In the heart of a bustling county fair, an extraordinary experiment unfolded, showcasing the incredible power of collective intelligence. A seemingly whimsical challenge emerged: Guess the weight of a cow on display. What initially appeared as a playful game soon transformed into a stunning demonstration of the “wisdom of crowds.”
A diverse group of fairgoers, each with varying degrees of knowledge and intuition, were asked two simple questions: How much does this cow weigh? Do you have any experience with the weight of cows? The goal was to see if anyone in the crowd could guess the correct weight and if experts would be superior to the average individual.
A fascinating phenomenon began to unfold. Although individual estimates ranged wildly, the average of all these guesses astonishingly approached the actual weight of the cow. In the end, the average guess for the non-experts was 1,287 pounds compared to the actual weight of 1,355 pounds. A difference of only 68 pounds. A bigger surprise: the expert’s average guess was less accurate at 1,272 pounds, a difference of 83 pounds.
The genius of this collective average lay in its ability to filter out errors and biases inherent in individual guesses. High estimates countered low ones, and the middle-ground approximations formed a consensus that defied the odds. This experiment showcased the concept of the “wisdom of crowds” that a diverse group’s collective knowledge can outperform the insights of any individual expert.
Translating this concept to the realm of financial markets, where stocks are traded and their prices determined, demonstrates a similar effect. The market comprises countless participants, each with their own insights, analyses, and biases. When these factors converge, the resulting stock prices tend to reflect the most accurate estimate of a company’s value at a given point in time.
This phenomenon finds its backbone in the Efficient Market Hypothesis (EMH), which proposes that stock prices encapsulate all available information. Much like the cow guessing average, EMH posits that the combined insights of countless individuals lead to fair and accurate valuations, making it incredibly challenging to outguess the market consistently. Financial markets react to new information quickly, updating prices to reflect the most up-to-date information and risks fairly. Rather than trying to outguess market prices, causing turnover, high fees, and trading costs, one is better off accepting and using market prices to your advantage. Invest in global capitalism rather than trying to outguess it.
From guessing the weight of a cow to the intricate world of financial markets, the wisdom of crowds continues to shape our understanding of collective intelligence. Just as a diverse group of fairgoers could accurately estimate the cow’s weight, the multitude of participants in financial markets work together to create prices that reflect a collective estimate of a company’s value. The efficient market hypothesis stands as a testament to the power of this concept, reminding us that while individual expertise is valuable, the aggregated insights of many can often lead to more accurate and reliable outcomes. As we navigate the complexities of the modern world, embracing the wisdom of crowds can lead to better decision-making and a higher likelihood of financial success.
It’s no secret that 2022 was challenging for both the stock and bond markets. Stocks ended the year down 18%*, while bonds were down 13%**. How did we do in 2022? Thanks to our compliance group, all we can say here is that our strategy of investing in low-cost, diversified strategies that tilt toward small, value, more profitable stocks meaningfully outperformed the S&P500 index in 2022.
As much as I would like to pat our firm on the back, you know our refrain: one year is essentially meaningless when it comes to investing. Due to the volatility and randomness of markets, any strategy can outperform or underperform in any given year. Our strategy certainly does not outperform every year and can even underperform several years in a row. To have real confidence in an investment strategy’s reliability, investors must look at how it performs over decades, not just years.
To see how we measure up over the long haul, we go back as far as we can, looking at the investments we recommended each year (and own ourselves) to see how our philosophy has held up over time. Our favorite chart compares the value of a hypothetical $1 invested in the year 2000 to 2022. Some of you may be familiar with Paul Harvey’s famous line regarding “the rest of the story.” Shoot me a note at email@example.com for the details and the rest of the returns story. We can share how our recommended equity strategy has performed over time and the magnitude of the benefit of taking the long view.
If you have been a client for a while, you have likely seen the benefit of a long-term, evidence-based strategy show up in your portfolio. If you’re not a client, ask yourself why. Then pick up the phone and call us. You can schedule a call with me anytime here.
As most of us were celebrating the holiday season, a significant piece of legislation passed that, in one way or another, impacted every person reading this. We’ve tried to boil down the 100+ pages to these highlights:
Required Minimum Distributions: The age at which required minimum distributions (RMDs) begin was pushed back to age 73 for individuals born between 1951-1959 and age 75 for those born after 1960, allowing for additional tax deferrals for many.
529 Plan Changes: Beginning in 2024, some individuals can move money from a 529 plan directly to a Roth IRA. This can be incredibly impactful if you set up a 529 years ago and the beneficiary finished college (or didn’t attend college) without completely exhausting the funds.
Retirement Plan Changes: Beginning in 2025, catch-up contributions will be indexed to inflation, ultimately allowing for more significant retirement vehicle savings. Additionally, matching contributions from employers can now be made to Roth accounts.
Student Loan Debt: Starting in 2024, employers can “match” employee student loan payments by contributing to a retirement account for the employee.
Please get in touch with us if you’d like to discuss any of the above information and see how it may impact your specific situation.
Hill Investment Group is a registered investment adviser. Registration of an Investment Advisor does not imply any level of skill or training. This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies. Investments involve risk and, past performance is not indicative of future performance. Consult with a qualified financial adviser before implementing any investment strategy.