Can we really learn from the lessons of the past?

The financial shockwaves of the past six years should demonstrate to us that almost anything is possible in today’s fast-moving world. The pace of change gets quicker and quicker, as does communication and as does, therefore, the potential for enormous and sudden financial dislocation.

Consequently, we’ve seen interest rates at record lows for a long time, we’ve seen tech stocks reach a giddy peak in early 2000 that could never possibly be warranted by earnings growth, and we’ve seen major banks disappear whilst others hung on by the skin of their teeth. We’ve also seen property prices spiral out of all kilter with reality, slump a bit, then come back again – as have stock markets.
Recently, interesting data from the UK demonstrate that people are cautious following all this dislocation. So, despite record low interest rates, people are saving more on average, but they’re also investing more in stocks and shares. You can find out more here about this report from HSBC. Overall – what it seems to be telling us is that people in the UK, anyway, are nervous about further financial upheaval – but are also seeking better returns than ordinary savings through the markets.
So where does all this leave us?
Well on the one hand, “history is bunk” in that just because something happened in the past – this is no great predictor that it will happen again.
Yet at the same time, human nature doesn’t fundamentally change so the overall kinds of mistakes of the past will inevitably be repeated in the future; it’s just that the content will be different and so the bubbles that blow up are often difficult to recognize when you’re trapped inside them.
So we can learn from history if we have our wits about us. But don’t look for the same actual things to recur.
If you’re an investor, then concentrating on specific company-related information, being very realistic about future earnings and optimism – and always looking for a very strong balance sheet should help to tell when a company is in bubble territory. If the valuation doesn’t make sense to you, then ignore the froth. This can be painful as you watch stocks reach new heights – but remember Warren Buffet’s first rule of investing, which is not to lose money. Famously, his second rule of investing is not to forget rule number one!
Be very suspicious of hot shares and overall hot sectors – as well as “explosive” earnings on the horizon.
Look for quality companies that pay a good dividend, have strong balance sheets, which are lowly geared and have good prospects. If you can’t find them or don’t trust your own judgement – see a reputable and independent financial advisor and outline to him or her your long-term aims.
Overall; have a spread of investments, keep cash in reserve, have some money in property, stay lowly geared and never put all your eggs in the one basket.
So can we learn to behave differently in our financial futures by looking at the past? And is all history bunk so there’s no point expecting the same things to happen again? A very strong “yes” is the answer to both these questions.