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Four Pillars, part 2

“The only thing new in the world is the history you don’t know.”

This quote from Harry Truman holds true in investing, which is why understanding financial history is crucial. We tend to generalize from what has happened over the last 10-20 years or even from what’s happened the last few months. Over the course of 40+ years of saving and investing for retirement, you are likely to encounter the uncommon and the unexpected. You’ll be less surprised and better able to navigate these unusual periods with an understanding of the past.

What lessons can we learn from financial history? This is Bill Bernstein’s second pillar.

1) “Markets can remain depressed for decades at a time.” Equities can lose (and have lost) value over long periods of time (they are risky, even over the long-term). Yes, certain markets (the U.S. included) have offered strong returns over the last century. But, even in the U.S., there have been decade-long stretches of poor returns. For example, U.S. equities only kept pace with inflation from 1966 to early 1983.

2) Over the last 40 years, U.S. investors benefited from very low starting valuations. The stock and bond markets were cheap in the early 1980s. In 1979, Businessweek proclaimed the “Death of Equities”, stating “the death of equities looks like an almost permanent condition—reversible someday, but not soon.” We are unlikely to see a repeat of this over the next 30-40 years given today’s valuations.

3) Across countries, equities have returned ~5% more than the risk-free asset. This is 4% once you back out the effect of increasing valuations over time (unless you expect valuations to keep increasing forever). Going forward, it might be safer to assume an equity risk premium closer to 3-4%.

4) “Not all stock market crashes follow well-established bubbles.” And “most dramatic price increases are not followed by a precipitous decline.” (That said, crashes or longer periods of weak returns tend to follow true bubbles – as an example, see Japanese equities since 1989.)

5) Bubbles often contain a kernel of truth, typically starting with some technological or financial innovation. There’s a reason for the hype but it gets taken too far. Other conditions include: low interest rates, the passage of time (enough for investors to forget the last bubble), and disregard for traditional financial metrics.

6) Investing during the worst of times pays off. Usually. But, like Russian Roulette, it doesn’t pay off every single time and, from time to time, the bad outcome does occur. Plus, steep declines in markets are almost always accompanied by “alarming narratives.” Investing when terrified is not easy.

7) Manias and crashes have been recurring as long as there have been markets (and likely before). From the South Sea Bubble in the 1600s to several railway bubbles in the 1800s to U.S. TMT stocks in the 1990s. And, more recently, meme stocks, NFTs, and cryptocurrencies.


When living through a euphoric or turbulent investment period, it helps to know that similar things have happened before. Perhaps the main lessons from history are that unusual things happen, and markets are unpredictable (in the last few years, we’ve had a global pandemic, a spike in inflation, and a war in Europe). The key is to avoid getting caught up in the hype or panicking and deviating from a well thought out saving and investing plan. The right answer, most of the time, is to stay the course. That doesn’t mean it is easy. We are human after all. And that leads to the third pillar (covered in Part 3).


Related posts: Part 1 (on theory), Part 3 (on psychology), Part 4 (on the investing industry), Part 5 (closing thoughts).

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