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When Inexperience is an Asset

You can’t become a great investor overnight because the most important lessons can’t be taught. They must be experienced.

You can’t become a great investor overnight because the most important lessons can’t be taught. They must be experienced. Experience can be an asset, but it can also be a liability.

Michael Liu works with me at IFCM. He’s a talented 23 year old, and truth be told he probably has more stock picking/investing reps than most 40 year olds. One day one of our positions was down 25% for no business related reasons – just a fat finger seller. I was cautiously placing some buy orders below the market price just so I could say I bought the dip. Then Michael messages me, “A younger Ian wouldn’t be this timid.” I let that sink in for 30 seconds, and he was right. I immediately modified my orders, added 10x to the size, and took offers like I wanted to buy it.

In 2015, Stanley Druckenmiller, gave a speech at the Lost Tree Club. I love this excerpt:

“Ken Langone knows my first mentor very well. He’s not a well-known guy, but he was absolutely brilliant, and I would say a bit of a maverick. He was at Pittsburgh National Bank. I started there when I was 23 years old. I was in a research department. There were eight of us. I was the only one without an MBA, and I was the only one under 32 years of age. I was 23 years old.

After about a year and a half – I was a banking and chemical analyst – this guy calls me into his office and announces he’s going to make me the director of research, and these other eight guys and my 52-year old boss are going to report to me. So, I started to think I’m pretty good stuff here. But he instantly said, “Now, do you know why I’m doing this?” I said no. He says, “Because for the same reason they send 18-year-olds to war. You’re too dumb, too young, and too inexperienced not to know to charge. We around here have been in a bear market since 1968.” This was 1978. “I think a big secular bull market’s coming. We’ve all got scars. We’re not going to be able to pull the trigger. So, I need a young, inexperienced guy. But I think you’ve got the magic to go in there and lead the charge.” So, I told you he was a maverick, and as you can already see, he’s a little bit eccentric. After he put me in there, he was gone in three months. I’ll get to that in a minute.

But before he left, he taught me two things. A. never, ever invest in the present. It doesn’t matter what a company’s earning, what they have earned. He taught me that you have to visualize the situation 18 months from now, and whatever that is, that’s where the price will be, not where it is today. And too many people tend to look at the present, oh this is a great company, they’ve done this or this central bank is doing all the right things. But you have to look to the future. If you invest in the present, you’re going to get run over.

The other thing he taught me is earnings don’t move the overall market; it’s the Federal Reserve Board. And whatever I do, focus on the central banks and focus on the movement of liquidity, that most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.

Now, i told you he left three months later, and here’s where the dumb luck came in in terms of my investment philosophy. So, right after he leaves, the Shah of Iran goes under. So, oil looks like it’s going to go up 300%. I’m 25, and I don’t have any experience. I don’t know anything about portfolio managers. So, I think well, this is easy. Let’s put 70% of our money in oil stocks and let’s put 30% of our money in defense stocks and let’s sell all our bonds. The portfolio managers that were competing with me for the top job, they, of course, thought it was crazy. I would have thought it was crazy too if I’d have had any experience, but the list I proposed went up 100%. The S&P was flat. And then at 26 years old they made me chief investment officer of the whole place. So, the reason I say there was a lot of luck involved is because it was my youth and it was my inexperience, and I was ready to charge.”

Inexperience sometimes lets us react quicker because we don’t feel the pressure of the moment.

Inexperience frees us up to ask “obvious” or even “dumb” questions everyone else is too afraid to ask.

Inexperience lets us attack problems with enthusiasm because we don’t have battle scars from past failures.

Inexperience allows us to “charge” and figure it out as we go. It’s why most successful entrepreneurs looking back say, “If I knew back then how hard this was going to be, I wouldn’t have started.”

Whether you are building a business, investment firm, or trying to solve a problem, I think the key to success is combining experience and inexperience. If you are experienced, it is crucial to have a few talented inexperienced people around you. If you are inexperienced, it is crucial to have a few experienced people around you that accomplished similar things to what you are trying to do.

The more you experience the more you respect what you are up against. Inexperience almost always underestimates risk. They are the perfect combination.

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