Earlier this month the Federal Reserve released the complete transcripts of all 11 policy-making meetings that took place in 2009. The financial media dissected every line item of the nearly 2,000 pages from these meetings. Investors and economists eat this stuff up because you get to see what Ben Bernanke, Janet Yellen and others were thinking during one of the most difficult economic periods in decades. Plus, with the benefit of hindsight, it’s easy to spot where they were right and what they missed.
My first thought when I was reading some of the reaction pieces to these transcripts was this: What if investors were forced to release their own transcripts from past decisions? What if all of your fears, forecasts and investment decisions were made public for everyone to see?
So let’s peer into the past to see what investors may have been thinking at different points in the past:
Early 2009: The S&P 500 is going to hit the 600 level for sure and probably fall to at least 300 or 400 by the time all is said and done. There’s nothing the Fed or anyone else can do to turn this thing around. Harry Dent just put out a book about the coming Great Depression. The only safe asset right now is cash.
2008: Wait, what!? Everything in my portfolio is down this year. Diversification is dead. Buy and hold is dead. Nothing is working. It’s all a giant casino. I’m never investing in the markets again. Just make it stop.
2007: Ben Stein told me the risks in subprime are contained so I’m not too worried about a recession. I’m predicting a soft landing.
2006: Why would I want to invest in the financial markets? Real estate is where the real money is being made. Have you seen how much money Armando is making on Flip This House? I have a friend who’s going to get me in on an investment in some condos units in Miami. Real estate is a can’t miss because the housing market never goes down and people will always need to live somewhere.
2005: I don’t mess around with stocks and bonds. I’m making far too much money investing in commodities. The demand from emerging markets is only going to continue to get stronger. Oil is going to $200/barrel.
Early 2000: I only invest in Internet stocks and won’t even look at a company unless it has .com in the name. Value investing is dead. Warren Buffett is past his prime and doesn’t know what he’s talking about. It’s a new paradigm. My Internet mutual fund manager said I can expect 35% annual returns for the next two decades. Why would I ever invest in bonds or anything else when I’m making money hand over fist in Internet stocks?
1990s: I’m going to quit my job to become a day trader. Stocks go up double digits every single year. The great moderation means we’ll have far fewer recessions and market crashes going forward. This is too easy.
October 1987: I just turned on the evening news and it says that the stock market was down 20% today. How is that even possible? It’s down more than 30% in the past 4 days alone! What is happening right now? Get me out. Get me out now. This is going to crash everything. The system is going down.
1979: Businessweek is right you know. Stocks are deadweight. Inflation is going to ruin everything and there’s no reason to invest in the stock market with interest rates so high. I’ll just keep everything parked in my money market account.
I think it would actually be a good move for investors to document their thoughts and actions like this in real-time. Michael Mauboussin covered the benefits of creating a decision-making journal in a piece last year:
Over the long haul, of course, good decisions provide a much higher chance of desirable outcomes. But in the short run the link between decisions and results can be very loose. The primary way to focus attention on the decision-making process is to keep a journal that documents your thinking. This is how you impose accountability on yourself.
Here’s what you do. Go out and get a notebook. When you are making a consequential decision in your portfolio, business, or life, write down what you expect to happen, why you expect it to happen, and attach probabilities to your views. If you are so inclined, also jot down how you feel physically and emotionally. Make sure you note the date and time.
This practice is valuable because it mitigates some common cognitive traps. The first of these is hindsight bias, the sense that you knew what was going to happen, before the event occurred, with a greater probability than you actually did. Creeping determinism is a related trap. This is the name for the sense that what happened was inevitable. In both cases, your mind draws out the facts around an event that occurs and weaves a narrative to explain the result. You do this unconsciously and effortlessly. Knowledge of the outcome and the facts behind it bleed into your memory, and you start to believe that you knew more than you did.
I’m not sure if Fed officials ever look back at their past statements to learn from their mistakes. I hope they do. Investors would be wise to do the same.
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