Mark Twain said, “History doesn’t repeat itself, but it often rhymes.” Investors would do well to imbibe this vital lesson and deeply study financial markets’ history.
Examples from history
Pandemics. We are presently in the terrible grip of the Covid-19 crisis. The Spanish flu started in 1918 and continued for over four years in many waves, killing an estimated 25 million. Our Covid-19 pandemic has officially killed over 5 million worldwide, with unofficial figures much higher.
Wars. In 1812 Napoleon invaded Russia in winter with an army of 600,000. The large size of the Russian countryside, the harsh winter conditions, and the Russian tactic of burning crops before the French arrived all led to a disastrous defeat for Napoleon. Despite owning and reading many books on Napoleon, in 1941, Hitler made the same mistake. Hitler believed he would defeat the Soviets in a few months. Instead, the Germans got bogged down in the immense Russian countryside, and the loss of life on both sides was one of the worst in history.
The Similar Waves in Financial History
For the audience of this column, the most important lesson is probably the similar waves we see in the history of investing. Economic and finance history moves in waves.
For example, the 2007/8 subprime crisis devastated the stock markets and led to the great recession. There were many similarities with the 1930s Great Depression. Both financial disasters were:
- preceded by years of extraordinary wealth creation
- occurred when banks were introducing new financial products
- followed asset bubbles
- accompanies by steep stock market declines in the first one and half years after the initial crash
There were also differences in severity and total length of the crisis, but the above-mentioned macro similarities provide great lessons.
Lessons for today
What is essential to keep in mind are two concepts:
- Repetition: Human nature has not changed for thousands of years. Hence the way humans act, individually and collectively, often leads to similar outcomes.
- Rhyming: While history repeats – it is not an exact re-occurrence. There are always some differences in severity or conditions. The broad, macro waves, however, repeat in a very similar manner.
Look for the patterns – is the boom in unicorns similar to that of dot coms in 1999/2000? Are the present tensions in Europe similar to the earlier crises in the middle of the last century? Are the current economic conditions (interest rates and inflation) more like the 1960s than the 1980s?
One needs to stay humble and alert. We are not in a brand new situation where the normal long-term laws of economics and human behavior can be ignored.
We should never forget what the philosopher George Santayana wrote, “Those who cannot remember the past are condemned to repeat it.”