Ducks, Swans and Old People
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Last month we hosted two groups of students in our office: undergrads from the University of Wisconsin Milwaukee, and graduate students from the Instituto de Empresa in Madrid, Spain. All were stock jockeys, the undergrads having competed to be accepted into the Investment Management Certificate program at the Lubar School of Business, led by Dr. G. Kevin Spellman. Not only does Dr. Spellman have a Ph.D. in Behavioral Finance, he has also slogged in the investment trenches since 1993.
After presentations by several of my staff members, it was my turn to talk about stocks. Let me tell you, nothing thrills an old fart more than being asked to give advice (solicited, no less!) to fresh blood.
Over the next hour, I lobbed many advice bombs. One in particular, which I share with you today, was this: If you don't have experience, substitute history.
Experience is overrated
Regardless of where you, personally, fall on the investment experience continuum – total rookie to blowhard veteran – this particular trait isn't all that it's cracked up to be. I can think of at least four reasons why not:
The older we get, the easier it is to be dismissive and to rely too much on pattern recognition and heuristics as lazy shortcuts.
"If it walks like a duck and quacks like a duck, it must be a duck." Except, of course, when upon closer examination, it turns out not to be duck (e.g., The Ugly Duckling). The world is always changing, and the market always discounts the future. If you aren't open to recognizing in what ways the future will be different from the past, you will miss opportunities.
It's worth poking that duck hard, because most everyone else will be too lazy to do so. By the time they figure out it's a swan, you've made a bundle. Young people, not having built dismissive shortcuts, always poke the duck hard.
Lots of the same kind of experience doesn't make you any wiser.
It cracks me up when I read firms brag about their collective "200+ years of investment experience." It could be 40 guys with five years, five guys with 40 years, or 200 spider monkeys with one year – no matter. Whatever the calculation, it's hard wired into humans to overweight what happened most recently and fight the last investment war (remember the Maginot line?).
And with all that shared past experience at a given firm, there's probably no differentiated perspective. If people all think alike, does it matter whether it's five, 10 or 20 years' worth of shared experience making them think alike?
With age comes caution – but often too much.
The adage that "bull markets are for young people and bear markets for old people" does young people a disservice. The point of the truism is that young people won't be scared to ride bull markets all the way up because they haven't learned to fear the ugly and brutal end, whereas old hands will know a bubble when they see one.
But it cuts both ways: We old folks tend to take money off the table way too early (and then complain bitterly about a market that doesn't make sense). And while the young gunslingers may very well bury their investors, the old guys will so wallow in being right to have called the bubble that they are scared to actually deploy all that capital they preserved by being bearish in the first place. Then they miss the next market upswing.