Page 121 - Morgan Housel - The Psychology of Money_ Timeless Lessons on Wealth, Greed, and Happiness-Harriman House Limited (2020)

The cornerstone of economics is that things change over time, because the
invisible hand hates anything staying too good or too bad indefinitely.
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Investor Bill Bonner once described how Mr. Market works: “He’s got a

‘Capitalism at Work’ T-shirt on and a sledgehammer in his hand.” Few
things stay the same for very long, which means we can’t treat historians as
prophets.

The most important driver of anything tied to money is the stories people
tell themselves and the preferences they have for goods and services. Those
things don’t tend to sit still. They change with culture and generation.
They’re always changing and always will.

The mental trick we play on ourselves here is an over-admiration of people
who have been there, done that, when it comes to money. Experiencing

specific events does not necessarily qualify you to know what will happen
next. In fact it rarely does, because experience leads to overconfidence
more than forecasting ability.

Investor Michael Batnick once explained this well. Confronted with the
argument that few investors are prepared for rising interest rates because
they’ve never experienced them—the last big period of rising interest rates

occurred almost 40 years ago—he argued that it didn’t matter, because
experiencing or even studying what happened in the past might not serve as
any guide to what will happen when rates rise in the future:

So what? Will the current rate hike look like the last one, or the one before
that? Will different asset classes behave similarly, the same, or the exact
opposite?

On the one hand, people that have been investing through the events of
1987, 2000 and 2008 have experienced a lot of different markets. On the
other hand, isn’t it possible that this experience can lead to overconfidence?
Failing to admit you’re wrong? Anchoring to previous outcomes?