In Michael Lewis' just-released Audible Original, The Coming Storm, he tells an interesting story about someone that went to interview people in towns that had been hit by tornadoes. The people in and around those towns had created stories about why their homes weren't likely to be struck by a tornado (tornadoes don't cross a certain river, a certain road, hit a certain side of town, their homes were protected by hills, etc.). As Lewis writes, when discussing what the interviewer (Kim) learned (my transcription of the audio):
It isn't that people wantingly disregard warning. It's that they think it won't hit them. The paper Kim subsequently co-authored pointed out that people associate "home" with "safety." This feeling was reinforced each and every day nothing horrible happened inside it. People acquired a false confidence that they would not be hit. Some inner calculation led them to believe that if it's never happened here, it never will.
And as Lewis then quotes Kim, "Where tornadoes go is totally random...The steering winds are in the upper atmosphere. But people aren't thinking of the forces of the atmosphere. They're thinking of their place on the ground."
The psychology behind all of the above is worth thinking about in all areas of life, investing included. Seeing patterns among randomness and feeling safe among the familiar are things previously noticed by psychologists. And as I've mentioned before, the human mind is made to fall for stories and miscalculate the odds when a good narrative is in place. There are likely many people that held stocks like General Motors or Wachovia or Washington Mutual for decades leading up to 2008 that thought because things had ended well before, all would be okay once that latest financial storm had passed. And there are probably some long-time holders of General Electric in recent months that figured their dividend would never be cut.
Given the length of the current upturn, there are many in the investment business yet to experience a downturn of any real consequence that may have trouble putting things in perspective should the weather change. And it's why it is also important for those of us that haven't personally experienced other events—like serious bouts of inflation, for example—need to take Charlie Munger's advice to read history.
Reshaping ones view of the world through knowledge can help one be prepared, and hopefully survive, the next storm, whether it's of the weather or economic variety. As Lewis writes (my transcription of the audio):
Who is more likely to survive a tornado: the person who's personally experienced one, or the person who has not? The advantage of experience is more or less obvious. The disadvantage of not having had the experience, less so. But it might be the more important factor.
All kinds of things might happen to you in life. By sheer accident, only a few of them do. That tiny subset shapes your view of the world to a shocking degree. If a tornado has never hit your town, you think it never will.