The importance of studying history is a recurring theme from many great investors. Yet, history is probably the most ignored part of investing.
There’s a number of reasons I’m sure. But I was reminded of this while listening to a recent interview with Jason Zweig. He said:
It’s extraordinarily difficult for people to maintain a long-term perspective in a world, I think we would generously be describing as short-term oriented…The best way to do that, is by enabling people to make more points of contact with the wisdom of past ages. ~ Jason Zweig
I doubt the short-term mindset changes anytime soon. Technology is clearly focused on shrinking it. The instant access, always connected world we live in will only speed up the crowd behavior in markets.
So the reactive nature of investing means even a limited knowledge is not enough.
Sure, it’s nice that investors know how different assets performed over time or how those assets perform pieced together. Except, knowing that stocks returned about 10% annually from 1926 till today misses the point.
What happened in between is what people need to know:
- Stocks saw losses and gains all along the way.
- Some losses were made worse because people panicked and sold.
- The worst losses created long periods of investor skepticism in stocks.
- The selling produced periods of better than 10% returns because stocks had to climb out of the hole.
- Those better than 10% returns slowly chiseled away the skepticism.
- The skepticism turned to trust that, a few times, morphed into a belief that stocks can’t lose.
- That can’t lose mentality created periods of excess that inflated stock prices beyond reason.
- But the excess always ended, prices popped, gravity took over, some people panicked, and, after some time, reason returned.
If you dig deep enough, you’ll see that stocks seesaw through periods above and below that 10% return as the economy, investor behavior, and valuations drove it.
And you can dig deeper. You can study the excesses of the Roaring ’20s, the post-WWII boom, the Nifty 50, the Dot-coms, and every bull and bear market in between.
Yet, for most people, it’s not necessary to know every tiny detail. A broad view is good enough.
I think Lynch said it well in the foreword to The Davis Dynasty:
We’ve all heard that people who are ignorant of history are doomed to repeat it. On Wall Street, history repeats itself routinely, as corrections and bear markets turn into bull markets sooner or later. Investors who are ignorant of this pattern aren’t necessarily doomed, but they are likely to lose money trying to escape stocks at inopportune moments. ~ Peter Lynch
But if you only know stocks return 10% annually, you’d be very disappointed to see a couple losses in a row. You’d be ecstatic to see a couple huge gains. You might act on it.
And you wouldn’t be alone. Millions of people before you experienced a similar thing. Why not learn from it?