Everyone Has their Own Version of History

Statistics genius Nate Silver spoke at a conference in Seattle a few weeks ago. He made a point that stuck with me. Radar technology was in its infancy in the early 1940s. To protect U.S. interests like the Pacific Fleet in Pearl Harbor, Navy planes circled the Hawaiian Islands, searching for threats. "You were just sending a couple of planes that would go around a circumference until they ran out of fuel and then head back to base," Silver said.

Alas, the Japanese military knew exactly how large that circumference was, and in November, 1941, sent its aircraft carriers just beyond the range our reconnaissance planes could fly. On December 7th, it attacked.

"My point is that everyone has a viewpoint," Silver said, and that viewpoint usually shows just a fraction of the whole picture. There are important events sitting outside your viewpoint that, if you knew about them, would totally change how you view the world.

There's a similar problem with investors and history. Your view of history is heavily influenced by your own experiences. But just like the Navy, your own experiences are an incomplete view of the world, arbitrarily blocked by when and where you were born -- the equivalent of reconnaissance planes with limited fuel range. There are important events sitting outside your viewpoint that, if you experienced them, would totally change how you view the world.

Take what the stock market did in your teens and 20s. There's a body of research showing that events experienced in your youth shape how you'll feel about a topic for the rest of your life. And depending on when you were born, stock market performance has ranged between dreadful and phenomenal during your teens and 20s:

If you were born in 1970, stocks increased nine-fold during your teens and 20s (adjusted for both inflation and dividends). This probably had a profound impact on you. You saw your parents gawk at their 401(k) statements, watched the E*TRADE commercial during the Super Bowl, and maybe had friends who retired early without much effort. To you, the market was a place easy fortunes could be made.

If you were born in 1950, stocks went almost nowhere during your teens and 20s. You probably saw your parents shake their head in frustration as what little gain stocks produced were eaten by inflation. It's unlikely you knew anyone who made a fortune in stocks, and you probably knew several who lost one. To you, the market was kind of a joke.

Neither of those views is "right." They're both just half-baked observations of the market's boom-bust cycle. But it's hard to convince people of that. To them, history is what they experienced. Everyone assumes they can think objectively, but if you were born in a different year you would probably have a totally different view of how the stock market works.

It's the same with inflation. I started paying attention to the economy when I was about 16. Since then inflation has averaged 2.3% per year, and the highest it's been is 4%. When my parents were the same age, inflation had averaged 7.1% per year and the lowest it had been was 4%. We've had totally different experiences, and those experiences shape how we think about inflation. But both are arbitrary and incomplete, and both could be dangerous. My experience may fool me into discounting the risk of future inflation, and my parents' generation may overestimate it.

Part of the reason people are bad at predicting the future is because everyone thinks the future will resemble the past, and people have totally different definitions of what the past is, biased to our own experiences. As Silver might say, everyone has a viewpoint, and that viewpoint usually shows a fraction of the whole picture.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

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  • Report this Comment On May 23, 2014, at 2:18 AM, douglee8 wrote:

    Radar did pick up the incoming Japanese planes.

  • Report this Comment On May 23, 2014, at 5:26 AM, appalossole wrote:

    You make a great point.

  • Report this Comment On May 23, 2014, at 7:21 AM, TMFHousel wrote:

    Douglee8,

    Not until right before the attack. And the radar signals were dismissed as either an error or incoming American planes (one young radar technician freaked out but was basically ignored by his superior).

  • Report this Comment On May 23, 2014, at 2:50 PM, cooncreekcrawler wrote:

    Great perspective on perceptions regarding investing. Similar emotions involved in the climate change "debate." The next few years are going to be very interesting indeed (terrifying)

    . Elon Musk may be observing from Mars.

  • Report this Comment On May 23, 2014, at 3:40 PM, kyleleeh wrote:

    @douglee8

    Radar picked up the planes as they were coming in to attack, but neither radar nor scout planes detected the Japanese fleet approaching or withdrawing from Hawaii. Not knowing that a Japanese fleet was in the vicinity caused them to dismiss the incoming planes until it was to late.

  • Report this Comment On May 24, 2014, at 12:07 AM, BruceBenson wrote:

    Or some of us were completely clueless as our family had too little to even be aware of the stock market. I suspect being poor was great preparation for being successful in the stock market and investing in general! No expectations and things could only get better.

  • Report this Comment On May 24, 2014, at 11:14 PM, iamthecoley wrote:

    Another great piece Morgan

  • Report this Comment On May 25, 2014, at 6:11 AM, talotu wrote:

    No real argument with the conclusion of the piece but I was born pretty close to 1970, and doubt that many people my age had parents with large 401K sums until the mid-late 90's if ever (many of them spent a great deal of time working when pensions were the norm). My own 401(K) did fire up some huge gains through the 90s however.

    By the time the e-trade commercials were running during the super bowl the end was near.

  • Report this Comment On May 27, 2014, at 8:13 PM, Mjd wrote:

    I was born in 71 and did not start learning about the stock market at all until college. I don't think it really started to shape my view of money until I had a real job and was able to save in the mid 90s. I try to talk to our 16 year old about money and the stock market... But I think we are a few years away from it having any impact on her mind set. So I personally feel that while the value of money is clearly established in ones teens and twenties, I do not think a view of markets is developed until later in life... 30s and 40s...

  • Report this Comment On May 28, 2014, at 7:19 AM, ENDzFED wrote:

    Operations North Woods- which was a program JFK oppsed shows our own government has scripted with the media and bankers to allow attacks to justify war mongering for profits, and when you realize the first to finance WW2 and Hitlers agenda were the very ones that cry victim- kind of maks you question the history we are taught for sure.

  • Report this Comment On May 31, 2014, at 11:24 PM, SkepikI wrote:

    hmmmm, well Morgan I can assure you that HISTORY is written by the writers .... and that does not always do justice to the facts. As Nate Silvers book will reveal to you if you read it again.

    FACTS are such slippery things... we are sure they are one way until we find out they are another.

    In another two or three decades you yourself will find that things you know to be true based on experience, are in print another way, so you are wrong by history and the facts?..... Real life examples at request.

  • Report this Comment On June 02, 2014, at 12:38 AM, enginear wrote:

    good point...but:

    I was born in '53, and although my folks owned some stocks, I had no inkling of what they were, or how they were performing (its said, 'if you remember the '60's you probably weren't there').

    I did begin investing in the early '80's, in bonds (horrible inflation was being conquered by Paul Volcker) and utilities, and my 'history' came from that great experience. I pretty much doubled my money in a year because my older brother had taken an economics degree, and explained how interest rates affected the price of these things).

    I did OK over the years (divorce and life's other requirements have taken their toll) by learning that you need a reason for investing in something, and that reason should be kept in mind for the eventual disposition of that investment.

    The point that we all have a personal 'history' is valid, but it's a bit broader than stated.

  • Report this Comment On June 19, 2014, at 11:08 AM, TMFKlesta wrote:

    Great read, Morgan.

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