Knowledge Vs. Experience: Why Most Investors Wind Up Losing

Knowledge vs. experience. When it comes to investing, such is what separates long-term success from failure.

Amid a “market mania,” retail investors believe they have “knowledge” as every investment they make seems to be successful. As the bubble inflates, continued success breeds over-confidence to the point where it is widely believed “this time is different.”

I previously discussed Charles Mackay’s book “Extraordinary Popular Delusions And The Madness Of Crowds.” As noted, that book was an early study in crowd psychology. To wit:

“Essential is the understanding of the role psychology plays in the formation and expansion of financial manias. From the 1711 ‘South Sea Bubble’ to the 2000 ‘ crash,’ all bubbles formed from a similar ‘panic’ by investors to chase ongoing speculation.”

For anyone who has lived through two “real” bear markets, the imagery of people trying to “daytrade” their way to riches is familiar. The recent surge in “Meme” stocks like AMC and Gamestop as the “retail trader sticks it to Wall Street” is not new.

Experience, Knowledge Vs. Experience: Why Most Investors Wind Up Losing

It wasn’t long after the turn of the century that those with “knowledge” learned the stern “lessons of experience.”