Few sayings are as universally applicable as “experience is the best teacher”.
Just ask Jeremy Grantham.
From an outsider’s perspective, it seems that Grantham, who co-founded GMO in 1977, knows what he’s doing.
But he’s made mistakes along the way. In the GMO Quarterly Letter, he describes major mistakes he made as a novice investor.
During business school, Grantham says that he was “seduced” by the “excitement” of investing — especially after quickly making money by investing over summers. He felt that “he had the touch for short-term investing.”
After business school, his “plan was to suffer and save and invest brilliantly in order to be able to return to Europe rich, or nearly so, and in a hurry”.
In the summer of 1968 he joined Keystone, and was “fascinated, indeed, almost overwhelmed by the story du jour: American Raceways”, which was a company planning on introducing Formula 1 Grand Prix to the U.S. Although this seemed like a great investment in the beginning, American Raceways failed to generate long-term interest.
After American Raceway’s bust, Grantham was “neither totally broke nor fully chastened, and was eager to make back [his] losses”. So he joined Market Monitor Data Systems which was “breakthrough technology”, but “ahead of its time”.
It didn’t do well. Grantham managed to “leap out two weeks before bankruptcy”.
After his failures, Grantham needed to learn how to live frugally, and had “lots of painful lessons to absorb.” He also needed to reorient his thinking from short-term investing, to long-term.
However, he does say that one thing was “at least not so painful” — having his wife’s support during the trying times following his failures.
So here are the lessons that Grantham learned as a novice investor:
1. You can’t know how people who are important to you will behave under pressure. And if you have to pick one who will outperform, pick your wife.
2. Local cultural differences can be very enduring even between Britain and the U.S. Formula 1 is trying again in the U.S. as I write, 46 years later. Soccer here has also been just around the corner for 50 years.
3. Sometimes even a great idea will fail, like Market Monitor, because the technology infrastructure is just not there; that it is simply ahead of its time.
4. Much more importantly, investing is serious. It can and often is intellectually compelling. But it should not be driven by excitement, as it is for many individuals, and when treated that way will almost always end badly. My experience with American Raceways and Market Monitor and, more important, my experience at painfully wiping out myself and my wife financially did far more than teach or reteach some of the basic rules of investing. It turned me profoundly away from the speculative and gambling possibilities of investing and turned me permanently, and pretty much overnight, into a patient, long-term value investor. Luckily, the new lifestyle fitted nicely with my nature conservative and frugal upbringing. The value perspective is pretty much baked into the Yorkshire culture. Happily, it also seems to work most of the time. Rolling the dice, however, was appropriate, it seems, when applied to the question of whether or not to start a new investment firm, for the period 1970 to about 1990 was particularly favourable to the start-up of new, small firms. For a while then, institutional investors actually seemed to prefer start-ups to the giant banks, which dominated the business but that had done so badly in the 1974 decline. And my willingness to take the risk of a start-up had been strongly influenced by the very brief existence of my substantial nest egg. So, once again…
5. It is better to be lucky than good, but of course appropriate to aspire to both.
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