CapitalTime

Articles on investing and capital management, with a quantitative focus.

We are shaped by our experiences

2019-06-05

“Investing” can mean different things to different people, and not everyone has the same priorities. Consider these two hypothetical investors:

Investor A

This investor aims to grow a modest amount of capital into a big, life-changing fortune. They are comfortable with the possibility that they could “lose it all” if things don’t go their way. Separate from their investments, this investor also has a company pension which can provide retirement income in the future; this back-stop insulates them from total ruin.

This investor began dabbling in stocks in 1949, seeing excellent initial results. They had a well paying job and accumulated more savings in the 1950s, seeing progressively better investment performance. By the 1960s, they had experienced fantastic growth in their stock-based investments. The risk-taking had paid off, validating Investor A’s risky, stock-focused approach.

Investor B

This investor aims to preserve and grow capital that they’ve accumulated by working. They expect some positive return after inflation, but don’t expect investing to create a fortune through high returns. They don’t want to ever see catastrophic losses, because this money is all they have. They don’t have a pension or wealthy family to bail them out.

This investor began learning about stocks in 2000. Within just a few months, they saw friends and coworkers experience steep losses in the stock market. Through the following 20 years of a fragile economy and fragile markets, the investor developed conservative techniques and steadily grew their capital. While their returns were not particularly high, the returns were better than what many people experienced. This investor watched people get “wiped out” in 2001-2003 and again in 2007-2009. Investing through these bear markets helped Investor B refine their own conservative investing technique.

It’s a matter of perspective

These two investors follow different strategies and have different priorities. Both are acting rationally, and neither one is right or wrong.

Everything I write and post to this web site is shaped by my own experiences (similar to Investor B) through 20 years of investing. What I’m writing here is my own perspective, and readers may have very different priorities than mine. Because we all have different experiences and backgrounds, I don’t expect my views to make sense to everyone.

I also think it’s valuable to think about conventional advice given by today’s investment advisors and book authors. These people were also shaped by their own experiences. Generally, they invested after 1980, riding one of the greatest stock bull markets in world history. They grew up seeing huge rewards from high risk-taking (high stock exposures), and unsurprisingly, recommend high stock exposures to investors today.

As you read my articles, and hear professional investment advice, you should keep thinking about the factors which bias and shape these views. There is no single, mathematically perfect, way to invest.

My articles are not meant to be investment advice or guidance on what you should do. Rather, I’m describing what I do and why I do it.