The gift of hindsight is a wonderful thing, especially when it comes to investing. As investors, for all the right calls we make, there are also those we wish could have done better, or maybe not at all.
With this in mind, I was recently asked ‘what I wish I’d known about investing when I was 20 years old?’ It was interesting because it was a question I hadn’t even asked myself before. I am so often preoccupied thinking forward about what is going to happen in markets, that it is easy to forget the lessons of the past.
Looking at the big pig picture, a few lessons have come with nearly 40 years in financial services. Just take inflation. In the current environment any young professional within the industry under the age of 30 won’t have seen real inflation during their lives, let alone their careers, before now.
However, if I have learnt one overarching lesson from the last four decades, it is humility, and if I can share my past experiences and opinions with others, hopefully some may find it helpful or, at the very least, somewhat interesting.
What was a major geopolitical, economic or market event when you were 20?
In 1987 I was 20 years old and still relatively new to financial services, where I was working for Prudential as a financial adviser. The role meant you worked very closely with retail clients and usually in their own homes.
On October 19 that year, I had my first experience of what it’s like working in the finance industry during a stock market crash. On a day that became ‘Black Monday,’ the S&P 500 fell 22.6% in one session.
This event and clients’ reactions to it were an early, but salutary, reminder of the value of the adviser/client relationship and the responsibilities an adviser has to manage their client’s expectations. It is often at times of maximum market or personal stress that the benefits of these relationships are realised.
What did you expect to happen in the future?
I have heard from many managers that economic and market conditions in their formative years create a view of the investing world that stays with them. Inflation in 1987 was 4.2%, which was actually considered low back then as only seven years earlier it had peaked at 20%.
Inflation was something people just expected to be an ongoing indefinite problem. What I didn’t expect to happen was an era such as the one we have just witnessed, where central bankers were bemoaning a lack of inflation. We are now living through a period of relatively high inflation again, which has been brought on for the most part by the same central bankers favouring equity market gains over what would have been best for their economies.
As humans, we have an inbuilt recency bias, leading to a failure to grasp new paradigms. My own problem bias was around interest rates which were then a mere 10%, but had been nearly 14% just two years earlier. I kept fearing rates would increase again, when in actuality they fell for most of the next 30 years!
Was there something you missed, or didn’t do, that you wish you had?
With the best investment tools in hindsight, I should have moved to larger properties and maximised my mortgage capabilities. However, the fear of interest rate rises kept more ambitious housing aspirations largely in check.
What might seem strange is that I was advising my 20-year-old self that I would be fairly cautious. House prices are now at an all-time high and affordability is getting more stretched, and this is whilst we are in unchartered inflationary waters with central banks being behind the curve. That backdrop, to me, suggests caution again, but then it could well be argued that the approach has been wrong for multiple decades. Thankfully I don’t have to advise on housing affordability.
Is there an example of a lesson you’ve learned that has benefited you since implementing it?
There are multiple lessons I have learned throughout my career within the industry, however, there are two that spring to mind.
The first, which can seem counterintuitive, is that geopolitical events don’t tend to adversely affect markets for very long, if at all. Unfortunately, we are living through the latest horrific example of this with the Russian war in Ukraine. It is central bank policy and not the awful events filling our TV screens that are moving markets. The obvious exception is energy stocks and commodities, which are spiraling upwards based on the changing supply and demand dynamic.
The second lesson is to try and focus on long term structural changes to market conditions. As an example, with the Fed, it doesn’t really matter whether they hike in 50bps chunks or lots of 25bps moves. What matters is the direction of travel for rates and how long it takes them to tame inflation, if indeed that is even in their gift, which I personally doubt.
It might take a while for many on the main street to catch up with what the bond markets are signaling. But especially in the US, it seems equity market participants believe that every dip can continue to be bought. That strategy has worked for many years, but no strategy lasts forever. A prolonged period of higher inflation, higher interest rates and equity markets that don’t go up in an almost straight line could be upon us.
Spotting the change in long term trends is very difficult, so if there is one over-ridding lesson I have learned, it is that speaking to smart people who have lived through different eras and in other geographical areas to your own is invaluable research in the investing world. This can help lessen the biases that can lead to us thinking we know more than we do and is still something I very much remind myself of today when I speak with fund managers and other industry peers.
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