Investing: Experience versus temperament

When friends introduce me as someone in the market for the last two decades, I often wonder: Does mere tenure imply proficiency? In the initial years, I oscillated between trading in stocks based on technical and fundamental analysis, before giving it up in 2002 — after losing a lot of money.

It was truly frustrating to see the index triple from 1990 to 2002 — without me really making anything out of it. In fact, for around eight years beginning 1997, I benefited more as a sub-broker, earning commissions, rather than an as an investor. I then realised, the limitation lay in my temperament, and, began investing through systematic investment plans (SIPs) in mutual funds. This has stood me in good stead.

In the world of science, law or performing arts, experience and practice play a pivotal role. That is why experienced doctors and lawyers are accorded a lot more importance than greenhorns. In these disciplines there is a formal body of knowledge which one must master first. After that, it is a matter of keeping oneself updated and building one’s contacts. For instance, a lawyer who is a constitutional expert needs to keep track of the amendments without revisiting the basic body of knowledge too often. This may apply to performing arts too, albeit to a lesser extent. For instance, you do not become an acclaimed opera singer or Indian classical singer without years of riyaaz, unless, of course, you are a prodigy.

I wonder if experience can be accorded the same significance in a field as dynamic as ‘investing’. I, for one, never consider myself a good stock picker, despite my years of experience. I simply lack the temperament for it. While I do enjoy reading books on investing, I do not have the patience to ferret through loads of data (turning over rocks, to quote Peter Lynch) in order to discover hidden gems.

I think a person who is at it for many years, but who lacks the temperament, need not necessarily be better than a beginner who begins on the right foot. For instance, while ‘investing’ may lack a formal body of knowledge, and is never taught in classrooms, there are several good books written on valuation and investing by industry stalwarts. A beginner who devotes time to read the basics before beginning her journey as an investor may do well (if not better) than a person possessing years of experience but lacking the temperament.

At best, having some experience may prevent you from making certain mistakes. However, it is not necessary that certain events will have the same outcome at different points in time. Many a time, history won’t repeat — but may rhyme.

For instance, from 2003 to 2007, many experienced market participants made less money than newcomers because they were unable to fathom the extent of the bull run in stocks, as their vision was distorted by the market correction which took place in the years immediately preceding. They were bearish merely because indices were moving quickly towards the highs attained in the year 2000. They ignored several fundamental changes which were driving stocks. On the other hand, newcomers, who were armed with the knowledge of valuation metrics, plunged in, as valuations were compelling during the first half of this bull run. Unlike other disciplines, the market does not lay great store by historical performances (both good and bad).

Also, investors who have experienced the carnage in 2008, may not necessarily be in a better position to know when the ongoing correction will end and whether we will experience an upsurge as robust as the one witnessed from early 2009 onwards. That is why, certified financial planners always stress that investing through SIPs is an option superior to lumpy investments predicted on market timing.

I, therefore, feel that knowledge and temperament play a greater role in success rather than mere tenure or experience. Hence, younger investors could beat older hands at the game.