Pillar two: History of financial markets

William Bernstein wrote a classic “Four Pillars of Investing”. It is a must read for any student of investments.

In the chapter “Introduction”, he writes that the second pillar of investing is knowledge of history. He writes:

… a study of previous manias and crashed will give you at least a fighting chance of recognising when asset prices have become absurdly expensive and risky and hewn they have become too depressed and cheap to pass up.

… the investor who is unaware of financial history is irretrievably handicapped.

Those who are interested in removing this handicap cannot ignore studying the history.

And this is what I have written in the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”:

In the beginning, all the events looked different. In spite of the apparent differences between the origins, as discussed above, there were too many common threads and parallels. It was hard to ignore the signals and still the world ignored ouches to ignore them. And that  confirms to what Bishop Desmond Tutu or Jeremy Grantham said. Remember the golden words of Sir John Templeton, “The four most dangerous words in investing are: ‘this time it’s different.'”

Ignore the history at your peril. Learn the lessons and remember those. If required, re-read the book.

#RidingTheRollerCoaster – 173

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“A book for keeps” says Deepali Sen

Amit Trivedi: absolutely enjoyed reading ‪#‎ridingtherollercoaster‬.
Greed and fear, the key drivers of our investing mistakes. And yes, we need to read and re read it to learn from history.
The examples on financial disasters chosen by you are over different geographies and time periods- the message is same, “too good to be true”.
Well written and insightful.
The book is certainly for keeps. Congratulations Amit.

 

When genius failed …

Two days ago, we wrote a post referring to an article titled, “The world’s smartest investors have failed …

There are numerous instances when the experts, the smartest in their respective fields, the best in the business, the genius have failed. Failure happens. When, where, how, why – these are questions that often have no answers. However, in certain cases, the answer to the “why” lies in one’s overconfidence, ego, refusal to learn – it’s all in the mind.

Just as a reminder, we have borrowed the title of today’s post from a book by the same name, written by Roger Lowenstein, highlighting how a team of the best in the business failed at their own game. It is a compelling story of a very large investment fund – Long Term Capital Management. Managed by Nobel Laureates, the fund could not live up to its name even and did not survive the “long term”. In “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”, we have a chapter on this episode.

#RidingTheRollerCoaster – 158

 

plus ça change, plus c’est la même chose

Edward Chancellor writes in Devil Take the Hindmost: ” …the notion of intrinsic value was an oxymoron, since intrinsic suggested an inward quality, while value was always external. For instance, Nicholas Barbon argued that ‘things have no value in themselves, it is opinion and fashion which brings them into use and gives them a value’.”

Compare Nicholas Barbon’s view with what Harshad Mehta said centuries later. Harshad Mehta argued that the price of a share is a function of the market’s perception of the future and not the past.

“plus ça change, plus c’est la même chose”, meaning “the more things change, the more they stay the same”

#RidingTheRollerCoaster – 153

The real value of history in the world of investing

William Bernstein writes in his classic Four Pillars of Investing – Lessons for building a winning portfolio: “The real value of the historical record is as a gauge of risk, not return.”

Still, majority of discussions focus on which asset class has outperformed or underperformed which other asset class. The focus is too much on the returns generated rather that the risks taken or avoided.

Read history to understand the risks. Read history to understand what can go wrong. Read history to understand what you can do to protect and nurture your investment portfolios.

#RidingTheRollerCoaster – 140

Common sense

Common sense is not common, after all.

Various episodes in financial markets, especially at the extremes, indicate that common sense is not so common. In fact, it seems quite common that large number of people can lose common sense so regularly.

Read such episodes in “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

#RidingTheRollerCoaster – 112

This is what Aneesh Kothare writes

As George Santayana wrote “Those who cannot remember the past are condemned to repeat it”. This book lucidly illustrates the relevance of historical investor failings in our present/ future investment decisions. Presented in a clear & interesting manner, which holds the attention of experienced as well as new comers to the financial markets.

Aneesh Kothare wrote on Facebook