Experience or Expertise?

In the first episode of his new podcast, The Knowledge Project, Farnam Street’s Shane Parrish interviews Michael Mauboussin about a wide range of topics centered around the decision-making process. Mauboussin had some interesting things to say about the difference between experience and expertise:

There is a great quote from Greg Northcraft, which I love, when he says you have to differentiate between experience and expertise. Intuition relates to this.

He said expertise… An expert is someone who has a predictive model that works, and so just because you’ve been doing something for a long time doesn’t mean that you have a predictive model that works.

I hear from young people in the finance industry on a regular basis who are forced to deal with a lack of experience when trying to get their ideas across to clients or their superiors. You have to pay your dues and be patient in any field, but there are also many bright and capable young people that are often overlooked simply because of their age. It feels safer for clients or co-workers to defer to the gray hairs who have been around for much longer.

A number of years ago I attended a conference with GMO’s Jeremy Grantham as the keynote speaker. During his speech Grantham pulled no punches and basically told the packed house full of professional investors that, “you’re all doing this wrong.” He said the majority of the people in the room tried to make portfolio and risk management far too complex and don’t spend enough time focusing on the things that really matter. He stated that most of the organizations these people were investing on behalf of would be worse off because of this. The reception from the crowd was less than enthusiastic, to say the least.

Following his speech there was a break for snacks (professional investors are like kids at a youth soccer game during conferences — we need a snack break) and I noticed no one was talking to Grantham as he waited in line for a cookie. I have a feeling this had something to do with the lukewarm reception his speech received. So I approached, introduced myself and asked, “What could a younger person such as myself do to create change within an investment organization?”

He was very kind and offered me a very quick outline of his views on not only portfolio management, but also how to run a successful investment firm (GMO, the firm he founded, manages over $100 billion so he has plenty of clout on the subject). His parting words before being whisked away by his handlers have stuck with me ever since.

To paraphrase, he said, “To create change in a financial firm as a young person you must back up all of your opinions with thoroughly researched evidence and data. And even then most of the higher-ups won’t listen to you. In that case, do what I did and start your own firm or try to find like-minded peers to work with because most people in this industry will never change their minds because of ignorance or career risk.”

This pep talk was both inspiring and depressing at the same time.

I do think that there are certain things, especially in the financial markets, that can only be learned through time and experience. Some things simply cannot be gleaned from a textbook and most go through a process of trial and error before settling on a workable philosophy. But a focus on experience can be taken too far. Investment organizations often tout the combined years of experience for their employees. Our firm has a combined 128 years of experience in the investment business. 

My problem with this line of thinking is that I’ve seen people who have been in this industry for decades, yet continue to make the same mistakes over and over again because of career risk or an inability (or reason) to change. There are also many people and organizations who claim to be experts, but really have no idea what they’re talking about. Most financial “experts” are really just very adept at selling themselves or their narrative to an unsuspecting audience.

From my experience and talking with peers in the industry, not nearly enough financial organizations spend time cultivating or training their younger employees. I get plenty of questions and comments from young people in finance who say they’re having a hard time breaking through because clients or management look at them differently because they’re young, even if they’re able to provide a different point of view or level or service.

Obviously, it’s always nice when you can find with someone with both experience and expertise. But I think there is a boatload of young talent out there that’s being overlooked or under-utilized in the world of finance. I personally know some of the brightest minds in the financial community who are on the younger side, but they’re also hungry, intelligent and entrepreneurial with an enormous amount of integrity to boot. Many of my peers have decided to go out on their own and start their own businesses because they were being overlooked or working for the wrong organization.

I think financial firms would be wise to pay attention to the younger generation. As technology and forms of communication continue to evolve this group is going to be a huge asset to those who understand how to get the most out of them. Expertise in certain areas doesn’t always require decades of experience.

Listen to The Knowledge Project podcast:
Michael Mauboussin on Intuition, Experts, Technology and Making Better Decisions (Farnam Street)

Further Reading:
Do You Feel Lucky?
My Letter to Young Analysts

Here’s the stuff I’ve been reading lately:

• The circus of what’s working now (Reformed Broker)
• 6 takeaways from Todd Wenning’s first trip to the Berkshire Hathaway annual meeting (Clear Eyes Investing) and see also 10 quotes on Warren Buffett I keep coming back to (William Green)
• What Dean Smith taught Jerry Stackhouse about money (Yahoo Finance)
• A brief history of 401ks (Morningstar)
• On cognitive biases and The Masters (Mullooly)
• Why setting the correct expectations is important no matter how you build your portfolio (Bason)
• Rebrand stage fright as excitement to overcome it (Scientific American)
• Advice for newly graduated college students (Motley Fool)
• “Why is this important, and why should I spend my time on this?” (om.com)