Our Experiences Shape Who We Are As Investors

This month we recognize the ten-year anniversary of the failure of Lehman Brothers as the U.S. and the world creped further into financial crisis in 2008. Greg Ip of the Wall Street Journal penned a good article this weekend looking at risk-taking since the crisis, making an important reminder that “Financial catastrophes usually alter attitudes to risk.” So true and this is something I personally feel has had a large and somewhat unique impact to my career as a professional money manager.

Our initial experiences often shape who we are. Nobel laureate and pioneer in the field of behavior economics, Daniel Kahneman, discussed the “experiencing self” and the “remembering self”, diving into the impact our memory has on how we experience moments in time. Kahneman notes the importance of an ending or final moments can have on shaping the moments of our past and how we recollect them.

How we each remember and were impacted by the Great Financial Crisis (GFC) alters how we view the investment world today. While this may not be something top-of-mind each day, it is a topic that we as investors and traders must address at some point and recognize its influence on our decision-making.

Personally, I can see a very large influence had by the GFC and the early days of my career in how I evaluate risk and investing in general. Let me explain…

I graduated from college in the spring of 2009. Being a Financial Counseling & Planning major, I was somewhat exposed to what was going on during the chaos of 2008, but not nearly to the same degree as those were found themselves in the jaws of the bear in real-time. In the summer of 2008 I completed an internship at a wealth management firm (which is an interesting story in itself, but I’ll save that for another day) but this was before the clouds truly darkened and the financial markets stepped onto the proverbial elevator that headed straight down.

Once I started my first job with a financial planning firm, I began to piece together what all had happened over the past twelve months.  I started to truly get an understanding of the downside risks that tore apart portfolios like a tornado for so many Americans.

I shifted to the portfolio management side of the firm I was with around late ‘09/early ’10 – becoming an Investment Analyst. Then the Flash Crash of 2010 happened, and I watched our firm’s two men in charge of the portfolios panic. I remember being instructed to put my phone on ‘do not disturb’ as we unloaded the portfolios of equity exposure. Unsure of what had/was happening, emotions took over, likely with GFC wounds still not fully scabbed over and fear of a financial ‘aftershock’ coming a year after the market bottomed. I later learned the mistake this turned out to be, but at the time I was an observer, I took my marching orders from those more senior.

Then the calendar rolled over to 2011 and brought with it another market correction. The Volatility Index quickly went from 15 to 48 and the S&P 500 declined 19+% in a matter of just a few weeks. Within my first two full years as a market participant I experienced two very quick periods of market declines and increases in volatility. I quickly learned that the equity market could turn on a dime.

As I gained experience, changed firms, and took on more responsibility within the investment decision-making I had a great deal of interest in risk management. I heard the “war stories” of the dot-com bubble, I read book after book about market history – learning about the great depression, the bond crisis in 1994 and Asian crisis in 1998, etc.

I’m not alone in learning these lessons and hearing these stories. My whole generation has been impacted from the past and we see news reports of it every few months. Most recently Barry Ritholtz covered this topic for Bloomberg, discussing the findings of a Vanguard paper that addressed the lack of investing being done by millennials. Vanguard found that those who opened accounts after the GFC were, “more than twice as likely to hold no stock as those who began investing before the crisis struck.” While I’m disappointed to read this, I can understand the “why” behind the reason. My generation saw what happened to our parents and their friends and other family members. Many saw their family homes taken by banks, parents coming home early from work holding the infamous white banker box containing their belongings. These were the final memories for many as they started their journey into adulthood, being told to save, offered a 401(k) from their employer. The first real money decisions my generation made were during or right after one of the worst financial periods of time in history.

I think this has a had a tremendous influence on my interest in market volatility, which has been a facet of my research for several years. I saw the destruction that’s paved the roads of our country’s past and knew it wasn’t going away. My research on volatility eventually led to my writing Forecasting a Volatility Tsunami which was awarded the 2017 Charles H. Dow award by the CMT Association.  My attitude towards risk and volatility also led to major changes in how my current firm handles risk exposure within client portfolios, improving a process that has made us much better stewards and more confident in taking emotion out of the execution process.

While no Portfolio Manager enjoys a drawdown, understanding they are part of the market’s structure and are unavoidable is critical to have a long-term future in this business. Nonetheless, my research focus has been largely on avoiding large drawdowns. But we can’t just hide in the closet, we must take risks to reap asset appreciation. Which commenced to my adaption of growth-style investing. While my firm deploys several stock selection strategies, one that I lead focuses on growth stocks, often associated with breakout patterns. While those that also deploy this type of strategy will surely attest to, growth stocks can often bring with them large bouts of volatility in both directions. This has played and continues to play well into my risk management focus and distain for drawdowns. By being keenly on the look out for risks within positions and studying volatility of the market and individual securities I’m able to dampen (not eliminate!) pieces of the volatility brought on with growth style investing.

A focus on volatility and market risk also has led to my creation of Thrasher Analytics, an institutional research service. I provide commentary and insights on where I see various risks within domestic equities, international markets, fixed income, and U.S. sectors and industries.  Using both my Volatility Risk Trigger model along with several other pieces of analysis I show subscribers where and when I think market risk is overly heightened.

So much of what we do as investors and traders is mental it’s enormously important to recognize how our past has shaped the way we view the world and specifically the financial markets. Fortunately, I’ve been able to wrangle my aversion to risk that was created during my first years in the market into a positive professional attribute that’s acted as an important steppingstone in being a more successful money manager.

I hope others in my generation can shed their fears of investing. Recognizing that some don’t take on market risk due to a lack of funds; I wish those that are deciding to sit in cash can speak with a trusted advisor or friend that can help them make the first moves in the right direction of proper financial planning. This topic will come to roost for far too many in 30 or 40 years as thoughts of retirement come into their purview. A lack of exposure to compound interest and market growth will hold back countless millennials unless action is taken soon. While we can’t eliminate the memories that shape who we have become, we undoubtedly can control who we will be in the future.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.