Avoid Investing Mistakes by Learning from the Experience of Others

“Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so.”  Douglas Adams


Investing lessons from the past are there for all to see should you choose to look for them.  You might say they are hidden in plain sight.  Indeed, in his classic book Reminiscences of a Stock Operator, first published in 1923, Edwin Lefevre wrote:

“Nowhere does history indulge in repetitions so often or uniformly as in Wall Street.  When you read contemporary accounts of booms or panics, the one thing that strikes you most forcibly is how little stock speculation or stock speculators today differ from yesterday.  The game does not change and neither does human nature.”

The only thing that has changed since Lefevre wrote that in the 1920s is nearly a hundred more years of evidence confirming the truthfulness of his observation. 

So what lessons should we learn from investing history?  An amusing story told by Gary Belsky in the book Why Smart People Make Big Money Mistakes provides one answer.

In 1987 Gary was a young financial reporter in New York City when he became friends with a grizzled veteran money manager named Bill.  On October 19, 1987 the market crashed in what came to be known as “Black Monday.”  The Dow Jones Industrial Average fell almost 23 percent that day, still the biggest one-day percentage drop in the history of the Dow.

Two days later, with the markets still reeling, Gary called Bill to get his opinion on the crash.  Part of their conversation went like this:

“Bill: Guess how many clients I have.

Gary: I don’t know, fifty?

Bill: Wrong.  One hundred and eighty.  Guess how many have called me over the past two days.

Gary: I don’t know, a hundred?

Bill: Wrong.  One hundred and fifty-eight.  Guess how many of them told me to sell some or all of their stocks.

Gary: I don’t know, half?

Bill: Wrong, one hundred and fifty-six.  Guess how old the other two are.

Gary: Huh?  How am I supposed to know?

Bill: You’re not, but don’t forget this.  Both those clients are older than eighty.  Both called to tell me to buy.  You know why?

Gary: No, why?

Bill: Because they’ve seen this before.”

What had these two savvy investors learned from their many years of experience that the other 156 of Bill’s presumably sophisticated and knowledgeable clients who called didn’t know?  Among other things, that:

  • Patience pays off in the long run, and
  • Keeping your head when everyone else is losing theirs can be very profitable indeed.

How profitable?  Famed mutual fund manager Peter Lynch, in his book Beating the Street, provides the following example:

  • “If you had put $1,000 in the S&P 500 index on January 31, 1940 and left it there for 52 years, you’d now have $333.793.30 in your account. This is only a theoretical exercise, since there were no index funds in 1940, but it gives you an idea of the value of sticking with a broad range of stocks.”
  • “If you’d added $1,000 to your initial outlay every January 31 throughout those same 52 years, your $52,000 investment would now be worth $3,554,227.”
  • “Finally, if you had the courage to add another $1,000 every time the market dropped 10 percent or more (this has happened 31 times in 52 years), your $83,000 investment would now be worth $6,295,000.”

Lynch concludes, “Thus, there are substantial rewards for adopting a regular routine of investing and following it no matter what, and additional rewards for buying more shares when most investors are scared into selling.”

And how does our story end?  By early 1989 the Dow had recovered all of its Black Monday losses and by the year 2000 it had increased more than 5-fold from Black Monday lows.  Of course, just as Edwin Lefevre would have predicted, history was about to repeat itself and more booms and busts (and the opportunities to profit from them) were on the horizon.

156 of Bill’s clients lost money during Black Monday and its aftermath while two profited handsomely.  You can either wait until you are eighty plus and learn these investing lessons through trial and error, or you can learn from these wise octogenarians.  Either way the lessons will be learned but one way is much more enjoyable and profitable than the other.  My suggestion is that you prove Douglas Adams wrong and actually use your unique human ability to learn from the experience of others.

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