The pain of a failed investment can be the best teacher of all

During Ronald Reagan’s second U.S. presidential debate with Walter Mondale in October 1984, the former movie star was asked about his age — he was 73 — and whether he would be able to handle the rigours of the toughest job in the world.

The oldest president in U.S. history responded: “I want you to know that also I will not make age an issue of this campaign. I am not going to exploit, for political purposes, my opponent’s youth and inexperience.”

Brilliant. Even Mondale had to laugh.

Top tennis players typically reach their highest levels of performance at age 24, (although Roger Federer and Rafael Nadal are making a strong argument that it can be past 30).

For baseball, the peak age is 28, the same for long distance runners. It’s three years older for golf. For table tennis it’s 17 years. It’s all downhill after that.

So, what’s the peak performance age for investors? Well, there are a number of great investors who are still going strong in their golden years. Warren Buffett, the CEO of Berkshire Hathaway and one of the richest men in the world, is 89. His right-hand man, Charlie Munger, is 95.

There are others who were even older. Phil Carret, one of Buffett’s role models and the founder of one of the first mutual funds in the U.S., was still investing when he died at 101. Irving Kahn, an early disciple to Benjamin Graham, a.k.a. the father of value investing, was the world’s oldest active investor when he passed away in 2015 at the age of 109. Interestingly, all of the them are (or were) value investors.

There seems to be no age limit, barring cognitive impairment or other ailments, that hampers one’s ability to be a great investor.

Great investing has nothing to do with getting older. In fact, it’s quite the opposite. I asked Carret at a Berkshire Hathaway meeting many years ago to what he owed his longevity. He thought for a moment and said, “Well, I never smoked, I drink in moderation and I don’t worry about anything.”

I believe it’s the latter element that was the most important. All of these aforementioned investors had the ability to block out short-term market gyrations and not be upset by them. In fact, they saw big drops or even collapses in stock prices as something to celebrate and they saw them many times during their careers.

Age gives you something that the young simply can’t have — experience and mistakes. Consider the thoughts of Thomas Edison, inventor of the light bulb.

“I have not failed 10,000 times. I have not failed once. I have succeeded in proving that those 10,000 ways will not work. When I have eliminated the ways that will not work, I will find the way that will work,” he said.

Those who have never experienced large market declines are at a distinct disadvantage to those who have. Many investors today don’t even remember the near-collapse in 2008, the bear market of 2000 to 2002 or the white-knuckle abyss of 1987.

Investors who have been around a few years possess the huge advantage of having lived through both bull and bear markets. They have witnessed the wild elation of investors throwing rational thought to the wind and paying ridiculously high prices for businesses. They have also seen their despair at the opposite end of the investing spectrum when selling their holdings for rock-bottom values. Reading the history of such events is one thing. Living through the real-world behaviour of Mr. Market, the imaginary investor in Graham’s 1949 book, “The Intelligent Investor,” is something else altogether.

Experience is invaluable in investing. Yes, having the right education is essential. Studying economics, accounting and mathematics helps to build an important foundation. But the classroom is light years away from the ultra-competitive and cut-throat real world of investing.

In that arena, my mistakes have taught me way more than my successes. The pains of losses are incredibly great teachers.

What do you learn from mistakes? Well, you do not want to do them ever again. For example, buying into a value trap or owning a company run by a bunch of crooks can feel like getting hit in the head by a brick. Paying far too much for a business, even a good one, can be another path to pain and learning the hard way.

So, what are the young investors who have never experienced these long-term events to do?

One suggestion: Read the history of markets. There are many great books that have been written about market manias, the subsequent panics and human behaviour.

This Time is Different: Eight Centuries of Financial Folly by Carmen Reinhart and Kenneth Rogoff and A Short History of Financial Euphoria by John Kenneth Galbraith are two of the best. The latter is a delightfully, entertaining short history of market madness through the ages. For a deeper understanding of the 1920s, Galbraith’s brilliant book, The Great Crash 1929, is also essential reading.

Otherwise, you will live the horror of what Galbraith reportedly said many years ago — the old generation has to die off so a new set of idiots can make the same mistakes all over again.

Larry Sarbit is a Portfolio Manager at Value Partners Investments in Winnipeg.

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