Experience Is Overrated

The machines have arrived on Wall Street. In 2016, quant driven hedge funds took in $13 billion while the rest of the industry lost $83 billion. One of the biggest appeals of eliminating the qualitative element that dominated the industry for so long is that quants sever the tie between emotions and decisions. Machines don’t carry  the same baggage as humans. The positive and negative experiences we had in the past stay with us and influence our decisions in the future. Sometimes for the better, often times for the worse.

If you saw The Social Network, you’ll recall the app Facemash that Mark Zuckerberg built with his friend Joe Green. This landed them in hot water, so when Green was asked to run the business side of what would become Facebook, he turned it down. Mark Twain described how our brains process these experiences: “We should be careful to get out of an experience only the wisdom that is in it and stop there lest we be like the cat that sits down on a hot stove lid. She will never sit down on a hot stove lid again and that is well but also she will never sit down on a cold one anymore.” Joe Green is the cat and Mark Zuckerberg is the stove. From a Bloomberg article, Facebook’s Missing Millionaires:

His dad, a professor at UCLA, told him, “ I don’t think you should do any more of these Zuckerberg projects.” Green heeded his father’s advice and opted out when Zuckerberg asked him to run the business side of what would become Facebook. Playing such a key role would have secured him 4 percent to 6 percent of the company, he estimates.

Ouch. Even if he got diluted several times and his ownership shrank to three tenths of one percent, Green still would have made it to the tres commas club.

What Will Happen to a Generation of Wall Street Traders Who Have Never Seen a Rate Hike? This question was making the rounds in 2015. The authors note that “two-thirds of traders have never seen a full Fed tightening cycle.” The implications being that those yet to experience a hike are not as equipped to navigate them as someone who has been through the proverbial ringer. I’ll take the other side. Experience is overrated, especially in systems as adaptable and unpredictable as the market.

Stanley Druckenmiller was promoted to director of equity research in just his second year on the job, leap-frogging eight people who had far more years under their belt. It wasn’t apparent at the time that he would go on to become one of the most successful money managers to ever live. Instead, the reason he was given that position was because he didn’t yet carry the burden of experience. When he asked why he was promoted above the others around him, his boss said, “For the same reason they send 18-year-olds to war. You’re too dumb, too young, and too inexperienced not to know to charge. We around here have been in a bear market since 1968.’ This was 1978. ‘I think a big secular bull market’s coming. We’ve all got scars. We’re not going to be able to pull the trigger. So I need a young, inexperienced guy to go in there and lead the charge.”

The other employees’ formative years came in a bear market. It’s all they knew. So when the bear finally came to an end in 1982, I would imagine they thought, here we go again. Fool me once, shame on you. Fool me twice, shame on me. Fool me three times? Get the fuck outta here.

When it really matters most, experience is not all it’s cracked up to be. Andy Groves wrote about this in Only The Paranoid Survive.

When an industry goes through a strategic inflection point, the practitioners of the old art may have trouble. On the other hand, the new landscape provides an opportunity for people, some of whom may not even be participants in the industry in question, to join and become part of the action….Few of the top ten participants in the new horizontal computer industry rose from the ranks of the old vertical computer industry, bearing testimony to the observation that it is truly difficult for a successful industry participant to adapt to a completely different industry structure.

He describes how those who grow accustomed to winning expect to stay on top. But few have managed to stay on top in a world that is constantly changing.

IBM was composed of a group of people who had won time and again, decade after decade…The managers who ran IBM grew up in this world… Their long reign of success deeply reinforced and ingrained the thought processes and instincts that led to winning in the vertical industry. So when the industry changed, they attempted to use the same type of thinking regarding product development and competitiveness that had worked so well in the past.

Using the same type of thinking that had worked so well in the past perfectly describes why there are so few household names in Wall Street. Thriving across different market environments is something only a handful of investors have ever been able to do. Jeremy Grantham, one of the most famous value investors of all-time, is living through this right now.  He recently said “Things do change. I was really lucky in that the first 30 years of my career were similar to the prior 30 years. But 1997 was very bad preparation for the next 20 years.” The same thing that gave Grantham fame and fortune in the first half of his career has brought his investors heartache and disappointment in the second half.

It’s uncomfortable for us to accept that our experience might be overrated; that somebody can come in and replace what we spent our entire career doing. But the game is always evolving and “iron-clad” rules are constantly crumbling. Experience doesn’t have to be a liability, but it can be for those who are always looking for history to rhyme. The greatest lesson we can learn from history is that those who learn too much from it are doomed to draw parallels where none exist.