Thread by @dollarsanddata

\1 Tweetstorm on The Privilege (and Curse) of Knowledge
and why “Buy and Hold” may not be so easy this time around.


To start, a history lesson: When George Washington died in 1799, he didn’t know that dinosaurs existed. In fact, no one did.

\2 Though the first dinosaur bone was discovered in New Jersey in 1787, no one realized its importance and it was eventually lost.

It wasn’t until the paleontologist Richard Owen coined the term dinosauria, meaning “terrible lizard”, in 1841 that dinosaurs became mainstream.

\3 It might seem shocking how ignorant our ancestors were, but that’s only because we have something they don’t have: the privilege of knowledge.

Just think about how many things you do on a daily basis that rely on discoveries from the last two centuries.

\4 You wake up to an alarm.

The first time clocks were standardized across the U.S. was November 18, 1883 with the creation of Eastern Standard Time (EST)

\5 You take a shower to stay clean and prevent germs.

The first person to prove that diseases could be caused by microorganisms (i.e. germs) was the Italian entomologist Agostino Bassi in the early 1800s.

\6 You grab food out of your refrigerator.


Though Fredic Tudor was shipping ice cut from the lakes of New England to the Caribbean in 1805, the first refrigerator for home/domestic use wasn’t invented until 1913 by Fred W. Wolf Jr.

\7 And I could go on, but all of these innovations happened AFTER Washington’s death in 1799.

And while it is easy to see how the world has changed in the last two centuries, it isn’t as easy to see how the investing world has changed even in the last 100 years.

\8 Consider this incredible tweet by @morganhousel:

\9 His point is obvious: those who bought and held a basket of U.S. stocks would’ve been handsomely rewarded over time.  

However, this point is only obvious today because we have the benefit of hindsight, ubiquitous data, and modern computational resources.

\10 A century ago, who would have had access to anything remotely this useful?  No one.

Therefore, why should we have expected investors from this time to “buy and hold” when they had little data to support such a decision? We shouldn’t.

\11 This is why grabbing data from 50 years ago and saying, “If you had bought X…” is all market fantasy.

The investment world has changed so much in the last half century that many historical comparisons are useless.

\12 However, now that we have this knowledge, it can also be a curse.

Why?

Because investing is a game that is based on the preferences and information of OTHER participants.

\13 If the other participants have learned things from market history such as “The market goes up in the long run” or “Buy the dip”, then your job as an investor didn’t get any easier, though you have more knowledge.

\14 If everyone KNOWS to buy the dip, then they may use that knowledge to stay invested longer, possibly irrationally propping up markets.

The rise of cheap, diversified investing options might make investing seem easier now, but this isn’t necessarily true.

\15 The risk we have reduced as a result of cheap diversification will show up somewhere else.

Maybe, behaviorally, the next panic will be that much harder than what we would have expected.

I don’t know for sure, but nothing comes for free.

\16 So though we live in the best era in history to be an investor, this doesn’t mean it will be easy. It will never be easy.

Knowledge can also be a curse, my friends.

Thank you for reading and happy investing from Of Dollars and Data. Travel safe and happy holidays!

If you liked this Tweetstorm, you can read the full blog post here: ofdollarsanddata.com/the-privilege-…