Are “beaten generations” better investors?

by admin on January 23, 2012

When you were born can dramatically affect the performance of your investments and your investment style, driving major investment decisions throughout your life. It sounds dumb at first, what the birth date has to do with anyone’s investment skills. You would be surprised by how much of an impact it has if you study the facts.

I recently read an article called “The Beaten Generation” in Money Magazine where they made the argument that the current economy has made life harder for most Americans in recent years, and especially for young adults. Whose earnings, net worth, and optimism have all declined, in some cases sharply. The home equity of young adults has collapsed -51% dragging down their net worth -55%. Their student debt load at graduation is up 19% while unemployment for college grads is +64%. Their income is down -4.5%, forcing them to live with their parents +31 and have less kids -7.1%. In other words the financial opportunities for this generation have been reduced to a minimum, and how they will do in life financially will be constantly marked by these events.

A recent article in The Atlantic Magazine said:

when you graduate really matters. Graduate into a bull market and you’re more likely to get a job, and to get a job that pays well. Graduate into a bear market and you’ll end up with less choice and a lower salary. Moreover, these differences persist: one study of Stanford M.B.A.s shows that even 20 years later, the average salary of a class that graduated into a bear market was still lower than those of classes that had graduated into an equity boom, when high-paying finance jobs tend to be more plentiful.

This generation, much like the generation of the 1930’s, will have less cash, less income and and less equity available for a good use in the investment world. The funny thing is though that history has shown that these “beaten generations” are more economy-conscious and better investors in general. Just think about it, Warren Buffett was born in 1930. As a child born during the Great Depression, Warren Buffett has strong memories of what it was like to grow up in such an era. He has a newspaper clipping of the 1929 stock market crash in plain view on his wall as a constant reminder to himself not to get caught up in the madness of crowds and the euphoria of the market. Buffet’s father used to have his own brokerage firm but when Warren showed his inclinations to work in Wall Street, he totally opposed, he didn’t want to expose Warren to the disappointments of a stock market that, at that time, had lost around 80% of its value in just few months.

Another value investor hit hard by recessions was Benjamin Graham, the Crash of 1929 almost wiped Graham out, but the partnership he had with Jerome Newman survived with the assistance of friends and the sale of most of his partners’ personal assets. At one point, Graham’s wife was forced to return to work as a dance teacher. Graham was soon back on his feet, and had learned valuable lessons that would soon be brought home to investors in his two books: Security Analysis and The Intelligent Investor. Benjamin parents struggled, Graham’s father died not long after moving from England to America and his mother lost the family savings in 1907 during an economic crisis. Regardless, Benjamin is recognized as the father of value investment and the biggest mentor Warren Buffet has ever had, Benjamin Graham became one of the greatest investors in all times.

So are bear markets the cradle for good investors? Perhaps, but other things are important as well. And a little bit of luck doesn’t hurt either. Think about the Canadian hokey players Malcolm Gladwell describes in his book “Outliers: The Story Of Success”. As Gladwell detailed Canadian hockey players born in the first months of the year enjoy advantages that those born later in the year don’t have. Canada takes hockey seriously, so coaches start streaming the best hockey players into elite programs, where they practice more and play more games and get better coaching, as early as 8 or 9. But who tends to be the “best” player at age 8 or 9? The oldest, of course. Players born nearest to the cut-off date, are almost a year older than kids born at the other end of the cut-off date. When you are 8 years old, 10 or 11 extra months of maturity means a lot. So those kids get special attention. That’s why there are more players in the NHL born in January and February and March than any other months.

The cut-off dates for the stock market are the bear and bull market cycles. Warren Buffet enjoyed perhaps the biggest increase in the stock market in history when he was more prepared to do so. I doubt we will see double digit increases in the stock market for years in a row anytime soon as we did in late 80’s and 90’s. So Warren Buffet wasn’t just born in a bear market, which made him a better value investor, but he also was lucky enough to take advantage of the best opportunities that the stock market has presented since it existed.

So lucky you if you got hit by this market and are willing to learn valuable lessons from it. Every period in history is different with their pro and cons, look around to see where the opportunities for today are and take advantage of them, be prepared for upcoming opportunities, bear and bull markets have always existed and nothing that is that good or that bad will stay the same forever, who knows, maybe you will also have a little bit of luck, and it doesn’t hurt to be prepared.

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