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Had I been much more mature when I was younger, I would likely now have a much larger investment portfolio. Alas, my priorities were much different decades ago.
Allow me to regale you with some of my high school and undergraduate degree education experiences.
Although I enjoyed high school and my undergraduate Economics university program, my enjoyment had nothing to do with what was being taught.
Do you think reading Chaucer's 'The Canterbury Tales' or Shakespeare's 'Othello' brought me enjoyment? Translation software would have really been helpful when I was reading this material.
High school chemistry!? I never wanted to become a chemist and only took chemistry because I had to. My classmates were also taking chemistry for the same reason. I can now sympathize with our high school chemistry teacher. It must be have been totally demoralizing teaching a group of students who did not want to be taught. Imagine the class average on quizzes consistently being 2 - 3 out of 10.
As an 17 - 20 year old attending university, do you think I had any interest in micro and macro economics?
An 8 AM Introductory Business class? Are you kidding me? Isn't that too early for a class? I was completely lost. No wonder the mark I received on my first mid-term was under 20%.
Combined, my roommate and I completed, at most, 24 hours of homework during our entire 1st year at university; I completed ~22 of those 24.
Another friend of mine enrolled in an Engineering program ended up being a Thanksgiving grad; Thanksgiving in Canada is in the first half of October. He stopped attending classes before Thanksgiving.
Some of the material taught in my MBA program in the 1980s?
- The efficient market theory!? Good grief.
- The Black Scholes model - a mathematical method to calculate the theoretical value of an option contract that I have never used!
I wish courses about personal investing applicable to the real world had been offered.
Perhaps your education experiences are much different than mine.
I just know that I am grateful for the advent of the internet. We now have access to a wealth of information that should form part of a school board's curriculum.
Case in point...
Recently, I have re-read Daniel Kahneman's Thinking, Fast and Slow. He is an Israeli-American psychologist best known as the ‘grandfather of behavioral economics’ and for his work on the psychology of judgment and decision-making as well as behavioral economics. He was awarded the 2002 Nobel Memorial Prize in Economic Sciences together with Vernon L. Smith.
One of his famous quotes is:
In a rising market, enough of your bad ideas will pay off so that you'll never learn that you should have fewer ideas.
This speaks to a fundamental truth about investing, especially in a rising market.
BTW - None of my university business professors ever discussed this!
Here are my thoughts related to this subject matter.
The Illusion of Success
Almost every investment seems to yield positive returns in a rising market because the overall market trend is upward. Even poorly researched or fundamentally weak investments can show gains simply because we are riding the market's wave. This can create a false sense of security and success, leading us to believe we are making sound decisions when we may merely be lucky.
Lack of Discernment
In a consistently rising market it becomes increasingly more difficult to distinguish between good and bad investment strategies. The success of bad ideas during these times prevents us from critically evaluating our strategies and learning from our mistakes. Instead of refining our investment approach, we may continue with a scattergun strategy whereby we invest in a large number of ideas without proper scrutiny.
Complacency and Overconfidence
Consistent market gains can lead to complacency. We might start to ignore fundamental analysis, risk assessment, and diversification, believing a rising market will correct some/all of our poor investment decisions. This overconfidence can be dangerous because it increases exposure to risk without a corresponding understanding of potential downsides.
Overconfident investors may believe they possess a superior ability to predict market movements thus leading them to take on excessive risk. This can lead to larger positions in high-risk assets and, in the worst-case scenario, result in substantial losses.
Hidden Risks
Bad investment ideas that pay off in a rising market may carry hidden risks that become apparent only when the market turns; the true quality of investments is revealed during market downturns. Investors who relied on the rising market to validate their bad ideas may suffer significant losses.
Long-Term Impact
Failing to recognize and learn from bad investment ideas in a rising market can have long-term consequences. Our poor investment decisions may result in us missing the opportunity to develop disciplined, evidence-based investment strategies that can withstand market volatility and downturns.
Final Thoughts
Some of you may wonder how we ever existed before the dawn of the internet.
The internet, however, is a double-edged sword. There is some horrible stuff out there. On the other hand, there is a wealth of information at our fingertips.
We can waste a ton of time on social media platforms looking at really stupid stuff or we can read excellent material that will help us get ahead in life (includes topics related to creating financial freedom).
My primary purpose for writing this post is to highlight the human biases and overconfidence that can lead to poor investment decisions. It is important to critically evaluate and continually learn when it comes to investing.
We must always strive to distinguish between luck and skill. This is essential to ensure our successes are based on sound decision-making rather than market conditions alone. By doing so, we can build resilient investment strategies that will serve us well in bull and bear markets.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
