The limits of direct experience in an investor’s education
- September 19th, 2012
Yesterday I had a post, “Investing Books That Go Above and Beyond” up at the new Amazon Money & Markets talking about some investment-related books that I find worth a further look. I view investment books as simply another resource for investors. If books are one end of an educational spectrum then one could argue that direct experience lies at the other end of the spectrum.
Direct experience is crucial for any investor but in practical terms is limited in its efficacy.* There are two reasons for this. Experience is not a useful learning tool unless investors actively embrace the lessons inherent in trading activity. This requires a purposeful approach to gathering and analyzing the data generated from one’s own investment activity. I would guess that most investors and traders really couldn’t tell you in any systematic fashion about their results. In short, they are trading out of their back pocket.
The benefits of experience is limited in another way. Any individual trader can only experience so much. We are limited by the particular markets in which are dealing and the time period it occurs. The fact is that other investors have collectively experienced so much more and in some cases written eloquently about those results. Tim Richards, the author of the newly published The Zeitgeist Investor, has a post up at The Psy-Fi Blog talking about the limits of experience. Richards writes:
For some people investing is as much about what other people think of them as what their returns are. Which is fine, if that’s your bag, but otherwise the best way of learning in investment markets is from other peoples’ research and experience. You’ll never learn enough from your own to really make a difference.
That is why I always find it puzzling that so many investors, often professional investors, are so scornful of new and emerging ways for investors to communicate with each other. Blogs were the first method that was scorned by the media and professionals. Now blogging is a dominant form of communicating information and opinion.
More recently, whether it be a StockTwits, SumZero or Estimize (among others) why wouldn’t you want to try and capture information and insights from other investors? If there is only so much we can do as investors on our own, doesn’t it make sense to try and leverage your knowledge in new ways? There are of course good ways and bad ways to use these services and used improperly they could be detrimental to one’s own investment efforts, but the same can be said for any other resource. However to ignore them seems an effort in willful denial.
*It should also be said that I am a skeptic of paper trading as well.
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