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Bob Pisani

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Bob Pisani: The Key to Making Better Market Predictions

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Bob Pisani, CNBC’s senior markets correspondent who reports from the floor of the New York Stock Exchange, thinks Wall Street punditry is “mostly baloney.” That includes predictions from economists and the Federal Reserve, he tells ThinkAdvisor in an interview.

But “you can get better at making forecasts,” he argues. “It’s not so much whether you know more; it’s more about having an open-minded attitude.”

Pisani’s new book is “Shut Up & Keep Talking: Lessons on Life and Investing from the Floor of the New York Stock Exchange” (Harriman House-October 2022).

In memoir style, the journalist, 65, explores financial issues in a tome laced with anecdotes about a variety of prominent people, from Fidel Castro to Aretha Franklin, whom he met on the job.

About the challenges of predicting the future, he writes: “It’s critical for anyone seeking advice to understand the problems with making predictions … This is important when making decisions on investing. The first problem is that predictions are riddled with biases and noise that limit their quality.” 

In the interview, he speaks candidly about the worst investing mistake he has ever made and how it turned him into a deep believer in behavioral economics, which focuses on the often-irrational component of investing.

Then he details the investments in his portfolio today and the biggest change he’s made in the last 10 years.

Pisani came to CNBC in 1990 specializing in real estate and corporate management. In 1997, he began covering the stock market full time from the floor of the Exchange.

In our conversation, he discusses what he calls “the final blow to the profitability of the brokerage industry” and what he looks for on the screens he runs daily.

ThinkAdvisor held an interview with Pisani on Nov. 15. He was speaking from his NYSE office.

The favorite part of his job turns out to be watching initial public offerings.

“You’re watching people get rich,” he says. “This is capitalism at work.”

Here are excerpts from our interview:

THINKADVISOR: Wall Street pundits’ predictions — like where the market will be in a month or a decade — is “mostly baloney,” you write. Please elaborate.

BOB PISANI: Most people are terrible at predicting the future. That’s true of professional stock pickers too. 

Economists are really bad also. They have a terrible track record of predicting the economy, and the Federal Reserve has a terrible record of predicting the U.S. GDP a year [ahead].

Why is it so hard to predict the future?

There are two basic problems. The first is that predictions are riddled with all sorts of mental and emotional biases that limit the quality of the predictions. 

For example, confirmation bias, when people tend to select information that confirms the viewpoints they already have and ignore the stuff that can contradict the information that’s out there.

What’s the second problem?

Lack of complete information. There are unpredictable events that affect outcomes, such as shocks to the economy, [high] inflation, or a rise in interest rates, or a war or a cyberattack. Then there are black swan events, like COVID.

So when you combine the biases that people have with the unpredictability of the future, it’s really difficult to [forecast] the future accurately.

But “Wall Street refuses to acknowledge that stock forecasts don’t work because there’s too much money in forecasting,” you write. Please explain.

That’s true of the forecasting business in general. The world is full of punditry.

However, you actually can get better at making forecasts. It’s not so much whether you know more; it’s more about having an open-minded attitude. 

Philip Tetlock, the Wharton professor who [co-wrote] “Superforecasting: The Art and Science of Prediction,” has the Good Judgment project, in which he’s trying to improve forecasting. 

He’s been able to [achieve] statistically better forecasting by employing better mental models.

What’s the best advice about the stock market you’ve ever received?

In the late ’90s and mid-2000s, when I asked traders, “What’s in your head all the time”, the most common thing I kept hearing was “limiting losses.”

They said time and time again that you can make money in this business, but you can lose it even faster — so managing losses is more important than managing gains. 

They told me: You can’t fall in love with stocks. Understand what your profits are — don’t be afraid to take some. And if a stock is down 10% from when you bought it, don’t hope it’s going to come back.

What’s been your biggest investing mistake? 

It’s very obvious that I’ve made a number of them. Becoming more aware of them is really the key [to reducing mistakes].

What was the worst blunder?

When I joined CNBC, I opened a 401(k) [account] and immediately began buying General Electric stock. GE owned NBC, and I was enamored with GE’s CEO, Jack Welch. In the 1990s, he was like a corporate god. 

So by 1999, 50% of my 401(k) was in GE stock. Anyone would tell you that’s a mistake because it’s too much concentration in one stock. You should never own more than 10% of your own company’s stock. Fifty percent is ridiculous.

Why did you buy so much GE?

I exhibited the behavioral bias of overconfidence — in this case, overconfidence in Jack Welch. I didn’t want to believe that he could be wrong. I knew about behavioral biases back then, but I did that anyhow.

And then I held onto the stock too long. Traders — people like [Bear Stearns chair Alan] “Ace” Greenberg — had told me not to do that. But I did. [Pisani sold his “entire” GE position in mid-2008. “I’m sure it was sold at a loss,” he writes.] 

Other than a small options grant, why didn’t you sell your GE stock much earlier? You write that in 2000, “GE began a long, slow descent.” By August 2002, it was “half the price it was two years” before.

Because behavioral biases are extremely powerful mentally. It’s very hard to shake them even when you understand.

I [later] became a believer in behavioral economics, which says that this is how people really act, not how they’re supposed to act.

Did you have any inclination to sell or rebalance in recent years?

It was obvious that the Federal Reserve was going to raise interest rates. I had a slight bias from 2010 on towards growth stocks and had a couple of growth funds. 

I decided to sell them and move into standard index funds — so a mid-cap index fund rather than a mid-cap growth fund. That was the biggest change I made in 10 years.

Why don’t you hire a financial advisor?

Why do you think they’re better? Why do you think they don’t have biases?

They might, but they likely shed them when they’re managing other people’s money.

No, I don’t think so. 

What are you invested in today?

I almost never change my asset allocation. I own mostly ETFs. My largest single holding is the S&P 500. I own a mid-cap index fund. I own a small-cap fund. I own a basic international fund [and a few other funds].

What do your TV viewers want to know most?

What’s going on, what’s the overall trend. Some are active traders, but those are in the minority. Most viewers are wealthier people who have investments and are just watching their money. 

They want a sense of what the trend is and what’s causing it.

For example, in the last week we’ve had very good reports from the Consumer Price Index and the Producer Price Index, both of which indicate that though inflation is still high, it’s cooling down.

That’s what the market wants to hear. Early signs have been encouraging, and the market has been rallying.

What trends do you look for on the screens that you run every day?

Typically, stocks move in sectors. Usually on days when there’s some market-moving event, sectors will move in common with each other. So I tend to look at sectors, then big outlier movers. Sometimes they’re earnings. 

Like today, Walmart was up a lot because it had [an] earnings report. I’ll look at what their earnings were and why.

You knew John (Jack) Bogle, founding father of the first index fund in 1976, and founder of The Vanguard Group the previous year, for more than two decades. You write that he was in “a constant war with the investment community.” Why?

I met Jack in 1997, and he was probably the single biggest influence on how I report on the markets.

He changed the world [with index funds]. But Wall Street’s attitude was that there’s no money in indexing, and therefore “Why do we want it?” 

Their attack line was, “Why would we want mediocrity? Going with the [broad] market is mediocrity. Don’t you want to beat the market?”

So Wall Street was at war with the concept; and in that sense, Bogle was at war with the industry for years.

“The final blow to the profitability of the brokerage industry was the move to trading in pennies,” you write. Please explain.

In 1996, trading was still done in eighths. That’s a very profitable business. There had been pressure on the industry for years to stop doing that and essentially shrink the bid and ask [prices]. 

So they went to sixteenths in 1997, then to pennies in 2000. Trading [quoting] in smaller increments dramatically shrunk the profitability of the industry.

At the same time, commissions were going down; and there was the rise of [discount] broker-dealers like Charles Schwab, with more competitive commission prices.

All that, combined with electronic trading, which provides better pricing, shrank the overall profitability.

Why is watching IPOs at the NYSE the favorite part of your job?

You’re watching people get rich. First, there’s a beautiful pageantry to it, with a welcoming ceremony for the CEOs, CFOs and their families. After ringing the opening bell, they stand [on the trading floor] seeing flashing indications of their opening stock [price]. 

They’re calculating their net worth. It’s a big moment for them. This is capitalism at work.

What has been your favorite NYSE bell ringing? 

When Warner Music Group was doing its IPO, Jimmy Page, the lead guitar player with Led Zeppelin, was brought along.

He started playing the opening to “Whole Lotta Love,” and the hundreds of traders, who knew he was coming and had been hoping to get a glimpse of him, went crazy. Nobody could even hear the opening bell.

The other [bell ringing] I really liked was [at] the Alibaba IPO when [co-founder] Jack Ma came. It was the biggest IPO Of all time — a market capitalization north of $230 billion.

It was an amazing day.   


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