Is Investment Experience Additive?

by Tom Brakke, Research Puzzle

If you’ve been on the receiving end of pitches by asset managers, you have seen something like this:  “Our investment team has a combined 138 years of experience.”  Let’s think about that.

The assumption, of course, is that more experience is better than less experience, and it is reasonable to think that is the case under most circumstances.  However, those who have been around a while know that in frisky markets it often pays — at least temporarily — to not have had the experience at all.  Those of us with scars from previous frisky periods have a hard time throwing caution completely to the wind, having seen the results before.  The neophytes will have their scars soon enough, but if the cycle has some length to it they can gain assets and fame in size as they ride the new wave.

But for the most part, experience is viewed as a very good thing, thus the marketing construct of adding up the years that the members of the team have been toiling in the markets.  But if experience could really be added up like that, you’d always want to go with a bigger firm, since five people with an average of fifteen years of experience would be beginners compared to a firm of fifty with the same average.

Beyond that lies a broader question:  Is experience additive?

If the members of a team had experience from different eras — say, someone from the 1930s, another from the 1950s, and (since we seem to be in another Gilded Age) perhaps the 1890s — then maybe it would be additive, in the sense that the people would have seen a variety of environments.  As it is, the vast majority of investment professionals have been playing the game together during a market regime that (despite some notable cataclysms) has been quite supportive for a good long while.  Perhaps that won’t always be the case.

Therefore, those common years of experience probably aren’t additive to the degree that we might think.  In fact, perhaps we should discount them quite a bit, since they were really the same years, just observed by different people.  Which brings us to the crux of the matter.

If those people are similar in training, attitude, orientation, and perspective, then they probably lived the years in similar ways and invested in similar ways.  In judging their combined experience, instead of adding up the years to 138, we might instead subtract to a relatively modest number.

On the contrary, if the members have a breadth of experience in different kinds of roles and a variety of skills and personalities, the years count for more than if it’s basically one career you’re counting over and over.

I’d be the first to say that having a shared set of beliefs is important, but having shared beliefs should not mean a uniformity of thought or experience.  If you are all looking through the same lens, the apparent promise of those cumulative years in the pitch book is just a mirage.

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