An investor's lived experience can be a poor guide to long-term market realities. For example, someone who started their career after 2009 has only known a US stock market that consistently rewards dip-buying, a pattern not representative of broader history.
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An investor's personal experience with market events like the 2008 crash is far more persuasive than any historical data. This firsthand experience shapes financial beliefs and behaviors more profoundly than reading about past events, effectively making investors prisoners of the specific era in which they began investing.
A generation of investors has only known a market where the Federal Reserve intervenes to prevent crises. This creates a deep-seated belief in a 'Fed put' that won't dissipate until the Fed is forced to let a significant event unfold without a bailout, which is unlikely in the near term.
During periods of intense market euphoria, investors with experience of past downturns are at a disadvantage. Their knowledge of how bubbles burst makes them cautious, causing them to underperform those who have only seen markets rebound, reinforcing a dangerous cycle of overconfidence.
A long bull market can produce a generation of venture capitalists who have never experienced a downturn. This lack of cyclical perspective leads to flawed investment heuristics, such as ignoring valuation discipline, which are then painfully corrected when the market inevitably turns.
Investors try to apply lessons from past market cycles, but this collective awareness changes their behavior. This creates a self-reinforcing loop that alters timelines and dynamics, ensuring history only rhymes, not repeats.
Judging investment skill requires observing performance through both bull and bear markets. A fixed period, like 5 or 10 years, can be misleading if it only captures one type of environment, often rewarding mere risk tolerance rather than genuine ability.
Investors who came of age after the 2008 crisis have only experienced V-shaped recoveries fueled by liquidity. Events like the 2020 COVID crash reinforced that market downturns are temporary and buying into weakness is consistently rewarded. This creates a generation with a unique risk tolerance, unfamiliar with prolonged bear markets.
In stable markets, answering established questions works. During systemic shifts, like today's geopolitical and monetary changes, investors must first identify new, relevant questions. The greatest risk is perfecting answers to outdated problems, a common pitfall highlighted by financial history.
A whole generation of market participants has never experienced a true, prolonged downturn, having been conditioned to always 'buy the dip' in a central bank-supported environment. This lack of crisis experience could exacerbate the next real recession, as ingrained behaviors prove ineffective or harmful.
Timing is more critical than talent. An investor who beat the market by 5% annually from 1960-1980 made less than an investor who underperformed by 5% from 1980-2000. This illustrates how the macro environment and the starting point of an investment journey can have a far greater impact on absolute returns than individual stock-picking skill.
