The Pitfalls Of Experience

Pitfalls of experience

Our kitchen table was literally covered with stacks of cash.

Even by western standards, it was a significant sum. But in a totalitarian, communist country, amassing this much money in one’s lifetime was nigh impossible.

I can only imagine the kinds of sacrifices my grandfather made along the way. And yet, his hands trembled visibly as he surveyed the sum of his life’s work.

A few minutes ago, the news broadcaster announced an urgent monetary reform, yet another attempt to prop up the country’s crumbling financial system.

Sure, each household was allowed to convert a ridiculously tiny amount into a new national currency.

However, the remaining money would cease to have any value overnight.

In other words, 99% of our family’s entire net worth was about to evaporate.

The Benefits Of Foresight

In the year preceding that fateful evening, my father had multiple arguments with my grandfather.

Repeatedly, he made the case for converting our family’s cash savings into dollars.

It was a tough sell.

To begin with, owning foreign currency was illegal.

Not impossible, thanks to the black market. But, given the dodgy characters involved, the very process of buying dollars was dangerous in itself.

People often got scammed, or worse.

My grandfather just couldn’t pull the trigger.

It was all too risky.

Also, the system couldn’t just collapse.

And thus, he traded a non-zero chance of losing his money to local criminals for a 100% chance of losing his money to the government.

To short-circuit the suspense, let me just say that our family ultimately managed to avoid financial ruin, albeit at a significant cost.

Phone calls were made. Favors called in. Money changed hands.

Ultimately, our family preserved enough capital to live a decent life over the next five years or so.

Until, in yet another foresightful move, my father decided he’d had enough – and we left the old country forever.

Old Habits

Two decades later and thousands of miles away, there was yet another heated argument taking place around the proverbial kitchen table.

This time it was my turn to be exasperated, all while trying to get my father to change his investment strategy.

To reduce his cash holdings.

Convert some of the egregiously expensive (remember load fees?) mutual funds into index trackers.

And put some money to work in real estate.

I might as well have been talking to a wall.

My dad, adventurous enough to uproot his entire family in search of a better life halfway around the world, just couldn’t come around to the idea.

It was all too risky.

No, he couldn’t afford to lose his money in the stock market or a levered real estate deal.

Then again, we’ve all seen this movie before. And if you think it’s unique to immigrant families like ours, you may want to reconsider.

Change In Perspective

Living through the Great Depression was a life-changing event.

Imagine for a moment that overnight, your bank folds.

Now, deposit insurance wasn’t a thing back then, which means that all of your savings and investments would have evaporated in an instant.

You are now living from paycheque to paycheque… except that your job is also gone.

Which is exactly what happened to millions of people in the 1930s, leading to a permanent change in their attitudes to risk – and investing.

The vast majority didn’t trust the banks for the rest of their lives. They hoarded cash and avoided the stock market.

Many of them were so averse to debt, they ended up renting for the rest of their lives.

I can only imagine the silent horror with which they observed their children, the baby boomers.

Entrusting banks with their money. Taking out mortgages to buy homes. Investing in equities.

Haven’t they learned anything?

Ultimately, baby boomers made out like absolute bandits, financially speaking.

And now, it’s their turn to shake their heads as they look at millennials.

NFTs? Crypto? DeFi? Meme stocks?

What the heck is going on here?

It’s not just investing money that has changed. The fundamental nature of making money has also taken a dramatic U-turn.

Gone are the days of being a good company man, faithfully climbing the career ladder for decades – and ultimately being rewarded with a corner office and a C-suite title (with compensation and an expense account to match).

These days, billion-dollar fortunes are being made in a matter of years, not decades.

Surely a house of cards, on the verge of total collapse.

No One Is Stupid

All of the above may seem mighty contradictory, but it really isn’t.

The fundamental tenet to keep in mind is that when it comes to money, no one is stupid.

More often than not, people are simply playing different games.

The Depression-era generation wasn’t stupid.

On the contrary, you’d have to be stupid to trust the financial system ever again after being screwed over like they have been.

The boomers weren’t stupid either.

They saw the wealth-creation potential of the stock market. They realized that their generation wants to own, not rent.

So they piled into equities and real estate.

And millennials aren’t stupid either.

With asset prices where they are today, compounding your way to wealth in the stock market isn’t nearly as attractive as it used to be, especially on an average income.

Hence, they resort to a modern-day equivalent of playing a lottery, knowing full well this might be their best chance to ascend up the wealth ladder.

And yes, the same applies to jobs.

Fifty years ago, the US economy was highly regulated in nature, creating well-entrenched oligopolies in most industries.

Hence, if you were looking to make money, the most obvious path was to join the winners and climb up the career ladder.

The one-two punch of deregulation and technological disruption changed all that.

No, you no longer need to be working at AT&T to have a shot at making the big bucks.

As a matter of fact, unless you are this guy, you pretty much want to avoid working at AT&T.

Today, joining a small but fast-growing SaaS company has a far higher expected value than working your way up at Walmart for decades on end.

No one is stupid. Everyone is just playing a different game.

Madness Wisdom Of The Crowds

We also shouldn’t underestimate the power of belief.

The stock market hasn’t always been a well-oiled money-making machine.

In the early days, corporate governance was non-existent. Frontrunning was commonplace. Pump and dump schemes take place to this day.

But the stock market had promise. And because people believed in the promise, they piled in.

And because they piled in, more and more companies realized that issuing equity may be a good way to raise money.

Regulators realized that improving the rules of the road might serve the common good.

A virtuous cycle of constant progress, creating one of the most amazing wealth-building tools at our disposal.

Lessons Learned

At this point, it’s easy to make this post about crypto – which it isn’t.

Rather, it’s a reminder that one day, I will become that grandfather. Sitting at the kitchen table, trying to decipher the strange concepts my son is trying to get across.

Except that I won’t let it happen.

It’s easy to get entrenched in our ways as we age. Arguably, the more successful you are, the easier it is.

I mean, why change your approach if you’ve figured out – and applied – a proven playbook for making money?

Well, as my experience shows, nothing is permanent.

Sure, some things continue to work spectacularly well through decades and centuries. And yet many others backfire spectacularly.

In other words, keep your eyes open and your ear to the ground.

And yes, my emerging thoughts on crypto and blockchain are coming next week.

Thank you for reading!

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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker.  I am passionate about capital markets, behavioural economics, financial independence and living the best life possible.

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16 Comments

  1. This one made me smile. I’ve sat at that table and had those discussions.

    The rules of the game are constantly changing and evolving. If we fail to take into account the more permanent structural changes, then we find ourselves fighting the last war. Which isn’t the same as chasing all the trendy fads or jumping on the latest bandwagon, but in the early days it can be hard to distinguish the substance from the noise.

    In some ways I would liken it to the way sports have evolved. When I was growing up, international rugby players were amateurs with day jobs. They would have a pint and a cigarette during the half time break on game day. Today, the international players are professionals, their bodies finally honed machines. Indeed, some of the fast blokes get within spitting distance of the Olympic qualifying times for short distance track events. Notionally the same game, but these days those old dinosaurs wouldn’t be qualified to carry the water bottles for the current players. Not better or worse necessarily, just different.

    • Evolution is ruthless, isn’t it?

      Keep learning and optimizing, otherwise you’ll get left behind.

      Sadly, this isn’t something we are good at, so nature steps in with the natural cycle of death and re-birth to keep the human race advancing along.

      But some folks manage to buck the trend when it comes to staying open-minded and continuing to evolve well into old age. I hope to be one of them!

  2. Interesting and thought provoking:-
    – Risk – Currency becomes worthless overnight, stock markets crash and jobs are lost
    – Mitigation – Buy other forms of value Gold, Crypto, NFTs etc

    There are deep and huge problems with Crypto and it is firmly in the “belief” maturity stage with little else worked out.

    Now NFTs looks like a great future – a way to make something digital and virtual unique but the value is stored in the unique thing you have bought – ie picture, video, virtual-thing

    • Thank you.

      Agree with you. Very early days and I think crypto is today where the internet was in the mid-90s.

      Few of those business models – and businesses – ultimately survived. But the ones that did, have made stratospheric progress indeed.

      And also think that in a world that’s digitizing / virtualizing at an unprecedented pace, NFTs have much more potential than people realize.

  3. Outstanding post. I read various blogs and other sources to help learn about personal finance. This post is way more thought provoking than most. I’d say at a personal level I’m in the position of having a successful strategy, and have been thinking about doubling down on what’s been working (equities, real estate, etc.). Great reminder to keep your eyes open to new options and don’t get too entrenched in what you “know” since it can change.

      • Thanks a lot Tom and David.

        @Tom – I’m in the same boat. A chunky equity portfolio and a number of real estate investments. If it ain’t broke, don’t fix it, right?

        And yet, the one thing I am painfully cognizant of is the inherent danger of getting too comfortable in an ever-evolving world.

        Stay complacent for too long and all of a sudden, you are so far behind the curve you might never be able to catch up.

        • I’ve really been thinking about (and struggling with) the balance on when to reduce risk vs. trying to run up the score. Then it comes back to the “if it ain’t broke” logic.

          However at some point new investment options are really just a different way of looking at modern portfolio theory and having a diversified basket of equities. No idea how much the returns are correlated, on the surface it might seem like they aren’t, but at the end of the day an expanding economy/pie potentially drives up crypto, etc. just like hard assets.

          Looking forward to your thoughts on crypto in the coming weeks. Of course I always enjoy the articles about real estate as that is my favorite asset class to analyze and invest in.

  4. When my paternal grandmother, addled with alzheimers had to leave her home to live with family, relatives clearing her house got rid of (mostly by burning), boxes and boxes full of rubbish she had hoarded over the years. Little did they realise that so distrusting of banks was she, that she kept most of her savings as cash – you guessed it, hidden amongst the ‘rubbish’ in the boxes… ouch!

    I do some of my investing via an app so in that sense, I’m kinda up there with the kids, but I think I’m going to be one of those old people left on the side while everyone’s got crypto accounts!

    • Ouch. Very familiar story though – we had something similar with the other set of grandparents (but found the money in the end).

      I can only imagine how many hidden crypto accounts will go unclaimed over time!

  5. Love this (and the blog in general)

    As a son to my parents and figuring out how to make the most of their retirement pots and convincing them to consider new ideas; and a father to a teenager who openly talks about making money on YouTube/Social Media and starting his own business alongside asking really insightful question on crypto & NFTs, I can see this evolution playing out first hand.

    I am passionate about being intellectually curious and open to new ideas so I’m hopeful I can make the transition with some grace and flexibility, but this is a great reminder that change is constant and risk is always a matter of perspective(s).

    • Thanks for the kind words – and that’s exactly how I am thinking about it.

      The “crossover” point from being in the flow to slowly falling behind the times (and technologies) is an invisible one, but it certainly is there.

      Like you, it’s something I’m painfully cognizant of it and will do my best to stay current for as long as I can!

  6. Great post. I went through something similar a few years ago in Nigeria with the local currency declining 20% annually and had to return to the UK to hold more foreign assets. Every investment I made that earned a 20% return was wiped off by the currency devaluations.

    My father has refused to hold foreign assets however my sister has done this and her funds have held value in dollars. This is unfortunately the sad experience of those living in developing countries and this is only a 20% annual decline. I can’t imagine the experience of people living in countries like Zimbabwe and Venezuela.

    Luckily in developed economies, the devaluation is so subtle, you don’t notice is daily or monthly but it is there. I don’t think Crypto will be a silver bullet though but there are exciting innovations going on that can’t be denied.

    • I think this is why some folks in the west are having a hard time to wrap their head around use cases for Bitcoin.

      If you are lucky enough to have the USD or GBP or another solid currency as the “default” option, you naturally won’t flock to crypto.

      But if you live in a place like Venezuela, different story!

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