Question: What makes good advice?
Answer: It comes from Gandalf.
“Read more Tolkien” is a piece of ad(d)vice, but it is good? — Rhetorical question
The same piece of advice can do heinous harm or give great benefits. From the introduction, we know that listening to the wiser of us, is well advised. But if we could judge wisdom accurately, would we still need advice? I believe so, and here is why.
Timing makes good advice
Another dimension besides wisdom is timing. Buy low, sell high works better if you know exactly when to enter the market or to exit it. This does not even have to be a long span of time. Frontrunning pays for fibre between Chicago and New York.
But even if it does not provide information beforehand, timing of decision inside a process matter. If a fund manager manages multiple funds, and can hold the decision which fund to allocate an asset to until the market closes for the day, he can systematically allocate well performing assets to the one fund to rule them all, and the worse performing ones to others. Keep the fund to rule them all around, and retire the others regularly. In step four you shall profit.
So if you have to pick an asset manager, inspect the performance of all of his funds, including his old ones.
But for mere mortals, who can not see the unseen world on their own, the optimal stopping theorem holds. In a fair and random game of luck (martingale), with no material information about the future, your expected outcome is your wealth at entry. In other words, the probability of good outcomes multiplied by their benefit is equal to the probability of bad outcomes times their malice. With enough cynicism, lack of scruple, or adequate incentive structures, just load up on unlikely bulldozers, to collect plenteous pennies in front of. If your asset manager consistently outperforms the market, he is likely to incur some form of unseen uncertainty.
Mimesis can be detrimental
Following, by mere imitation, does not guarantee success. An opportunity for one, could be doom for all others. Mimesis is self-referential, and as such prone to cycles of excess and deficiency. Grasshoppers in normal years contribute to their ecosystems, as locusts, to its extinction.
In summary, the quality of advice depends not only on the wisdom of the donor, but also on the circumstances (timing) and the psychology of the receiver. Even then, excessive following of advice can crutch away their inherent faculties of thought, or turn from valuable to detrimental by following too late.
What the wise man did in the beginning, the fool does in the end.
