are financial writers.

They make forecasts on the price of things...

You can tell if there's monoculture with a very simple metric: The variance between forecasters needs to be at least equal to -- if not higher -- to the variance between the average forecast and the random variable.

But what we have is the exact opposite. In other words, the random variable is less volatile than the difference between what happens and the forecast.

This is a critical observation. Many in finance media are required to not own stocks of the companies they report on. But that reporting includes giving their opinion as to whether or not a stock is a "buy."

The thinking behind this is easy to follow: if reporters have a financial interest, they will likely be biased. But, Taleb would argue, this means that the opinions that these finance journalists give are largely "free" -- there's no price to pay for being wrong. And there are few thinks more onerous to Taleb than free opinions.

That helps explain why, when once asked on live TV to give his opinion on Microsoft stock, Taleb responded: "I own no Microsoft stock ... Hence I can't talk about it."

On why finance writers all tend to have the same ideas or forecasts

That's... clustering. Now why do people cluster?

  • They cluster to protect their reputation.
  • It's easier if you're wrong together.
  • They cluster maybe for some psychological reason.

There's a saying in the finance community that, "No one ever got fired for buying IBM." It helps explain why actively managed funds often under-perform indices, and how human motivation plays a role. 

It's easy for us to forget people who make big financial decisions are humans -- they have families waiting for them at home, mortgages to pay off, and kids to send to college. As such, they are often risk averse and seek stability. 

Since many finance journalists can't benefit -- financially -- from a "rogue" market insight, there's no motivation to pursue them. When there's no financial reward to bucking conventional wisdom -- say, by shorting IBM -- then people will herd together to protect themselves.

On how traders are different from finance journalists

Clustering disappears when you trade. Because those who are wrong go bust. And it's not comparative: In trading, if you go bust, you go bust. [But finance journalists don't.]

In trading -- effectively -- there's a penalty for being a Me-Too person. Me-Too-ism is heavily penalized in trading. If you imitate others, you're going to be late to the game, and you will also -- of course -- be late in exiting.

So independence is what is required in trading at a minimum. And you should have that with journalists.

What this means for you

Does that mean that you should ignore anything written by someone without skin in the game? Not necessarily.

Instead, I suggest that you add another, counter-intuitive filter to your own stock-picking system.

Often times, we think: "I want stock advice from a completely unbiased analyst, who has nothing to gain or lose from their suggestion." On the one hand, this makes sense -- and I would suggest checking out the author's CAPS score to see if they have a history of successful picks.

On the other hand, you might want to ask this question: "This article claims Stock X is the top stock to buy this month. If it's such a great buy, then why doesn't the author own it him/herself?"

Of course, there are a myriad of innocuous explanations for why they might not: They having a growing family and no extra money to invest; they are carrying a large debt load for reasons entirely unrelated to their market insights; they're taking care of elderly family members.

But one fact rings true -- those who do have skin in the game are more likely to have done the research and have enough courage in their convictions to act on them. That's a powerful signal that investors shouldn't ignore.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
$261.12 (2.26%) $5.77
International Business Machines Corporation Stock Quote
International Business Machines Corporation
$133.60 (0.53%) $0.70

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.