<December 4, 2020>
In 1993 I started my career in the investment management industry. The economy was coming out of a recession and entering a healthy profit boom and prolonged bull market. With the help of higher profits and a rising stock market, many of my early stock recommendations worked out well.
As the 1990s market cycle progressed, I received promotions, raises, and eventually my dream job as an analyst and co-manager of a small cap fund in New York. I was being conditioned to believe everything in the investment world would go according to plan. I was a young and overconfident investor—a very dangerous combination!
Just as my head couldn’t get much bigger, everything changed. In 1999, the tech bubble inflated, the small cap value stocks I recommended tumbled, and I was transformed from an up-and-coming portfolio manager to an investment dunce. It was a dreadful experience, but in hindsight, extremely valuable. The rise and fall of the 1990s stock market and profit boom taught me about cycles in the economy, profits, and investment styles. It’s when I learned the risk of extrapolating and the importance of normalizing.
There’s no question the start date of my career influenced me as an investor, but what about when I was born? Every generation has its own investment tendencies that were shaped by their birth date and “wonder years.” For example, an investor who grew up in the Great Depression likely has a different view of risk than an investor who was raised in the 1950s and 60s, a period of economic growth and rising stock prices.
As a member of Generation X, I grew up in the 1970s and 80s. The most vivid memory I have of the financial markets during this period was watching the Nightly Business Report with my grandfather. I’ll never forget Paul Kangas ending each show wishing viewers “the best of good byes (buys).” Besides wanting to emulate my grandfather, the financial markets during the 70s and 80s didn’t have a lasting impression on me. However, societal and parenting trends did.
Parenting in the 70s and 80s was considerably different than today. Today we have child car seats that look like something you’d see in the Space Shuttle. All that is missing is a crash helmet (I’m sure they’re coming!). Many of my fellow Generation Xers and I were simply thrown in the back seat of a sturdy Chevy and were left to fend for ourselves. During my family’s annual summer drive (14 hours!) to the Jersey Shore, my brothers and I would pile into the back seat and fight for position. With the best spots taken, one year I decided to climb the back seat and lay my body against the rear window. It was very comfortable, but not something crash consultants would recommend today!
Other childhood memories include riding BMX bikes down steep gravel hills and jumping off ramps that would probably kill us today! We swam in a quarry and muddy creeks. We climbed 50-foot maple trees and swung from ropes high above the forest floor. We hiked for miles through the woods and came home with spiders and ticks in our hair. We had neighborhood wars, fighting each other with tomatoes, bottle rockets, and sling shots. We were always outside, often playing backyard football and basketball for hours, only taking breaks to drink from the garden hose. We even threw eggs at a neighbor’s house once, only to hear the sound of a shotgun being loaded and shot in the air (lesson learned instantly!). And what Generation Xer didn’t have a friend whose parent smoked in the car with the windows rolled up! Ah, the good ol’ days.
Many Generation Xers grew up with few guardrails and limited supervision. We were allowed to make mistakes—sometimes big ones. And we were certainly allowed to fail, with teachers more than willing to give us C’s, D’s, and F’s (grade inflation was low!). Participation trophies had not been invented and parent involvement in sports often consisted of being dropped off, and if they remembered, picking us up! Smothering parents were the minority and “helicopter parenting,” not yet coined, would have been embarrassing.
There are several theories as to why Generation X was raised as they were. Rising divorce rates and an increase in dual-income households are commonly cited. There are also theories that suggest parenting trends alternate between generations, with the Greatest Generation, Baby Boomers, and Generation X all having styles that contrast with the previous generation. While I’m not an expert, maybe there’s a little, “I’m not going to be like my parents” going on!
As parents today, most of the Generation Xers I know are raising their families differently than their parents. While we’re not all helicopter moms and dads, I believe many of us are practicing a little more oversight in raising our children. Instead of parenting without guardrails, we’re putting on sunblock, buckling up, and aren’t as comfortable letting our kids roam the neighborhood unsupervised. I’m not arguing one method is better than the other—I’m simply stating our technique differs and may be a result of the risks we assumed during our childhood and adolescence.
This leads me back to investing and my original question. Do generational influences impact us as investors? I believe they do. As a Generation Xer, I’m grateful for the space and freedom our parents provided us. While we certainly made mistakes, it was a fertile environment for independent thinking and decision-making. The more choices we made free of oversight, the more attuned we became to the risks and consequences of our decision-making. The ability to think independently and properly assess risk are two very important traits of successful investing, especially absolute return investing. As such, Jayme and I (Palm Valley) are thankful for these generational traits.
Independent thinking and risk assessment are not the words we'd use to describe today’s financial markets. With most asset prices and valuations near all-time highs, investors have become dependent on the overprotective policies of central banks. Guardrails and investment chaperones are all around us, safeguarding us from failure. Instead of helicopter parents, we have helicopter central bankers making sure little Johnny doesn’t bloody his IRA! No, markets and investors are not independent and risk aware; spoiled and coddled may be a better description.
The past decade of overprotective central banking has likely influenced today’s younger generation of investors. Through their relentless support of asset prices, the Federal Reserve has conditioned young investors that they can enjoy the above-average returns of risk assets without assuming the associated risk. In the current environment, it’s challenging for young investors to understand risk without incurring it. The feeling and emotions associated with losing money are difficult to replicate on a spreadsheet or price chart. Risk, or loss, is something that must be experienced to fully appreciate its consequences.
Instead of respecting the potential loss associated with record equity prices, many young investors see opportunity. The CNBC article “Young Investors Pile into Stocks, seeing ‘Generational-Buying Moment’ Instead of Risk,” describes how a new generation of investors are piling into the rising stock market. They are young and overconfident, just like me during my first market cycle.
While we can’t predict the future, based on price and valuation, we are fairly certain young investors are not being presented with a generational buying moment. More likely, we believe investors are being offered a generational selling moment! Nevertheless, it won’t be our opinion that influences young investors, it will be their experiences and lessons learned. And at some point, once the guardrails and overprotective parenting of central banking are removed, another generation of investors will learn what I learned growing up and during my first market cycle. Through experience, they’ll discover the importance of thinking independently, assessing risk, normalizing (full-cycle investing), and remaining humble.
Regardless of how the current market cycle ends, we suspect it will be an ending that defines investors for generations to come. Best of luck to all ages and strategies!
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Definitions:
Wilshire 5000: a market-capitalization-weighted index of the market value of all US-stocks actively traded in the United States.