Last week, I pointed out that experience is a great teacher for those willing to learn. But it can be a slow process at times. The best way to speed it along is to study history.
The best example I have is learning from market extremes. Despite the constant talk of bubbles and crashes, the market spends most of its time away from these extremes.
Yes, we’ve dealt with outliers recently – the internet bubble (2000) and the housing bubble (2008) – but outliers don’t happen very often. You have to go back to maybe the Nifty Fifty, then the Roaring Twenties (ending with the 1929 crash) to find the last big U.S. bubbles.
Sure there were boom periods (like the ’80s bull market) and crashes (like ’87) in between, but not nearly as extreme. Beyond that, you have to look outside the U.S or outside the stock market, to find other examples.
I think it’s safe to say that bubbles are a once (or twice) in a lifetime experience. It’s also not something you should wait around for to learn from.
To that end, history is your next best guide for some perspective on what people were thinking before, during, and after the event. If you dig far enough into the past you’ll find the Tulipmania, the South Sea Bubble, and Railway Mania are great places to start.
- The Museum of Art and Finance, Gallery 1: Tulipmania – J. Zweig
- Why We Hate Cheap Things – The Book of Life
- How Market Volatility Affects Our Brains – Alpha Architect
- A “Crazy Like a Fox” Idea for Managing Market Uncertainty – R. Ferri
- When Stocks Plunge – M. Housel
- The Lessons In A Correction – L. Swedroe
- The Fed, Interest Rates and Stock Prices: Fighting the Fear Factor – Musings on Markets
- The Dangerous Long Bias and the End of the Supercycle – R. Dalio
- The Argument About Time Diversification – Morningstar
- Maybe This Global Slowdown Is Different – J. Fox