What history teaches about investing

I am always queried at what investing books to read and of course, a lot of them to list down.

Great investors like Benjamin Graham, Jim Rogers, John Templeton, Warren Buffet and many more have either written, or their principles/quotes compiled to create a huge knowledge database of illustration on how they have succeeded in stock market investing.

While this also chronicles the way to succeed for any other investor, the common underlying crucial aspects on all this literature are temperament and knowledge of history.

I have been discussing about the investment psychology and the behavioural approach to investing through this space for some time.

Today, I would like to highlight the need to know the history and how it would be important to make investment decisions.

Jim Rogers post the Great Financial Crisis in 2009 said that the only other way (besides visiting the countries around world yourself) to know what is going on is to study history. When I teach or speak at universities, young people always ask me: "I want to be successful and travel around the world, what should I study?" I always tell them the same thing: "Study History."

He further replies to the perplexed and confused students who ask about, "what are you talking about…. What about economics, what about marketing…?", "If you want to be successful, you have got to understand history.

You'll see how the world is always changing. You'll see how a lot of the things we see today have happened before. Believe it or not, the stock market didn't begin the day you graduated from school.

The stock market's been around for centuries. All markets have been. These things have happened before. And will happen again."

While John Templeton was quoted in the book, "The Templeton way", that understanding the history of the market is a huge asset for investing.

This is the case not because events repeat themselves exactly but because patterns of events and the way the people who make up the market react can be typical and predictable.

History shows that crisis always appears worse at the outset and that all panics are subdued in time. When panics die down, stock prices rise.

The world has witnessed multiple shocks through various events like recessions, booms, busts, hyper-inflation, disinflation, sovereign defaults, corporate bankruptcies, zero interest rates, wars, etc., which have impacted the various asset classes and thus the wealth of the investors.

Despite the common disclaimer provided that the past returns are not an indication of the future returns, they could also help us understand how a particular investment avenue behaved in the past. That learning is why one has to study the history for.

True that each such event was caused by different set of events and possibly one can't come up with a forecast of what could be the future risk or event; the cliché of 'this time it's different' turns correct.

However, what's common through all these events is how the market participants reacted to these events than the actual event itself. So, one should always remember that it's not the event that poses risk to our portfolios but it's how we react to the event does.

The current situation is no different than those that happened in the history. One may argue that this time it would be more severe or even may last longer but it's again anybody's guess.

Nassim Taleb writes, "History doesn't crawl, it leaps, go from fracture to fracture with few vibrations in between. Yet we like to believe in the predictable, small incremental progression."

It's imperative that the environment might change from normal to critical at a quick pace and it may be not to our liking but that's reality.

In conclusion, what history teaches us is that not to stretch anything too far. As the good things don't last forever, caution should be at the highest during these phases when most of us tend to take irrational decisions.

Keynes famously said after the Great Depression that 'markets can remain irrational longer than you can remain solvent.' Of course, history could only teach lessons to those who are prepared to learn.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])