First Impressions Matter

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I was in eighth grade when the Great Recession really took off. Our yearbook had a page with current events from that year, and one was an ominous photo of the Lehman Brothers headquarters on its final night.

They say a picture is worth a thousand words and this was no different. The photo was supposed to represent the collapse of the economy that year. The thing is, I was just a kid and knew very little about markets. I knew the Great Recession was a massive event but I only understood it through the reactions of adults in my life. Somehow that was enough.

Much of our perspective can be explained by something as random as what happened in the world during our formative years. It's especially true for emotional topics like money, where highs and lows are felt bone-deep.

All it took was seeing the pale-faced looks, standing three feet from the television with hands on hips to feel it. I would be lying if I said those reactions didn't stay with me as I began to better understand markets.

The range of experiences people have in their youth is vast. An investor coming of age in the mid-1970s saw wage stagnation, high inflation, and an unemployment rate of 8.5%. The stock market got wrecked in the process.

Rewind a couple of decades, and an investor coming of age in the postwar boom of the 1950s saw real GDP and employment skyrocket, while per capita income almost doubled and the stock market enjoyed a bull run.

However, that person's parents probably didn't own stocks. With a generation scarred by the Great Depression, only 4 percent of the American population owned stocks in 1952.

Three eras, three wildly different experiences.

A study published in the Oxford University Press found that:

Economic crises affect people’s psychology, and ultimately forge attitudes and beliefs that sustain for years. Think about it - if your introduction to the stock market was horrible, or even just dull, you're more likely to be disenchanted by it. However, if all you know is up and to the right, you're probably feeling pretty optimistic about your investing future.

This dynamic spills over to many areas of the economy.

Millennials had never experienced significant inflation before 2021. We can read about the 1970s, but some things aren't fully appreciated vicariously. So when inflation spikes in 2021, we conceptually understand from reading textbooks that it's bad, but it doesn't conjure memories of oil shocks and meatless spaghetti as it would for Baby Boomers.

Gold experienced one of its greatest bull markets of all time in the 1970s, gaining over 700%. Outside of its inherent safety, it's no wonder why most gold bugs are Baby Boomers. Young investors may have read about gold's epic run, but they didn't live it. And with higher return investments elsewhere in the 2010s, gold wasn't as exciting to them.

Younger investors have never had to consider interest rates in their investing decisions. The Federal Funds Rate was essentially zero from 2009 until 2022. That was 13 years of fun and games, which is in stark contrast to the rates that past generations grew up with.

2021 was the year investing went mainstream among a generation. 2022 will leave scars for many of these newer investors, just as bear markets did for generations past.

As with every bull market, there are rationalizations made for each investment: sky-high multiples, 1,000% APRs, zero revenue companies with multi-billion dollar market caps. Everything has a perfectly sound economic theory to stand on. Market moves are consistently upward, no matter the news. And winning experiences in the stock market boost willingness to invest, further adding fuel to the fire.

As the market reaches a top, you find out who was swimming naked. Accounting in 2000, mortgages in 2008, and crypto in 2022. It starts with a couple of canaries here and there, and soon the dam bursts.

You have to experience it to learn it. And our first experiences have a disproportionate impact on how we think about investing.

Imagine two investors with the same goal and the same data. One might believe Tesla is the future of cars, while the other investor thinks it will flop. This diversity of opinions is what makes markets work. But if we are using the same data and we all want to make money, why are there gaps in opinion? Part of it is because we’ve all had different experiences. And no amount of reading lets you fully understand what it was like to experience someone else's.

What you have experienced as an investor is different from what I have experienced. The generation we are born into, the values instilled by our parents, and the random paths we take are sometimes out of our control.

It's like we are standing in a room with a giant puzzle on the table in front of us. We all have the same pieces, but we're putting them together in different ways, trying to create a cohesive picture. Some of us might be focusing on the edges, trying to get a clear outline of the overall image. Others might be diving straight into the middle, piecing together the details. And then there are those who are just throwing pieces wherever they see fit, hoping for the best.

We may have different approaches, but we're all working towards the same goal. And that's what makes markets so interesting. It's this diversity of perspectives that drives progress.

It's not easy. Sometimes we get so caught up in our own pieces that we can't see the bigger picture. We become stubborn and refuse to consider other perspectives, even when it's clear that our approach isn't working. Sometimes we learn that the hard way.

So the next time you find yourself amid a market disagreement, consider others' experiences and remember: we're all in this puzzle-solving frenzy, trying to piece together a better future.

-Sam

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