Investing: Why Experience Matters

One of the treasures I own is a set of my grandmother’s cookbooks from the 1960s and 1970s. They are full of newspaper clippings with recipes and notations regarding whether she tried the recipe or not. They are very retro: the kind of books you would find in a thrift store that only sold vintage bell bottoms and butterfly-collared shirts. One of them– the Better Homes & Gardens Meat Cookbook (1967) (yes, there are copies for sale on Amazon)–is particularly entertaining. What’s striking about it, aside from the captions and technicolor photographs, is that many of the recipes called for some type of processed or canned foods that you will not find in too many recipes today (think of things like canned fish, processed cheese, and monosodium glutamate).

This reminded me of two principles: (1) some things were just not meant to be (Exhibit A: see the “Friday Banquet Pie” that is built upon 2 lbs of canned salmon); and (2) some things are just so inherently awful that no matter how hard you try, you just can’t make it good (Exhibit B: beef tongue shows up more than once). No amount of seasoning or even frying can alter it into something that it’s not.

Somehow I connected this cookbook, which I was showing to my children this week to investing behaviors. Behaviors can change. We can change our course of action by changing how we do things. Likewise, how we experience and react to the movements of securities markets does change. Our decision-making skills and how we perceive what’s going on around us can improve with the right experiences, information, and instruction.

Personal experience with investing matters in two ways.

First, consider experience with investing in the form of a longitudinal knowledge of the stock market from having paid some amount of attention to its gyrations over many years–as a result of being brought up by parents/caregivers that explained and demonstrated good investing behaviors, or through early trial-and-error experiences of your own. This kind of healthy personal experience with the securities markets (in the form of a pattern of life experiences) can help to prepare us to make good investment decisions in bad times. And making sound financial decisions during bad economic times is part of the job definition for anyone who is responsible for the financial management of his/her household. So even if taking financial risks feels (hopefully) temporarily unpleasant, taking these calculated and informed risks in investing your hard-earned money is often critical to achieving long-term financial success.

And this type of personal experience comes in really handy when times get tough. Experience helps you have perspective and builds confidence. It helps to remember that the stock market goes up and down–and to have LIVED that experience, not simply read about it as a fairy tale. It helps to be aware that our most typical reaction when we hear something about the LARGEST DROP IN HISTORY will be to act–do something! Anything!–before we think deeply (or maybe even conduct a bit of research). Experience can help remove some of those biases in investing that we hear so much about.

Our research tells us that even affluent investors have made investing mistakes. Plenty of them. We see this in our latest research with high- and ultra-high net worth individuals, and we see it in mass affluent investors as well. But we also know that taking risks is associated with wealth accumulation. Whether it directly led to the creation of wealth is another story, but the data shows that affluent investors tend to take greater risks. Is it because they can? Or is it because they have had the experience to know that the market will rise and fall and rise again?

If you’ve had personal experience doing not-so-great things–like maybe selling out during a massive sell-off (2008 and 2009, anyone?)–maybe you’ll learn not to make this same mistake again in the future. Maybe the consequences of making this mistake, and your experience since then, will lead to better decisions next time (or…this week).

Of course some of us won’t learn. Learning from past mistakes is an individual-difference characteristic: some of us learn better from the past than others. Volatility composure is also an individual difference characteristic: some of us stay cool in the face of uncertainty and/or tumult while others are anxious. Some of us won’t see patterns in the past and change what we do the next time, and some of us can’t keep our cool long enough to soberly assess what’s going on in the markets.

Personal experience can also have unproductive and distortive results. Consider a situation where you have experienced crazy, dumb luck. For example, if I had to pick the first person I would check in with about the chaotic market over the last couple of days, I would check in with someone who is relatively inexperienced in investing but has had one or two unbelievably lucky experiences. Like that someone who bought bitcoin at $1,000 and sold it in December 2017 for $16,000. That person may be inclined to think this is just what happens, and it can and will happen again and again. Recency effects and bias take hold, and without sound advice or a breadth of experience and competencies for decision-making, we’re apt to make those same decisions again.

Those experiences, once cemented in your mind, can be hard to ignore. Like driving home drunk and then concluding that because you made it home safely once that you can do it again: if it worked last time, why wouldn’t it work today?

When the news inspires panic, it’s important to remember to trust your experiences–presuming they’re of the good variety. And, if you don’t have any or if all of them have been outrageously positive and without a reality-check as to whether they are typical or not, it’s critical to turn to resources that aren’t trying to fan the flames in a way that lead to bad decision-making. Solid experiences, yours and those you trust, can help you see clearly during choppy waters. Unlike fried beef tongue, your investing decisions this time and in future times can change for the better.

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