This weekend many investment professionals (and amateurs) will sit down and read the most recent quarterly letter from GMO. with contributions from Jeremy Grantham and Ben Inker. In it Grantham relates a story about his first experience in investing. I will leave you to read the entire (short) story from which Grantham learned eight important lessons on investing. They include:
1) Inside advice, legal in those days, from friends in the company is a LEARNED: particularly dangerous basis for decisions; you know little how limited their knowledge really is and you are overexposed to sustained enthusiasm;
2) Always diversify, particularly for your pension fund;
3) Fraud, near-fraud, or colossal incompetence can always strike;
4) Don’t buy stocks yourself if you’re an amateur: invest with a relatively rare expert or in a low-cost index;
5) Investing when young will start your brain turning on things financial;
6) Painful errors teach you more than success does;
7) Luck helps; and finally,
8) Have a convenient mother to be the fall guy.
These are all good lessons but I want to highlight number five which talks about getting started early in investing. Who knows whether Grantham would become the investor today without that experience but it certainly didn’t hurt. A ways back I wrote a post talking about the importance of getting started early investing not necessarily for the monetary gains. More importantly the experience you gain early in you working life can compound over time so when the stakes are higher you are ready to make more impactful decisions. I wrote:
More importantly as a young investor you get a chance to make your novice investment mistakes while the stakes are, in actual dollar terms, relatively low. Or as said in a different context, “You only get one chance to be a beginner.” Wouldn’t you rather experience your first bear market when you are 25 and you have $5,000 in your 401(k) plan than when you are 50 and retirement is beginning to stare you in the face? The experience gained when you are young will help you when the stakes are ratcheted up later on in your career.
Therefore a more important, and relevant, concept isn’t compound interest but compound experience. By that I mean compounding experience upon experience. Taking what you learn from one experience and applying it to the next. In this context, piling lesson upon lesson helps generate much greater insights than trying to learn everything all at once and under intense pressure.
The great thing is today that are plenty of ways to get started investing with only small amounts of capital. Non-transaction fee ETFs and low commissions in general make it feasible for young investors to get their feet wet in the financial markets. The confidence that comes from “compounding experiences” (both good and bad) cannot be learned, it has to be earned the hard way. We are all in the end responsible for our own financial decision making and there is no substitute for learning the lessons of the market over time.