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OSCAR WILDE ONCE made this observation: “Education is an admirable thing, but it is well to remember from time to time that nothing that is worth knowing can be taught.” In other words, the only way to truly learn something is through experience.
When it comes to investing, this is easier said than done because learning through experience can be expensive. As Warren Buffett once quipped, “It is good to learn from your mistakes. It’s better to learn from other people’s mistakes.”
How can you square this circle? Wilde and Buffett each make good points. I believe both education and experience are key to learning more about investing. How might you approach that?
Let’s start with education. Finance books and articles could fill a library, but there’s no need to read them all. Instead, I’d focus on four important concepts.
1. History. The one thing about the stock market that’s predictable is its unpredictability. New crises frequently come along, and each is different enough to give investors renewed anxiety. In dealing with these crises, what’s most important? In my opinion, it’s perspective. Good investors have a sense of market history that can help them navigate crises better than other investors.
To learn history, you might consult this list of past market crashes. While it’s useful to study U.S. history, this list is global, going back to the Dutch tulip craze in 1637. Lists like this can help us appreciate an unavoidable reality: that crises have always been a feature of investment markets, and likely always will be. While this fact might seem unnerving, knowing this can help us better weather future events.
The investment consulting firm Callan provides another great resource: Its Periodic Table of Investment Returns helps investors appreciate the largely random nature of markets and thus the futility of making predictions.
For a more comprehensive study of market history, turn to William Bernstein’s 2002 book The Four Pillars of Investing. One of the four pillars is dedicated to history. As Bernstein puts it, markets periodically go “barking mad.” But by studying history, investors have “at least a fighting chance” at recognizing and understanding the madness when we see it. A second edition was published in 2023.
2. Psychology. I believe understanding market psychology is as important as studying market history. Benjamin Graham’s The Intelligent Investor is a good place to start. In a preface to the book, Warren Buffett notes that he first came across Graham’s book 75 years ago: “I thought then that it was by far the best book about investing ever written. I still think it is.” Why? Graham explains market psychology by way of a parable.
Mr. Market is a fellow who can’t control his emotions. Sometimes he’s rational, Graham says, but sometimes “his enthusiasm or his fears run away with him.” Mr. Market’s behavior is representative of the market as a whole. That’s why, Graham says, investors “should neither be concerned by sizable declines nor become excited by sizable advances.”
3. Statistics. How should we think about star investors who seem to be able to beat the market? In his book Fooled by Randomness, retired investor Nassim Taleb offers this illustration: “If one puts an infinite number of monkeys in front of (strongly built) typewriters, and lets them clap away, there is a certainty that one of them would come out with an exact version of the Iliad.”
Taleb acknowledges that the probability is “ridiculously low,” but he uses this idea to explain why we should never be too impressed by investors who manage to beat the market. In short, Taleb ascribes this to random chance. Each year, there will always be investment managers who end up way ahead, but there will be very few, Taleb points out, who are able to beat the market multiple years in a row.
Taleb’s book is 20 years old, but more recent data still confirm his argument. Each year, Standard & Poor’s publishes its “Index vs. Active” report comparing the performance of actively managed funds to their benchmarks. In any given one-year period, somewhat more than half of active funds underperform. But over longer periods, upwards of 80% or 90% of active funds lag behind.
4. Simplicity. Retired money manager Peter Lynch commented that investing “is both an art and a science,” but added that “too much of either is a dangerous thing.”
To illustrate Lynch’s comment, I recommend the book When Genius Failed. It tells the story of a group of Nobel Prize winners who started a hedge fund based on highly quantitative strategies. While the fund was successful, their combined pedigree and early accomplishments led to an overconfidence in the system they’d built. The result was a financial meltdown so severe that the Federal Reserve stepped in to stabilize the situation.
The lesson: While complex investment strategies may seem compelling, I believe simplicity for most investors most of the time is a more reliable strategy. For more on that point, you might like a book titled The Simple Path to Wealth.
Another recommendation: Longtime journalist and investment manager Barry Ritholtz recently published an entertaining volume titled How Not to Invest. The book is a field guide to avoiding the worst of what he calls bad ideas, bad numbers and bad behavior. The idea is to keep things simple.
What about Oscar Wilde’s comment that we need to learn through experience? There’s truth to it. In addition to this recommended reading, I suggest that investors—especially those just getting started—experiment a little. What should you buy? To answer this question, we can look to Albert Einstein.
At one point in his life, Einstein owned a small sailboat which he named Tinef—German for “piece of junk.” Because it wasn’t very seaworthy, he often ended up on the rocks. But Einstein continued to sail the Tinef, even refusing a motor that a friend bought for him. He preferred wandering and exploring, even if it didn’t always end well.
If you want to learn more about investing rather than by reading about it, I suggest taking a page from Einstein’s book. Explore a bit. If you have a favorite product, try buying the company’s stock. Interested in cryptocurrency? You could put a few dollars into one of the new bitcoin exchange-traded funds. In short, you might explore some of the investments that—according to the data—aren’t necessarily recommended. As long as the amounts are modest, I believe this is an effective way to learn.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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I wonder how Wilde would interact with Socrates, who seemed to think that everything we know is already within us, but requires a series of questions in progression to be brought into the light from within.
With investing, I think Wilde has a point in one important respect. One sometimes needs actually to experience enough investing gains and losses, all-too-temporary increases in value and the alternative, sweat-inducing drops, in order to know oneself and one’s tolerance for risk, loss and patience. But that also confirms Socrates – learning to be a calm rational investor often requires us to mature ourselves, and to draw out from within the characteristics that keep us calm and rational. I’m not sure we get the same result from learning from others’ mistakes, as Buffett counsels, although there are no doubt things to learn from other people that don’t need to be experienced directly.
Perhaps you should reference Rudyand Kipling’s poem, If. That poem deals with the traits of investors – keeping your head when others lose theirs, wait without getting tired of waiting, dream but not become controlled by those dreams, accept losses of things dear to you, be willing to take risks – even big ones – and not crumble if you lose, and ultimately, to know yourself, whether you deal with kings or commoners. It is a pretty good poem (and should perhaps get a rewrite to cover daughters as well as sons.)
Wilde was being his usual flippant, ironic self with that quote.
In fact, education is the perfect place for learning facts and hard truths. Try learning your times tables through trial and error. Learn some facts, learn how to learn, learn critical thinking, and then go get experience.
Your portfolio will thank you.
Another great book is “A Random Walk Down Wall Street” by Burton G. Malkiel. He recommends low cost investing through simple, total market index funds (stock and bond; domestic and international), and provides long term data to support his findings. He also provides ‘down to earth’ asset allocations for different age brackets.
Adam, the multiple URL links to other resources in this week’s article are exceptionally helpful! I have read a good number of the works you cited, but your narrative helps to nicely connect the dots for newer investors on the 4 key concepts highlighted. I am forwarding a copy of this article to my adult children. Thank you for this insightful posting.
‘OSCAR WILDE ONCE made this observation: “Education is an admirable thing, but it is well to remember from time to time that nothing that is worth knowing can be taught.”’
school is a great adjunct to education…shared knowledge base, specific skills and self advancement in a personally desired or rewarded direction. but it is the smallest part of learning..walking, talking, socialization, values, etc…all are the real education.
that plus the desire to learn to think too as you referenced w einstein to explore…science has been defined as thoughtful observation..i believe that represents the best model for education. and then build on that…..
Excellent article and worthy of a review for all investors.
My education was accidental. In 1975, right out of college, i got a job as a sales assistant to 5 brokers at the Bethesda, MD office of Merrill Lynch. They gave me the famous Louis Engel book, How to Buy Stocks. There were 3 women brokers in the office, one of whom was sleeping with the manager. My bosses—all in their early 30s—always wandered in around 10 am so my mornings were spent with their clients. I executed orders by putting them into a vacuum tube sent to the backroom.
When I saw another fresh college grad (male) get a job as a broker, I asked myself why I didn’t give it a shot. I mean, he didn’t know ANYTHING and was only allowed to promote ML approved stocks. His days were spent cold-calling. I thought he was a complete idiot. I remember that I made $600 a month. And my guys gave me a sweater rather than a bonus. An effing SWEATER! He made $2000 a month and would receive commissions when his sales hit a designated threshold.
So I applied to be a broker and traveled to New York to take the Series 7 test. I passed the math part with nearly a perfect score. But got a “C’ on the aptitude component. I was told I wasn’t aggressive enough to be a broker. A few years later, a check for $200 arrived at my dad’s house. Yup, a class action suit brought by every woman who had applied to be a broker and was denied.
My interest in being a broker faded—though I was tempted by a Dean Witter offer for a new office in Fairbanks. I met the guys while an exotic dancer at the Bare Affair for all those pipeline workers. But, Merrell Lynch turned out to be the last corporate or for-profit business job I ever held. I turned my career towards public work in the arts and humanities.
And my knowledge proved useful as I managed the money of the 4 non-profits I directed. And what I learned guided my personal investing decisions. And I have some definite ideas about brokers!
the old saw ‘I have some definite ideas about brokers!
every time i call my broker i am…
Yes indeed! Thanks Adam. Along the teachings of Nassim Talebs book, a friend and I ‘went up the hill’ to the casinos in Colorado. We both had a great time. He had $141 extra dollars and was and is so ecstatic about that. We HD folks know, getting a lot of joy in a gain is usually quickly erased.
My education started when I was young with the book by Andrew Tobias, The Only Investment Guide You’ll Ever Need in 1978. And I listened to Forbes Magazine (when Malcom Forbes was the editor) and Louis Rukeyser on PBS.
The first year of the IRA (1974 or 5), I was eligible to put the kingly sum of $600 into my brand new IRA account. Saving to the maximum of my IRA, 401K, Sep IRA or Solo 401K accounts was my mission in life.
My portfolio grew, and I ignored the markets and kept saving the maximum allowed. I was planning to retire early in 2009. Thank goodness I did not mention this to any clients!
After the haircut in 2008, I needed to avoid withdrawals for awhile. I continued working and went looking for advice on managing my now sizable portfolio for withdrawals, and found the Bogleheads forum. It was an excellent place for me to investigate what to change, how to manage withdrawals, and gave me solace that I hadn’t done too much stupid over the years.
Now, I’m several years into retirement and the trepidation around starting my way down the mountain has eased. The best instruction along the way has been Wade Pfau’s book The Retirement Planning Guidebook. I never would have guessed that spending my savings would be harder than building my savings. All of us seem surprised by this, as we reach the peak, take a few selfies, and then ponder how to get down the mountain safely.
The RISA selftest in Pfau’s book really narrows the scope of what you should consider when setting up your retirement plan. I wish I’d had it sooner, but still found it comforting in confirming the choices that “felt” right for me.
Nice.
A suggestion: Morgan Housel has written several books. One is called The Psychology of Money. His books have sold over eight million copies.
“If you want to learn more about investing rather than by reading about it, I suggest taking a page from Einstein’s book. Explore a bit.” I’ve taken this approach, and I like it. A couple of decade ago I began setting aside a small portion of my portfolio, invest it in pieces into things that interest me. I recall reading about this and it was described as having a “sand box”.
I’ve found that by owning something I pay far more attention to the company and the industry. For example, I’ve been following all things space & rocketry related for many decades, but never owned any stock in a company dedicated to this endeavor. That changed in 2024.
I think that Nassim Taleb’s term “black swan event” description has been overused as an excuse for underperformance or exuberance. This term was applied in 2008, but there were lots of warnings about that financial melt-down. Some experts chose to ignore. You can’t invest reassurances.
Callan’s periodic table is one of my go-to resources.
Thanks for the article Adam. I would like to add another book to the list which was recommended by Warren Buffet in one of his annual letters several years ago. It is entitled “Where Are The Customers’ Yachts?” An excellent read for less experienced investors.
I always said that I learned from my big brothers mistakes regarding his early driving habits. He destroyed a couple of mom’s cars, and then several of his own either by accidents or abuse. While no prude when it came to driving habits, I never took auto abuse to the same destructive level as big bro. As I write this I realize the same is true with finances. Big Bro has done great due to a lifetime of public employment and the pension they provide, but has little in the way of savings. I don’t have the security of a defined benefit pension, however, I learned from our parent’s responsible approach to budgeting and saving and am doing well.
Thanks Adam. I always enjoy your articles. I slowly became convinced that broad based, ultra low fee index funds were the way to go for equities.
I avoided most of the carnage of the dot com market because I heeded the call of Bob Brinker that the market was going to tank, and dramatically reduced my equities. I was not so fortunate in 2008 because even though my AA was 65/35, the 65 was in more risky stuff like natural resources, international and sector funds.
After that “experience”, I slowly began to gravitate towards broad based, low cost funds/etfs like VTI, VOO and VEA which are the only equities I have now. I read books by Bernstein, Bogle, Ferri and others which helped me better understand the argument for index funds.
I do not like market downturns like we are now experiencing, but I have learned they are part of the investing process, so I sitting tight right now.