History will repeat itself

Tim Mak

This may surprise some, for the disciplines seem to be miles apart, but I think reading up on history is very important to investors’ long-term financial welfare.

Like Winston Churchill once said, “the farther backward you can look, the farther forward you can see.”

Even Confucius, arguably the most confused of philosophers and the King of All Confusions, managed to add in his own: “Study the past if you would divine the future.”

Warren Buffett, the world’s greatest investor, says that one thing he did in school was read up on all those past market manias.

And, this is key: the thing Buffett says he has learned from his reading is that people have been consistently repeating the same mistakes that their predecessors fell prey to.

Buffett says that in the market, normal people go crazy, and occasionally very intelligent people also go crazy. He says it’s amazing to see how people, smart or otherwise, easily succumb to herd instinct.

Some who don’t like history may argue that life’s too short to study history for history’s sake, but studying previous market manias carefully for investment’s sake is vital in building one’s sense of financial discipline and independent thinking.

For example, if you read enough about past market manias you’ll realize that every single time people who got swept up by the popular thinking of the time needed some excuse to convince themselves that “this time it’s different.” Things new or peculiar to that era would be conveniently used to justify their lemmings-like participation in market manias.

I mention the word “discipline” because discipline is so important in investing. In real estate, they like to say the three most important things are location, location and location. I would say, in investing, the three most important things are discipline, discipline, and discipline.

Asking a 20-year-old college student or a 25-year-old fresh college graduate, or, for that matter, a middle-aged professional to command a completely independent mind that can’t be swayed by what those around him or her say about the market is likely asking for too much.

Why? Because human beings are social animals.

If one simply goes with the flow, an enormously useful skill in one’s social and professional circles, one will do badly in investments. For one will then tend to buy high and sell low.

What can one do then, to be able to think and act independently, unaffected by the conventional wisdom?

The answer: history.

As Robert Heinlein once said, “A generation which ignores history has no past — and no future.”

After you’ve spent hundreds, hopefully thousands, of hours carefully studying past market manias, like the Tulipomania, the South Sea Bubble, the late 1920s bull market, the IT Stock Mania of the late 1990s, and countless others, you won’t feel like spending time arguing with the next person who tries to convince you that today’s market mania, whatever it is, is different and will last forever.

Because you have centuries of history behind you, you’ll know that speculators are just repeating history’s mistakes.

Like Buffett says, what we learn from history is that people don’t learn from history.

Tim Mak is a teaching fellow at the College of Business Administration and a columnist for the Summer Kent Stater. Contact him at [email protected].