There are a bunch of ways I which I feel fortunate in falling in to a philosophy major but if I had the chance to do it all over again, I would include a lot more Anthropology. I read the theory that the universality of nodding the head as a positive signal and shaking for negative is an outgrowth of being presented with food in primitive eras– the nod is reflection of ducking the head to eat what’s offered and shaking is a rejection – and I’m fascinated by the insight into how our brains actually work at a base, hard wiring level and how these patterns persist. I’m going to suggest today that the career of an investor, and definitely the psychological arc of a industry professional, is subject to its own anthropology dictated by the time period in which they developed industry and investment knowledge.
I refer frequently to the technology bubble and this is only in part because it can be held up as a complete boom and bust cycle worthy of analysis. The other reason is that the 1990s is when I came up, and absorbed the majority of what knowledge I have as to investing and the inner workings of the industry. Most intuitive reactions I have about any market are, at their base, the result of subconscious comparisons with conditions, and the result, then.
In those halcyon days, the old-timers were a consistent source of hilarity with their hackneyed insistence on commodity stocks. Why, we wondered, would anyone care about drill holes and ore samples when crude was on its way to $20 and the history of modern civilization was being re-written by Bill Gates? It was quaint, like long underwear with a flap on the back or the Edsel. In hindsight the foundation for their bias is clear – the old-timers came up in the late 70s, early 80s (or apprenticed under someone who did) when commodity stocks were about the only way for investors to dodge stagnation and the oil embargo.
It takes time to develop a body of knowledge. Most investors not being geologists, the ability to comprehend the investment application of seismology reports, and the meeting-by-meeting assessment of management and engineering teams (always a key determinant of commodity investing success) is the task of years. Once developed, the last thing you want to hear is that boom is over and your skill set needs to be put aside for a decade or two. In the same way, for my generation the tech bubble came with its own set of lessons, both good (the transformative power of the Internet, successful capital allocation towards efficiency, etc) and bad (horrendous corruption in the new issue business).
In a practical sense those of my era still struggle with this reflexive impulse to look back at technology stocks for investment opportunities and now I assume it’s the old-timers turn to laugh at us. The last major report I wrote for my previous firm was on Cloud computing despite the ridiculous valuation levels at the time. More generally, however, I would argue that the primary lesson of the tech bubble, reinforced with a sledgehammer in 2008, is a pervasive lack of trust in any type of sustained rallies.
In order to progress as an investor these biases, an accident of history, have to be fought but it is incredibly hard. Every time I see photos of the shiny Chinese ghost towns and hear yet another story of accounting fraud I think immediately of standing over the trader’s shoulder on the first day Yahoo! traded thinking, “This is nuts. There’s no way this can continue.”
In the time-squeezed, quick burnout environment of finance, estimates of how long a “generation” lasts run to about seven or eight years. So we now have two generations of traders, bankers and brokers who in the back of their mind are at least partially conditioned to expect market disaster every few years. Is it any wonder then that technical analysis has become almost the sole determinant of investment decisions? Get in and get out before the dyke collapses and don’t bother reading research because they can’t agree on anything and even if they did it would be a sure sign we’re being lied to.
If I tell you the current market “feels” unsustainable, it might be a sign that I am the victim of my own investor anthropology and tech bubble-derived hard wiring. (One of the benefits of an education in the Humanities is the ability to recognize circular arguments.) Objectively though, I can not help but think that the psychological effects of the huge market upheavals of recent memory, and the lack of positive longer-term equity market returns, will have lasting implications for both professional and non-professional investors. The pendulum will undoubtedly swing backwards at some point, away from what looks like a weird form of investor nihilism, but it will likely take a long, long time – the memories and habits from your formative investing years appear to last forever.