In our more sanguine moments many of us like to imagine that society has unwritten economic rules. For example, many people believe that acquiring a college bachelor's degree is a surefire way to secure a position in the coveted middle class. And perhaps once, long ago, it was even true. Now however, a college bachelor's degree is just as likely to trap the young and naïve in a quagmire of six figure student loan debt and minimum wage work. These unwritten economic rules - otherwise known as conventional wisdom - all too often become a graveyard for the unwary.
Conventional wisdom feels intuitively safe. It lulls us into not really examining the decisions we're about to make. The fact that 100 million other people are making exactly the same decision gives us a sense of invulnerability. We're running with the pack now; how could so many people possibly be wrong simultaneously? And nowhere is this herding dynamic more prevalent than in investing.
Many years ago, I worked in Boston at a medium-sized mutual fund firm. It was the spring of 2000 near the peak of the dotcom bubble and I was shooting the breeze with a work colleague named Ryan. He was of Irish descent and had all the vices of any good Irishman: he liked to drink, smoke, gamble and fight. Our conversation went something like this:
"So Ryan, have you seen how much the NASDAQ is off its recent highs?" I remarked off-handedly.
"It's a great time to get in," shot back Ryan giddily as he took a big swig from his morning coffee. "All that volatility means there are a lot of screaming bargains out there in techland!"
"I'm not sure I'd want to own many of those businesses," I countered cautiously. "Some of those big tech companies don't have any earnings while others have insanely high price-to-earnings ratios."
"Look, it doesn't matter which of them you buy. They're all going to do great," admonished Ryan in an exasperated tone as he rolled his eyes. "The important thing is to get your money in the game!"
Neither of us knew it at the time, but the NASDAQ had actually peaked a month before. It would go on to lose over 75% of its value over the next few years. Speculator darlings such as Pets.com, Webvan and Global Crossing all ended up filing bankruptcy in the ensuing chaos. "Getting in the game," as Ryan advocated ended up being hazardous to your wealth.
Years later, in late 2005, I had another, eerily similar discussion with a different co-worker named Dave. By this time I worked at the mutual fund division of a large bank. The topic revolved around the high price of housing in the Boston area:
"With real estate prices as high as they are I don't think I'll every buy a house as long as I live in Boston," I commented with disappointed resignation.
"What? Why wouldn't you buy?" asked Dave incredulously.
"Because renting is cheaper," I countered, "a lot cheaper."
"It doesn't matter how expensive houses are," intoned Dave earnestly. "You have to buy in order to get on the escalator up!"
"The escalator up?" I repeated very slowly in utter disbelief.
"Yes, the escalator up!" chirped Dave with obvious excitement. "You need to own a house in order to get all those fat capital gains!"
Predictably, this conversation with my real-estate obsessed co-worker coincided almost perfectly with the peak of housing prices in the Boston area. A couple years later the largest financial crisis since the Great Depression descended, driven primarily by the unwinding of a massive housing bubble. Dave discovered, rather painfully, that escalators can go down as well as up.
Although both of my former co-workers were spectacularly wrong, their beliefs represented the very best conventional wisdom at the time. The problem is that today's conventional wisdom all too often becomes tomorrow's discredited idea. This is one of the reasons I like art and antiques as investments; they are about as far from conventional wisdom as one can get at the moment. I don't have any co-workers telling me I need to sink my 401-k into medieval European illuminated manuscripts or old mine cut diamonds. There aren't any radio, television or internet advertisements screaming that I need to buy ancient Roman Republic denarii or vintage mid-century fountain pens. Few people even know art and antiques can be investments, and that's the way I like it.
