The investment blogosphere and Financial Twitter are built on all manner of financial/economic/market charts. So why do we study market history? When I say we, I mean the financial-investment industrial complex. I think there are two reasons. The first is that it is simply a way of marketing your wares, whether your motives be honest or cynical. The second is a genuine attempt to try and understand market history.

So why do we want to understand market history? I think this quote below by Adam Gopnik in the New Yorker is apt:

But the best argument for reading history is not that it will show us the right thing to do in one case or the other, but rather that it will show us why even doing the right thing rarely works out. The advantage of having a historical sense is not that it will lead you to some quarry of instructions, the way that Superman can regularly return to the Fortress of Solitude to get instructions from his dad, but that it will teach you that no such crystal cave exists.

Reading market history is really all about getting some, any, sense for what might occur. In real-time we don’t know whether what is happening in the markets is simply a replay of past market events or something altogether different. That is why, in part, Howard Marks famously wrote:

Risk means more things can happen than will happen.

So given that we are somewhat powerless to divine the future, what do we do? Investors have been thinking about these issues for centuries, so a quick review of what they have said is a worthwhile endeavor. Merryn Somerset Webb in MoneyWeek took a look at the phenomenon of investment book as self-help guide. The idea being that we buy investment books less for their concrete strategies and advice and more for us to feel like we are doing something to better ourselves. That being said, there are some common threads among the advice given investors over the years. Webb identifies seven of them:

  • Buy high quality stocks at reasonable prices.
  • Avoid short-term forecasts.
  • Diversify!
  • Investing ain’t easy.
  • Incentives matter.
  • Don’t get obsessed.
  • Money is not an end in and of itself.

Read correctly this is more of an anti-list than a list. It is more about what not to do, than what to do. Success in markets, business and life is as much about luck than it is about skill. This list is less about how to achieve great wealth, and it is more about putting yourself in a situation where your mistakes and life’s vicissitudes don’t knock you down for good.*

Since we don’t know what the future holds all we can do is try to minimize our exposure to the truly unexpected. Weird stuff happens all the time. And often we don’t recognize it until much later. Investing is the art of balancing our desire for growth and our ignorance in knowing the future. Studying market history makes this balancing act ever so slightly easier.

*An enterprising investment blogger could use these precepts to write for years on end.