In 1994, I was given a phone, a desk and a computer terminal at a major brokerage firm’s office in Queens, N.Y., and cut loose to build an investment practice. Though I didn’t have much market experience, I did have plenty of research to draw from and I read voraciously. It didn’t long for me to begin to attract some very savvy clients. After two years, I did well enough to finish the training program in what they referred to as top quintile; my assets under management, number of accounts and revenue for the firm were high enough to earn the maximum bonuses over the two-year period I was tracked.
The one thing I didn’t have was the experience of living through a full-fledged bull and bear market. That experience is invaluable. Reading about a crash is one thing; speaking with clients in the midst of one is very much another. When the dot-com bubble burst in 2000, the older, wiser brokers in my office left at 5:00 and slept well because they hadn’t listened to anyone saying, “This time is different.” They kept their clients diversified or even encouraged them to tilt their portfolios to the conservative side as prices teetered on insanity. Those of us who hadn’t yet gone through a crash were more prone to be seduced by rapidly growing website views (but no revenue), and we bought into “whisper earnings.” We were trained by Wall Street to accept the complete disconnect of value from price.
The market is a fine teacher, though, even if the tuition can get pretty expensive. My experience of the dot-com crash made me very skeptical of home prices in 2006 and 2007. But some of the best-educated and smartest people I knew in the investment industry got stung badly on the value of their own homes, only because they hadn’t yet gotten to know an investment bubble up close and personal. My bet is they’ll be smarter the next time excess rears its head.
If you rely on investment advice, make sure the person giving it to you has been through a full market cycle and has had the training to learn from it (the CFP and CFA designations are some of the most widely respected). Otherwise, your portfolio might become more a training ground than a significant part of your wealth.
Over time, investing experience eventually manifests itself as (at least what feels like) common sense. At the moment, for example, that common sense makes me really question whether oil is going to zero. I think it won’t. If ever there were a time to be studying a few different big oil stocks, it sure feels like it now.