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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.)