History is a funny thing. Despite being over and done with, it’s constantly changing. It’s fluid. Our understanding of history is in a state of flux.
Our knowledge of any past event is always incomplete, probably inaccurate, beclouded by ambivalent evidence and biased historians, and perhaps distorted by our own patriotic or religious partisanship. “Most history is guessing, and the rest is prejudice.”
To top it off, we may not have the knowledge — yet or ever — to piece it all together. New ideas and discoveries constantly rewrite what we thought we knew about the past.
So historians make do with what they have. The result is an incomplete, biased, and often simplistic story that brings order to past events.
That’s roughly how The Lessons of History, a book by Will and Ariel Durant, presents it. And it relates surprisingly well to investing. For instance, the above describes how media present headlines and narratives around market moves.
Especially the big market moves.
We must remind ourselves again that history as usually written is quite different from history as usually lived: the historian records the exceptional because it is interesting — because it is exceptional.
How many market historians opine on the infamous 1% move of 1910? Or how that one wild investor risked everything to build a big enough nest egg, after earning an average return before fees, to live comfortably the rest of her life?
Market historians don’t write about boring mundane day to day occurrences, because nobody cares. It has to be exceptional, probably chaotic, and impossibly complex.
So we read about the biggest success stories and the worst blunders in business and investing. We spend an inordinate amount of time on the biggest market booms and busts for the same reason.
And its often to our own detriment.
Most investors will achieve success not because of exceptional events but despite it. What they do during the mundane periods will be far more impactful to their success. And they’ll do it despite being their ordinary selves, by investing in quite ordinary businesses.
The fundamental lessons are of biology.
The laws of biology are the fundamental lessons of history. We are subject to the processes and trials of evolution, to the struggle for existence, and the survival of the fittest to survive. If some of us seem to escape the strife or the trials it is because our group protects us; but that group itself must meet the tests of survival.
Markets may be relatively new (that we know of) but are driven by the same dynamics — competition, survival, reproduction – as people. In other words, capitalism is biological. Businesses go through a life cycle. The rush for market share is built on competition and survival. Buying products or services and pricing assets boil down to human nature. Laws are the only thing that stops or slows the process from becoming wildly chaotic.
Sure, people have evolved over the millennia but mostly socially. We’ve improved economically and intellectually through innovation and education. Yet, despite all the progress in science, technology, and knowledge, we’re still the same biological creatures we were thousands of years ago.
Our baser instincts are still the same.
Theoretically there must have been some change; natural selection has presumably operated upon psychological as well as upon physiological variations. Nevertheless, known history shows little alteration in the conduct of man. The Greeks of Plato’s time behaved very much like the French of modern centuries; and the Romans behaved like the English. Means and instrumentalities change; motives and ends remain the same: to act or rest, to acquire or give, to fight or retreat, to seek association or privacy, to mate or reject, to offer or resent parental care. Nor does human nature alter as between classes: by and large the poor have the same impulses as the rich, with only less opportunity or skill to implement them.
You don’t have to look too hard to realize that people have been doing stupid human things for a very, very long time. Dishonesty, corruption, sin, even gambling — it’s always existed. It will always exist.
Dice can be traced back over 5,000 years. Which explains a lot. Markets get compared to casinos because people have always been willing to take big chances to acquire, to improve their standing, to feed their greed, and “survive.”
History sort of rhymes…sometimes.
History repeats itself in the large because human nature changes with geological leisureliness, and man is equipped to respond in stereotyped ways to frequently occurring situations and stimuli like hunger, danger, and sex. But in a developed and complex civilization individuals are more differentiated and unique than in a primitive society, and many situations contain novel circumstances requiring modifications of instinctive response; custom recedes, reasoning spreads; the results are less predictable. There is no certainty that the future will repeat the past. Every year is an adventure.
No matter how hard we try to compare past market events to what’s going on today, it’ll never be exact. Partially because the amount of market history we have to draw from is so limited.
But mainly because history is not like the wheel of a bike going around endlessly, where the same spoke always makes it back to the top. It ebbs and flows.
It’s closer to a process of growth and decay. Combined with the natural tendencies of evolution — competition, survival, etc. — in biology it creates variation.
So the present isn’t a repeat of some past event, it’s the product of all the things that came before it. Of course, that makes predicting the future especially inconvenient. And because we don’t know what happens next, diversification becomes more important.
The best we can do is guess.
We must operate with partial knowledge, and be provisionally content with probabilities, in history, as in science and politics, relativity rules, and all formula should be suspect. ‘History smiles at all attempts to force its flow into theoretical patterns or logical grooves; it plays havoc with our generalizations, breaks all our rules; history is baroque.’ Perhaps, within these limits, we can learn enough from history to bear reality patiently, and to respect one another’s delusions.
Since the future is unknown, the past is our only resource for understanding today and preparing for tomorrow. But it comes with an asterisk labeled incomplete.
There are no formulas or models that produce great returns year after year. And it’s impossible to account for every eventuality.
Investing is about putting the odds in your favor. That’s the best we can do. And just to be safe, we should expect surprises will happen, exceptional events will pop up, and it won’t always be for the best.
The only thing really worth expecting from markets is change.
The Lessons of History
Why We Fail to Learn from History
Notes: The Lessons of History