The financial pages stress the importance of conviction in investing. Fortunes are made, we're told, by those who have a strong sense of how things will pan out and invest accordingly. But, as ROBIN POWELL explains, a much more valuable attribute for ordinary investors is the complete opposite — in other words, humility in the face of complexity and uncertainty.
The COVID-19 pandemic has left millions of people dead, has left millions more permanently scarred, and has disrupted the lives of billions around the world. Yet not everyone has been uniformly affected.
For instance, the experience of a low-wage worker delivering groceries or cooked meals door to door during the pandemic is a world away from the experience of the secure and highly paid knowledge industry professional who can work remotely and safely.
Consequently, memories of this pandemic will differ significantly among individuals, dependent on each’s lived experience and sense of wellbeing and security.
Money and experience
This is a point that Morgan Housel translates to money in his illuminating work The Psychology of Money: Timeless Lessons on Wealth, Greed and Happiness. In short, people’s view of money and investing is shaped by their own experience.
There is no boilerplate human when it comes to finance. We see the world differently. Our views are shaped by our family backgrounds, our environment, our circumstances, our emotional make-up, and our day-to-day experience.
Housel uses as an example the late US president John F Kennedy, whose family thrived during the Great Depression to the extent that it was only when JFK went to Harvard and read about the slump that he realised how badly people had suffered.
“Your personal experiences with money make up maybe 0.0000001% of what’s happened in the world, but maybe 80% of how you think the world works,” Housel writes. So, while everyone thinks they have a clear perspective of reality, the truth is we have only experienced a tiny sliver of it.
Attitudes to risk
These idiosyncratic perceptions also help explain why there is so much variation in people’s view of risk and return — why one investor in the middle of an equity slump, for instance, may coolly double down while another will run for cover at the hint of trouble.
Knowing of this breadth of experience should also help the more well-off among us to feel a greater degree of sympathy for those struggling on minimum wage who bet on lotteries. It’s a ridiculous long shot, of course, but what other chance do they have?
Age matters too. If you are old enough to have lived through the stagflation of the 1970s odds are that you will be much more sensitive to the recent revival in inflation than if you are a millennial who has only ever known inflation in the low single digits.
Times change quickly
Housel also provides perspective around many of the economic and financial concepts we take for granted today — like retirement from the workforce, or ease of access to credit, or index funds. These are all inventions of the last 50 years or so.
Most baby boomers will recall their grandparents didn’t really retire. People did not live long enough back then, for a start. And unless you were a salaried manager, you did not have the retirement fund that most workers have today.
We also tend to under-estimate the importance of luck in our financial fortunes. People have no control over the economic or geopolitical environment they live in and much of what is sold to as investment acumen is really good fortune — a roll of the dice.
A small number of investments in a broad portfolio will often account for the bulk of the gains. Similarly, just a few days can make a significant difference in the long-term returns of your portfolio, which is an argument against market timing.
The finance industry loves to talk about average returns, but the fact is returns are a long, long way from being distributed evenly.
The wisdom of humility
The key takeaway from this book is the need for people to exercise humility around investing. Our experiences, by definition, are limited. We can never have the full picture. Our view of money is shaped by our personal history and circumstances. Luck plays a significant role in outcomes and the world is a lot messier and random than the textbooks depict.
This is why an evidence-based investment approach makes so much sense. Instead of trying to outguess the market, we should work with it. Instead of presuming we know what will happen next, we should protect ourselves with diversification and discipline. And because anything is possible, we should always manage our expectations.
“When things are going extremely well, realise it’s not as good as you think,” Housel says. “You are not invincible, and if you acknowledge that luck brought you success then you have to believe in luck’s cousin, risk, which can turn your story around just as quickly.”
ROBIN POWELL is a journalist and author and Head of Client Education at RockWealth
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