The Power of Crowds

HighTower recently celebrated another milestone: our seventh birthday. During that time, we have moved from startup to profitable company, while remaining true to our fiduciary objectives. One of the important elements of our model is that we do not believe in one binding view on markets, as is the case in most traditional firms, but rather in the power of our collective wisdom, therefore disagreeing with the fact that one person (or team) can accurately predict outcomes.

The pressing question is how good economic predictions are to begin with. One of my university professors never missed an opportunity to proclaim his view that “a bad model is better than none”; agreed, and yet possibly rather insufficient when making “bets” with real money. I cannot recall a single financial services firm that, with great conviction, rang the alarm bell before the market crash of the Credit Crisis. In fact, the Federal Reserve of New York even “came clean” in a 2011 blog entry, admitting “unusually large forecast errors” related to unemployment and real GDP predictions for 2008/2009. Even better is an extensive list of research on why so many economists failed to predict the 2008 Financial Crisis, with explanations ranging from systemic failure of the financial profession to conspiracy theories. 

At HighTower (HT), we have built on the 1906 thesis of Sir Francis Galton (based on a competition to guess the weight of an ox) that a diverse group of independent individuals is likely to make certain types of decisions/predictions better than individuals alone, including subject-matter experts. On a regular basis, HT partners, analysts, corporate executives, and board members allocate a (sample) $100 over 13 asset classes to determine their preferred global multi-asset class allocation. All findings are aggregated and published monthly as an internal “WoX Index.” The input is not related to any specific client risk profile, but is simply a status quo assessment of current market conditions and preferences. True to the nature of HighTower, the WoX Index has become a source of allocation guidance to our partners in their client-related work, but is not considered a binding or representative “house” opinion.

For those who may want to view us as a bunch of “loose cannons” when it comes to the assessment of markets—with potentially too many opinions to begin with—the proof of our collective wisdom is in the proverbial pudding. Our most recent findings are consistent with current market developments, as our survey participants have reduced exposure to U.S. and emerging market equities throughout the year, while increasing exposure to international equities. We attribute at least part of the change to: a) increasing market volatility stemming from the anticipated reduction of “easy money” policies in the U.S., b) weaker domestic corporate earnings, and c) challenging economic conditions in many emerging markets due to a stronger U.S. dollar and lower commodity prices. While there should never be a single method for formulating an investment thesis, our WoX index has been a helpful component for evaluating trends in asset allocation and investor sentiment.