Old books may be an investor's best friend when it comes to pondering over the future course of events. Indeed, thinking about what financial or economic developments lie ahead can be tricky business. Making sense of the 24 hour financial media news cycle may sometimes feel like trying to read cuneiform tablets or decoding the hidden meaning of ancient runes. In order to avoid getting swept away in this flash flood of news and data, investors need grounding and few things offer a better anchor than old books.
This makes for a nice introduction to The Lessons of History, a succinct 117 page tract by renowned historians Will and Ariel Durant. This book is a synoptic volume written after the completion of the tenth installment in their eleven volume series The Story of Civilization, aimed at the collection and explanation of themes they had observed after covering 5,000 years of world history in their writing. There are both pros and cons to this work, and the passage of time has bore out the truth and inaccuracy of some of the assertions made therein. However, the book is well written enough to be accessible to the lay reader and my thought is that its real value lies in being a kind of literary counterweight to the deluge of noise by framing the prior millennia in a manner more consistent with the vicissitudes of human nature. There are also several thoughtful passages throughout that give pause, and I will include a few here for reader edification.
I have been wondering about the connection between history and investing lately, and a possible answer was offered up from an unlikely source. In a pronouncement attributed to Karl Marx, the philosopher stated that history is nothing more than economics in action. If this is correct, then this helps outline the connection between these two disciplines. From the book:
History, according to Karl Marx, is economics in action-the contest, among individuals, groups, classes, and states, for food, fuel, materials, and economic power. Political forms, religious institutions, cultural creations, are all rooted in economic realities.
These economic realities manifest themselves in financial statements and other data, and are taken into consideration when doing quantitative and qualitative analyses. This view makes a reasonable case then for a more thorough reading of history. To my mind, exogenous events are not to be given limited treatment or relegated to the periphery; rather, they merit the same careful analysis as quantitative data.
Some sections of this book sound surprisingly close to what Ben Graham or a similarly thoughtful value investor might say about the broader context of security analysis. From the first page:
As his studies come to a close the historian faces the challenge: Of what use have your studies been? Have you found in your work only the amusement of recounting the rise and fall of nations and ideas, and retelling "sad stories of the death of kings"? Have you learned more about human nature than the man in the street can learn without so much as opening a book? Have you derived from history any illumination of our present condition, any guidance for our judgments and policies, any guard against the rebuffs of surprise or the vicissitudes of change? Have you found such regularities in the sequence of past events that you can predict the future actions of mankind or the fate of states? Is it possible that, after all, "history has no sense," that it teaches us nothing, and that the immense past was only the weary rehearsal of the mistakes that the future is destined to make on a larger stage and scale?
Thought provoking, and it only gets better from there. Immediately following this paragraph the Durants launch into perhaps the core issue plaguing all who spend time studying the events of the past:
At times we feel so, and a multitude of doubts assail our enterprise. To begin with, do we really know what the past was, what actually happened, or is history "a fable" not quite "agreed upon"? Our knowledge of any past event is always incomplete, probably inaccurate, beclouded by ambivalent evidence and biased historians, and perhaps distorted by our own patriotic or religious partisanship.
And owing to the immutability of the past, the reading and interpretation of any event can easily become fraught with the difficulty of trying to ascertain what actually happened and its importance:
The historian always oversimplifies, and hastily selects a manageable minority of facts and faces out of a crowd of souls and events whose multitudinous complexity he can never quite embrace or comprehend.
There are quite a few fragments and paragraphs throughout where if you tilt your head a bit it suddenly appears as thoughtful counsel for shoring up one's outlook on investment and financial matters.
On imposing order and creating meaning out of history:
History smiles at all attempts to force its flow into theoretical patterns or logical grooves; it plays havoc with our generalizations, breaks all our rules; history is baroque.
As in history, so too in investment. If markets can remain irrational longer than individuals can remain solvent, this would be good advice to remember.
At the risk of verbosity, there is one final passage I would like to include before closing this post. The search for patterns, trends, or meaning in the numbers staring back at us can gradually create a pastiche of comfort or familiarity that is unwarranted. This process can be significantly bolstered, consciously or unconsciously by the pressure exerted from "the crowd."
Evolution in man during recorded time has been social rather than biological: it has proceeded not by heritable variations in the species, but mostly by economic, political, intellectual, and moral innovation transmitted to individuals and generations by imitation, custom, or education. Custom and tradition within a group correspond to type and heredity in the species, and to instincts in the individual; they are ready adjustments to typical and frequently repeated situations. New situations, however, do arise, requiring novel, unstereotyped responses; hence development, in the higher organisms, requires a capacity for experiment and innovation-the social correlates of variation and mutation. Social evolution is an interplay of custom with origination.
Warren Buffett had the opportunity to study under Ben Graham, the veritable father of value investing. Yet instead of completely imitating Graham in every way, he resolved to develop his own style and variation, and did just that. Mike Burry also cited Graham as influential on his thinking, yet mentioned that he too developed his own style based on his own views (Burry's) and interpretation. Seth Klarman has credited Max Heine and Michael Price for their contributions to his development, yet he has also developed his own signature approach to value investing. What stands out as important then from this passage is that coming into one's own is necessary for long-term development and that the character of the markets, the participants, and the economic milieu encompassing it all does not remain fixed but instead changes over time in ways not completely dissimilar to living organisms. With this in mind I propose a framing of the present assisted by the light of the past; to borrow a phrase: "The part in the light of the whole."
The present is the past rolled up for action, and the past is the present unrolled for understanding.