Investment lessons: What to do when history returns to rhyme in your investing world

Can one look at the past and tell what is going to happen in the future? The answer is NO.

Then what’s the point in studying history if it has no predictive power? For the longest time I’ve been misinterpreting the quote: “History does not repeat, but it rhymes.”

I used to believe it means events may not occur exactly like they did in the past, but something similar might happen. That is perhaps an incomplete way to look at history.

Then what should we look at when we study historical events? It doesn’t matter how frequently or rarely an event occurred in the past. What matters is, when it occurred, how did people react to it. This gives a whole new meaning to the phrase – “history rhymes.”

It has been studied in behavioral experiments, that as humans we still rely on our animal instincts when we react to events. Something we’ve been doing for millions of years. In a given historical event, it is always interesting to observe how people acted when they found themselves in that situation.

Imagine being an investor during the dotcom boom or during the infrastructure boom just before the global financial crisis of 2008.

No matter how experienced we may have been, if we do not participate in such a rally, it is natural to occur to us that there is something we are missing and perhaps our ability to invest and make money has diminished.

That, when the whole world is getting paper rich, overnight!

Let’s transport ourselves to the current times. Is there a bubble in quality stocks? Is there a bubble in private equity, VC or pre-IPO stocks? These questions are natural and can help us define our own sense of value, which we give to future cash flows of these businesses. They also help us to define our behaviour when we come across such valuations.

Countless books and articles have been written on what happened to the majority of dotcom investors. So the behaviour to participate in inflated valuations may seem stupid in hindsight. Not only does such a dilemma occur from time to time, but it also forces us to feel that it can end badly for us as well if we follow in those footsteps.

What if someone who has not studied history ends up participating in such an inflated market?

The justifications they may provide to themselves for their actions would matter more than the eventual fate of that investor. This is where history rhymes and provides the blueprint for the excuses that people provide when they act using only their instinct.

So, how can we learn from history?

One way to learn from history may be to repeat the past behaviour in a controlled manner and let our instincts play out. We can’t ignore our emotions, nor can we control them. All we can do is commit small amounts of money and monitor our emotions while making these decisions and document them for future reference. That way we may enjoy the momentary benefits of the historical event and yet live long enough to learn from our own fate.