Why investors need to learn from history

The way that human beings generally learn to do things is through trial and error. In most cases, it’s a sensible and effective strategy. But, as behavioural finance expert Joe Wiggins explains, it’s not a good way to learn about investing.  A video on the Bloomsbury Wealth YouTube Channel.

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Transcript: Robin Powell & Joe Wiggins/ Behavioural finance expert.

RP: The way that human beings generally learn to do things is through trial and error. In most cases, it’s a sensible and effective strategy. But, as behavioural finance expert Joe Wiggins explains, it’s not a good way to learn about investing.

JW: There are two reasons. One is the feedback we receive and the other is time horizons. So we think about the way we learn as we grow up. So take a simple example, when we’re a child, we put our hand on a hot stove, then we realise quickly because of the short-term good quality feedback we get, not to do it again. So we learn very quickly about what is a good and a bad decision. In investing, unfortunately, we don’t get that opportunity. The feedback we get is very poor over the short term because markets are so noisy and random over the short term. So we can make good decisions. They look bad over the short term and people can make really bad decisions that look fantastic over the short term. So we struggle to learn because we get bad feedback and the good quality feedback we tend to get is over the long term.

RP: Of course, there lies a problem. It could take you, say, 20 years to learn an important lesson. But, by then, it might already be too late for you to achieve your investment goals.

JW: So what that means is we need to focus on sensible investment principles and we need to focus on the historical evidence to guide us because learning from our own personal experience will mean we’re going vulnerable to short-term noise, short-term fluctuations and poor quality feedback. The history of financial markets is incredibly important and focusing on robust, impartial evidence in how you frame your decisions is absolutely critical. The other point is to have a sound, sensible, evidence-informed set of investment principles that guide you. What are the key aspects? The hold over the long term in terms of investing, so long-term approach, diversification, compounding, those kinds of key unimpeachable principles should be your guiding light rather than short-term experience in markets.

RP: So a strategy may appear to have worked over, say, two or three years, that doesn’t mean it will carry on working. A strategy that’s worked over 50 years or more has far more credibility.

JW: I think the other critical thing about investment feedback is can you link the evidence, the information that you’re looking at to sound investment principles? Does it make sense? Is there a fundamental reason why what you believe should work? Rather than it’s just happened in markets, therefore I believe it. What’s the reason behind this? Can I understand the investment principle so I can understand why equities might deliver a long-run return because they’re a stream of real cash flows linked to economic growth? That’s something real and tangible I can link my beliefs to. Other things are far more transient and fanciful.

RP: So beware positive feedback loops. And remember, you might learn more about sensible investing from the history books than the weekend newspapers.

Disclaimer — The information in this video does not constitute advice or a recommendation, and you should not make any investment decisions on the basis of it. If you do however require advice please do not hesitate to contact Bloomsbury Wealth.