Fighting the Last War

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Hiroo Onoda was a 22-year-old Japanese soldier who, in December 1944, was sent to Lubang, a small island in the Philippines. The Second World War was nearing its end, although nobody knew exactly when it would finish.

Onoda was an intelligence officer, assigned to disrupt enemy operations and continue fighting, even if the Japanese forces on the island were defeated. He was specifically ordered not to surrender or take his own life. Whatever happened, he had to carry on his mission.

The American forces arrived in Lubang in February 1945 and quickly overwhelmed the Japanese defenders. Onoda managed to retreat into the mountainous jungle with a handful of other soldiers.

Japan surrendered in August 1945. The war was over.

News of the surrender eventually reached Onoda, but he refused to believe it.

Over the next few years, leaflets were dropped over the island announcing that Japan had surrendered and that the remaining soldiers should come out of hiding. But Onoda believed they were enemy propaganda designed to lure him into captivity.

He even dismissed messages from family, and all newspapers and photographs that were sent to convince him that the war had ended.

Years passed. One of his companions surrendered. Two others were killed. Onoda continued hiding in the jungle, occasionally engaging in violence with local people. His actions caused real suffering, including deaths among island residents.

By the early 1970s, almost three decades had passed since Japan’s surrender. The country Onoda had left behind had transformed into a prosperous, modern nation. But on Lubang Island, Onoda was still fighting the Second World War.

In February 1974, a young Japanese traveller named Norio Suzuki went looking for him. He managed to find Onoda and speak with him.

Onoda was now 52 years old. He listened to Suzuki’s account of the world outside, but still refused to surrender. He insisted that he could abandon his mission only if he received orders from his commanding officer.

Suzuki returned to Japan and made arrangements to bring Onoda’s former commander, Major Yoshimi Taniguchi, to the island. Taniguchi met Onoda in March 1974, and formally relieved him of his duties. Only then did Onoda surrender.

He had spent almost 29 years in the jungle, following orders issued during a war that had ended long ago. 

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I came across Onoda’s story a few years ago. It came up again recently when a friend and I were sharing memories of our trips to Japan.

It’s an extraordinary account of military obedience and the consequences of refusing to accept evidence that contradicts what we believe. Of course, his circumstances were extreme, but there’s one aspect of the story that I find very interesting.

For Onoda, the instructions he received in 1944 remained valid because he had never accepted that the circumstances surrounding those instructions had changed. And so, he continued to interpret everything that he came across through the world he had known when he entered the jungle.

It made me think about the lessons we carry from our own past. 

Someone who grew up watching his parents struggle with debt may remain deeply uncomfortable borrowing, even when he has a stable income and can comfortably afford the repayments.

Someone who saw his family’s savings wiped out in a failed business may spend his entire career avoiding entrepreneurship.

Someone who was betrayed by a close friend may find it difficult to trust people for years afterwards, even those who have given him no reason to doubt them. 

Such beliefs often come from experiences that mattered deeply to us. And over time, we may forget to question whether they still apply. 

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In 2011, economists Ulrike Malmendier and Stefan Nagel, published a paper titled Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?

They studied the US consumer finances data covering the period from 1960 to 2007, to understand how people’s experiences with stock market returns influenced their willingness to take financial risks.

People who had lived through periods of poor stock market returns were generally less willing to take financial risks. They were less likely to participate in the stock market, and those who did invest tended to allocate a smaller proportion of their liquid assets to stocks. They also tended to expect lower stock market returns in the future.

People who had experienced stronger market returns were generally more willing to take risks and more optimistic about future returns.

The researchers also found that recent experiences carried greater weight, although experiences from much earlier in life continued to matter.

In other words, people weren’t forming their expectations about the future entirely from historical data or an objective assessment of the market. Their personal experiences mattered.

Think about that. Two people could look at the same stock market, have access to the same information, and still arrive at very different conclusions about risk. And not because one was more intelligent or better informed. But because they had lived through different histories.

Consider an investor who entered the Indian stock market in 2007. The economy was growing rapidly. Business confidence was high. Stock prices had been rising for the previous four years, and stories of people making extraordinary returns were everywhere. Then came 2008.

The Sensex, which had crossed 21,000 in January, fell below 8,000 by October. Many individual stocks suffered even greater declines. Companies that had looked attractive only months earlier suddenly appeared frighteningly risky.

Imagine being a new investor watching your savings disappear at that speed. You might have read all the right books and understood that markets fluctuate. You might even have told yourself that you were investing for the long term. 

But watching your own money fall by 50% is a very different experience from reading about a 50% decline in a book.

Now consider someone who began investing in April 2020, shortly after the Covid crash.

This investor entered the market at a time when prices had already fallen sharply. What followed was a powerful recovery. Many stocks doubled or tripled over the next couple of years. Even investors with limited experience found themselves sitting on impressive gains.

For this person, buying during a market decline may have seemed like one of the easiest ways to make money.

Both investors participated in the same Indian stock market. But the market taught them very different lessons. The first may have learned that stocks are dangerous and that apparent bargains can become much cheaper. The second may have learned that every sharp decline is an opportunity and that markets recover quickly.

Neither lesson is completely wrong. But neither is a complete understanding of how markets behave. And that’s where the trouble begins.

A lesson learned from one period of history can quietly become a rule we apply to every period that follows.

The investor who suffered in 2008 may still be holding excessive cash, waiting for another crash. The investor who made easy money after 2020 may be taking risks he doesn’t fully understand, convinced that patience will eventually solve every problem.

Both may believe they’re acting sensibly. And both may be allowing their past experiences to make decisions that deserve a fresh examination.

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Another thing about experience is that we usually treat it as an advantage. When someone says he has been investing for 25-30 years, we naturally assume he has learned a great deal. And he probably has. After all, experience teaches us things that books cannot.

But the big problem with experience is that it has a limitation. We can learn the wrong lesson from something that actually happened.

Suppose you bought a stock without much research and it went up 5x. You might conclude that you have a talent for identifying great businesses. But what if most stocks in that sector rose sharply during the same period?

Or say you invested in a fundamentally sound company, only to see its share price fall by 40%. You might conclude that your analysis was poor. But what if the business continued performing well and the decline was largely caused by a broad market panic?

In the first case, a poor decision may have produced a wonderful outcome. In the second, a reasonable decision may have produced a disappointing one. Yet our minds are strongly influenced by what actually happened to our money. We remember the profits and losses. We remember the excitement and regret. And gradually, those experiences become part of our investing philosophy.

I’ve often noticed how confidently investors describe what they’ve learned from markets.

“Small-cap stocks are too risky.”

“Buying quality companies at any price works.”

“Never invest when markets are at all-time highs.”

“Every market crash is a buying opportunity.”

Some of these statements contain useful observations. But they also deserve to be questioned. Did the investor arrive at the conclusion after studying different market cycles? Or did he experience something memorable and turn it into a permanent rule?

There’s a difference. And understanding that difference is an important part of becoming a better investor.

I don’t think the answer is to disregard our experiences. That would be equally foolish. Having witnessed the 2008 crisis unfold before me, I know how valuable some of its lessons have been. I developed a much greater respect for the risks of borrowing, the importance of liquidity, and how quickly confidence can disappear when markets turn. 

An investor who began in 2020 may have learned the importance of staying invested during uncertainty. That’s valuable too.

The question is whether we can learn from our experiences without becoming prisoners of them.

And here, I think a useful starting point is to ask ourselves three questions:

1. Which financial experience has shaped my thinking the most? Was it the 2008 crash? A stock that multiplied your money? A business failure in your family? A period when you had very little money? Most of us can identify at least one such experience.
2. What did that experience teach me?  Maybe it taught you never to borrow. Never to invest in small companies. Always to keep a large amount of cash. Or to buy aggressively whenever markets decline. Then ask whether the lesson is supported by a wider understanding of financial history, or mainly by what happened to you.
3. Would I make the same decision if my experience had been different? I find this the most important question here. If your first investment had lost money instead of doubling, would you still be as confident about stock picking? If you had started investing in 2013 instead of 2007, would your asset allocation look the same today? If you had never experienced a serious market decline, would you be taking more risk than you currently are?

There’s no way to answer these questions with certainty. But the exercise can help us recognise the influence of experiences we’ve stopped consciously thinking about. It can also help us make decisions based more on our present circumstances.

For example, the right equity allocation for a person approaching retirement should depend on his financial needs, available resources, time horizon, and ability to absorb losses. It shouldn’t be determined primarily by whether he happened to start investing during a bull market or a bear market.

Similarly, the amount of risk you take in an individual stock should depend on the business, its valuation, your understanding of it, and the consequences of being wrong. Not on whether your last three stock picks happened to make money.

These distinctions sound obvious when written down. But they become much harder to remember when actual money is involved.

There’s one final thing about this research that I find important. It reminds us how small our personal experience really is.

Someone who has been investing for 30 years has seen a great deal. But 30 years is still only a small part of financial history. And those 30 years happened under a particular set of economic conditions.

An investor who built his wealth during a period of falling interest rates may have developed beliefs that don’t work as well when rates rise. Someone who has known only a strong domestic economy may underestimate what a prolonged slowdown can do. And someone who has experienced repeated market recoveries may forget that individual stocks don’t always recover with the market.

Howard Marks made an observation in his 2022 memo, Sea Change. Reflecting on the favourable investing environment of the preceding decades, he wrote:

…if you grant that the environment is and may continue to be very different from what it was over the last 13 years – and most of the last 40 years – it should follow that the investment strategies that worked best over those periods may not be the ones that outperform in the years ahead.

We may spend decades becoming good at investing under a particular set of conditions, without realising how much those conditions have contributed to our success.

The future is under no obligation to resemble the years in which we learned to invest. And that’s why reading financial history matters, because it exposes us to circumstances we haven’t personally experienced. It also reminds us that markets have behaved differently at different times, and that many things which once seemed impossible eventually happened. More importantly, it helps us see our own experience for what it is.

Valuable, certainly. But incomplete.

***

When Hiroo Onoda finally emerged from the jungle in 1974, the world he encountered was almost unrecognisable from the one he had left behind in 1944.

Japan had changed. The war had ended. Nearly three decades had passed. But the orders he had carried with him remained unchanged until his former commander formally released him from them.

I think about that when I see how strongly we sometimes hold on to financial beliefs formed many years ago.

We may have more money now, different responsibilities, a longer investing history, and a better understanding of risk. Yet somewhere in our minds, we may still be following instructions written by an earlier version of ourselves.

Those experiences deserve to be remembered, because they helped make us who we are. But they don’t have to decide everything we do next.

The next time you feel strongly about an investment decision, especially when you’re convinced that your past experience has already taught you the answer, ask yourself one question: Am I responding to the market in front of me, or am I still fighting the last war?

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Two Books. One Purpose. A Better Life.

• Click here to buy The Long Game
• Click here to buy Sketchbook
• Click here to buy the combo (The Long Game + Sketchbook)

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References and Further Reading

1. Hiroo Onoda, No Surrender: My Thirty-Year War (1974).
2. BBC Culture, Onoda: The Man Who Hid in the Jungle for 30 Years (2022).
3. Ulrike Malmendier and Stefan Nagel (2011), Depression Babies: Do Macroeconomic Experiences Affect Risk Taking? The Quarterly Journal of Economics, 126(1), 373–416.
4. Howard Marks (2022), Sea Change, Oaktree Capital Management, December 13, 2022.