‘This time’ will rarely be the same as the past. History has always been misquoted and misused; usually to support a preconceived view of the writer. Learning to identify, and then look through these distortions when reading financial musings is crucial. Especially true when the writer speaks with a tone of ‘definitive authority’ on the basis of the past. Here are a few tips when forming views from history;
History, it’s not different this time. It’s different EVERY time. Each crisis or surge is different. Nature is never constant. It is the arrogance of man to assume his ‘rules’ are set to never change and he is exempt from nature. The Great Depression didn’t emulate the depression of 1920-1921 just like that differed to the panic of 1907. The current crisis versus the GFC has far more differences than similarities. Historical panics do have one thing in common, they all end. Stocks recover. Economies grow. People still get up every day looking to get ahead.
Historical ‘context’ is fine but it’s not the answer. Back-tests are not called Front-tests for good reason. Understanding financial market history is not the same as it telling you what will happen next. It does provide a range of outcomes not ‘the’ full range of them. New outcomes frequently occur - a classic failure most commentators forget to factor in. What you can do is analyse the present and use the past to come up with reasonable probabilities when making decisions about the unknown, but never limit the outcomes just to past ones. Nature is always morphing and creating as is history. It’s not static.
History warns us about ignoring human nature. It’s said, ‘Never bet against the Fed’. I would add ‘Never bet against the human spirit’. If you are, I’ll take the other side of that bet. Commentators holding a far right or left of field view tend to ignore the human spirit. They do this because it gets in the way of their belief systems. This is the heartbeat of all human endeavour and hence of capitalism too. When you take a bet against human endeavour you are betting against the heart and engine room of our lives. Doomsayers value endeavour, imagination, stubbornness, curiosity, determination, and relentlessness at zero.
History shows risk is easier to predict than returns. Strolling down memory lane helps give investors a decent approximation of potential outcomes (e.g. the presence of risk in financial assets that seek to earn an expected return above the rate of inflation). Risk means different things to different people but it is always there no matter what you do with your money or even if you’re aware of it in the first place. One recurrent big risk for investors during bad times is the feeling that the good times won’t return for a long time.
History helps us avoid mistakes of the past. Charlie Munger (Buffets amazing partner) once said, “I believe in the discipline of mastering the best that other people have figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.”
The inverse is also powerful; avoiding the worst that people didn’t figure out in the past to avoid lethal mistakes… is easier than emulating brilliance.
History shows life always has hardships. People have always lived through hard times and then thrived! How did one generation born into poverty and no social security get through World War I, the Spanish Flu pandemic, the Great Depression, massive social upheavals, two market crashes, and World War II - all within the span of only 30 years, and yet progressed their lives? Maybe it’s that thought about underestimating human endeavour? People have many flaws but we are exceedingly adaptable. Never underestimate human endeavour and the will to progress.
Einstein once said, “I would rather be approximately right than precisely wrong.” Each investment plan requires educated and analysed guess work. Baseline assumptions backed by strong theories that use probabilities to make key decisions is a part of portfolio construction. The future still remains unclear to everyone. Investment information is imperfect. You work with what you’ve got, update assumptions and probabilities as new information comes to light. Good plans are flexible enough to take new realities into account. Balance this with how easy it is to get caught up in the moment and to then lose perspective (temperament) - especially considering time as a factor and in every way it impacts money.
History shows temperament is more useful for investors than intelligence. Overconfidence or underconfidence during a market event is lethal. Subduing those emotional attributes in the investment decision-making process is wise. Using educated specialist third-parties such as advisers and fund managers is good insurance for this and are useful tools to managing your money, including how history is accounted for. I’ll leave you with the thought below…
Our actions result from our behaviours that are determined by our attitudes…that are governed by our beliefs.
Note: Our thanks to Ben Carlson (CFA) in the USA for generating the idea for this article and for various portions of the content.
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