The Value of a Second Opinion

Imagine that, for a few months now, you’ve had a set of new health symptoms that seem to be related. So you go to see a doctor about it. The doctor tells you that he thinks it’s probably [some particular condition], but he notes that this isn’t the sort of thing that can be diagnosed with 100% confidence. This isn’t like a broken wrist, where we can just look at an x-ray and say, “Yep, that’s broken.”

Given the doctor’s uncertainty, you decide that you want a second opinion. So you go see another doctor. And she tells you pretty much the same thing as the first doctor. And that’s valuable! Even though she didn’t add any new information, and even though she was also not 100% confident, the fact that two different specialists agreed should give you more confidence.

Now imagine that there was an easy way for you to get not only a second, third, or fourth opinion, but thousands of opinions. Imagine that you could have thousands of specialists review your symptoms, your test results, and your medical history — and then all of those physicians’ feedback would be collected and tabulated. And you learn that most doctors do indeed agree with what the first two doctors said.

That doesn’t necessarily mean they’re all correct. (After all, they themselves noted that there’s some inherent uncertainty here.) Maybe the correct diagnosis is one of the less-common possibilities that some of the other doctors mentioned. Or maybe it’s a diagnosis that only one or two physicians mentioned.

But you have to pick a treatment plan. And given that you aren’t an expert in this field yourself (or frankly, even if you are an expert), selecting a plan that’s based on the feedback of the majority of the experts is very likely to be your best bet.

And that, by the way, is how the stock market works.

The price of a stock at any given time reflects the consensus opinion of a huge number of professional experts on the topic. This is not to say that every investor agrees that the current price is the correct price. But the current price is the weighted-average consensus, when we weight everybody’s opinion by the number of shares of the stock that they trade. (Point being, the professional investors who move the most money, such as mutual fund managers, hedge fund managers, pension fund managers, endowment managers, etc. are the people who are primarily responsible for setting the prices based on their trading.)

When you buy individual stocks, or when you jump in and out of the market based on stocks collectively looking overvalued or undervalued, you’re deciding that you know more than the collective consensus of a huge number of experts. It’s like a sick patient receiving feedback from thousands of physician specialists and then promptly ignoring that feedback, because he’s convinced he knows better than all those doctors do. Sure, it might happen to work out. But it’s not a great bet. And it’s definitely not the sort of thing that you’d want to implement as a general policy.