The title to this piece reads like the start of a bad joke (“A windscreen, a rearview mirror and a passenger walk into a bar…”) but originates from the many conventional sayings that invoke the windscreen and the rearview mirror. In both our daily lives and the investment world, we often hear people say things like “The windscreen is bigger than the rearview mirror” or “You do not move ahead by looking in a rearview mirror”. These reflect the accepted wisdom of focusing on what we can change (the present and the future) rather than devoting energy to what is past. However, the indiscriminate use of these sayings leaves me wondering whether the rearview mirror is on the receiving end of far too much bad press. A car, after all, has a rearview mirror for a reason and sometimes knowing what is happening behind the car can help a driver to make better decisions.
Therefore, it is worth considering if we might achieve better outcomes if we involve more components of the driving experience in our decision-making analogies:
A windscreen remains important if we want to move forward. In investing, it reflects that buying or selling an investment should be based on where the market price is likely to go, rather than what was originally paid for the investment. In life, it reflects that holding on to the past closes a person off to new opportunities. Effectively, focusing on what possibilities lie ahead avoids being paralysed by our past mistakes. It also serves our future selves by ensuring that we will have fewer regrets to look back on.
A rearview mirror is there for a purpose and should not be ignored. In investing, analysts frequently devote extensive time to studying the past performance of a firm. Superficially, this might seem to be a waste of time, as it is not immediately apparent why it matters what the return on capital was ten years ago, for example. However, the past performance of a firm frequently provides useful information about how it might perform in current or expected future circumstances. This is supported by research which finds, for example, that firms that made value-destructive acquisitions in the past tend to continue to do so. Significantly, this holds true, even when the management team changes. In other aspects of our life, the Freudian view that all our problems are rooted in childhood experiences has given way to a more nuanced concept of how our self-identities develop. Nevertheless, understanding our past (and how that has formed us) still provides valuable insights into our current behaviour and decision-making biases. Knowing where we come from acknowledges that experience is an invaluable part of improving our decision-making.
A passenger reflects that drivers have fewer accidents when a passenger is in the car with them, as passengers assist drivers by alerting them to potential problems. In our analogy, the role of the passenger is to ensure that the driver pays sufficient attention to the windscreen, without forgetting about the rearview mirror. From an investment perspective, this could mean that you make investment decisions with the help of a trusted family member or financial advisor. Professional investors benefit when they are part of an investment team, where research finds that investors in a strong team environment frequently perform better than when they make individual decisions. For some of us with the ability to view ourselves and our decisions dispassionately, the passenger might even be our more objective alter ego. Whoever your passenger may be, we all need to remember to pause sometimes and consider if we are paying an appropriate degree of attention to both the windscreen and the rearview mirror, particularly when making important decisions.
In summary, as with so many other aspects of life, balance remains an important factor. Refusing to let the past dictate your future is an important part of making better decisions. However, ignoring the past completely runs the risk of missing out on the wisdom gained from experience. None of us are getting this balance right on our own, which is why it is so valuable to have others around us to help us on our way.
However, another key takeaway is that we drive (make decisions) to get somewhere, even if it is only to end where we started (which is with a joke in this case): “A windscreen, a rearview mirror and a passenger walk into a bar… and order a whiplash.” Before you judge too much, remember that this was advertised from the beginning as the start of a bad joke…
[For those who are wondering, a whiplash usually consists of the potent combination of three parts brandy, one part white (dry) Martini, one part red (sweet) Martini and a dash of triple sec – driving after consumption is not recommended]