experience teaches

Classical Language, Mostly Classic Ideas

© Can Stock Photo / franckito

A surprising number of Latin phrases are woven into modern society, considering the language has not been widely used for centuries. From simple truisms like tempus fugit (time flies) to mottos like e pluribus unum (from many, one), the wisdom and ideas of a civilization lost to antiquity survive.

The Roman historian Tacitus wrote “experientia docet,” experience teaches. We must take issue with this one. Investors make a critical mistake in learning from experience, in our view. They often learn the wrong lesson.

People sometimes adopt tactics and strategies that would have worked great in the last cycle. Unfortunately, times change and the outdated strategies usually fail to perform like they did before.

In the year 2000, following the stock market bust stocks fell—but home values rose. This taught people the wrong idea that “you can’t lose money in real estate”, which caused a lot of damage during the 2007 financial crisis. Then, by 2009, lenders learned the wrong lesson again—because auto loans outperformed in the downturn. Today they may be setting up future losses by putting too much money into substandard auto loans.

A related problem is best illustrated by a product pitch we recently received from an investment sponsor. Their latest offering is based on “the top performing asset class of the last decade!”

Clients, you know what our issue is with this. We love to buy bargains. The best performer over the past decade is, by definition, no bargain. Piling in after a big runup may be jumping on the bandwagon right before it goes off a cliff. However, the experience of the last decade evidently taught many that the specific sector was the one to buy now. Wrong lesson, again.

One interesting facet of all this is that experience actually can teach us. We just need to be certain we are learning the right lesson.

There were useful and profitable lessons in the tech wreck of 2000 and the real estate bust that began in 2007. In our view, those lessons are that it is dangerous to invest in over-priced assets—and it doesn’t pay to join a stampede in the market. Those lessons help us live with attractively priced stocks, and avoid the flight to safety that made historically more stable assets overpriced (in our opinion.)

So let us leave you with a little Latin of our own devising: cognitio ad felicitatem. (Knowledge leads to prosperity.) Clients, if you have any questions, comments or insights please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

No strategy assures success or protects against loss.

Stock investing involves risk including loss of principal.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.