Age doesn't always mean investment wisdom

published 26 August 2016

808-Soros-1200 — George Soros: the exception, not the rule

On 30 August, legendary investor Warren Buffett will celebrate his 86th birthday. His advanced years have not deterred investors from hanging on his every word. George Soros is already 86, while Templeton's emerging-markets guru Mark Mobius is 80.

All, of course, started young: Buffett launched his first successful investment partnership at the age of 26, and Soros becoming a trader at the same age. However, they are unusual in managing money late in life (research suggests that most fund managers tend to be in their early middle age). So their continued success raises an interesting question: are they outliers, or does investment skill usually improve with age?

Until recently, it was assumed that, for most people, raw brainpower (or "fluid intelligence") peaks in your mid-20s. However, more recent studies, such as one by Joshua Hartshorne of MIT, present a more nuanced picture. Hartshorne finds that the ability to process information does indeed peak around the age of 18 or 19, while short-term memory peaks at around 25. However, the ability to read other people reaches maturity in your 40s and 50s, while accumulated knowledge may reach its zenith as late as 70.

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Studies of consumer behaviour suggest that the middle-aged are the best at managing their finances. For example, a 2009 study by David Laibson of Harvard University looked at the behaviour of those borrowing money. He found that the middle-aged adults made the best decisions, with those in their 20s and 80s managing their finances with much less skill. Those in their 50s were much better than younger and older borrowers in seeking out the best deal, correctly estimating the value of their homes and avoiding additional charges.

This doesn't necessarily mean 50-year-olds make the best fund managers. It all depends on the type of task. When it comes to routine work, or following a set strategy, those in their 50s, and even many in their 80s, will be able to use their superior experience to compensate for their lower cognitive abilities. But put them in a new situation and they may struggle. Fund management can also involve long hours of research and travel, something that also favours younger people with greater stamina.

And indeed studies of fund managers suggest that younger managers in fact do better than older ones. Two US studies in the 1990s found that performance declined with age. This may have been distorted by the technology boom of the 1990s, but a subsequent study by Aron Gottesman and Matthew Morey found that younger managers continued to do better during the dotcom crash between 2000 and 2003. The implication is that Buffett and his peers may be the exception rather than the rule.