Most of us have taken history classes at some point in our lives. We are taught about wars, people, events, politics, innovations, catastrophes, etc. It makes sense for us to learn about the past so we can better prepare for the future. Well, there is another class on history that we need to attend as well. That is the history of markets to include the people trading and their emotions. This is a BIG deal. Let class begin!
Why learn about the history of financial markets and the people connected to them? They repeat themselves again and again and again. By understanding what has happened in the past, we can better deal with the current situation because we have "seen" it play out before in the past. Knowing our history helps us understand markets AND the people involved in them. Let's take a look.
Markets got started in 13th-century Europe and gradually found their way to the United States in the 18th century. They have been around a LONG time! They were created to bring buyers and sellers together in one place as they made transactions they believed would benefit them in the present and for the more enlightened, the future. This is when someone is trying to outsmart another. It was mostly men.
For every buyer, there was a seller. Whether they were buying a bond, a stock, a promissory note or maybe a tulip, participants are trying to get a deal that will benefit them instead of the other party. This is where humans come in and cause some chaos. Sometimes humans trade because they don't want to be left out, or they are greedy, or they are scared, or maybe they are trading because they are cheaters!
Let's take a moment and discuss cheaters. These are folks who are using information that has not been disclosed to the public when making a trade. Today, we call these people insider traders. It is illegal, but it goes on all of the time. There are some big names like Martha Stewart who went to prison and many big name politicians who seem to "get lucky" and do not go to prison. Greed is a problem.
Back to history. In the 1630's tulip mania hit. People started to covet tulips as a status symbol causing their prices to go up, up and away. Speculation took hold and that means people started paying outrageous prices for tulips. Why? They thought some sucker would pay more money for that "thing" in the future. They were right until they were wrong. It all collapsed and many "smart" people were ruined.
Next came the South Sea bubble in the early 18th century. This was a pretty convoluted event to say the least. You had plenty of greed and corruption from well connected people and politicians that ended up ruining many innocent people. This is called collateral damage. Many bystanders get hurt when the inner circle folks behave badly. This happens again and again with markets.
Let's fast forward to 1929. I am guessing most of you are aware of this catastrophic event in the United States. They call this the Great Depression as the stock market collapsed by over 90% from its highs. How did it get so high? The 1920's were a great decade for stocks and the "smart" people thought it would last forever so they borrowed a lot of money to invest. Bankruptcy followed for many.
Let's now proceed to the .com bubble that took place in the 1990's. If you could create a company with .com at the end of it, you had a good chance of raising capital no matter how ridiculous your ideas might be. Boo.com was one of those companies that went belly-up. The herd took all of their money and bought .com companies and then got slaughtered as most went bankrupt, one after another.
Now, let's bring up 2008. Greed, ignorance, deception and a thing called derivatives made this the worst crash since 1929. It was just awful like the crashes that came before it. People were rich one moment (on paper) and broke (in real life) the next. As usual, plenty of innocent people got hurt over this debacle that ended up looking like a Greek tragedy for many individuals and institutions.
How about some good news from the history books! The average return on the U.S. stock market over the last 100 years comes in at roughly 10.6% per year, which means your money is doubling about every 7 years. Yes, through all of that crap, the market has steadily gone up, which also includes many wars, recessions, gas shortages, farm crisis, runaway inflation, 9/11, Covid, etc...
What can we take from this brief look at the history of markets and the people who trade within them? There will be periods of euphoria where all is well as our investments go up, up and away! There will be periods of pain and suffering as we see the value of our portfolio go down, down and down. That roller coaster of ups and downs is part of our history and will certainly play a part in our future.
What can YOU do about what you know about the history of markets? When they go up, you rejoice, but not too much as you know they will stop at some point and go down, maybe a lot. When those same markets tank on occasion, you say to yourself, "of course they did, that has happened before and it will surely happen again. I must keep my head as others lose theirs. I will steer clear of the herd."
To know history and apply lessons to your current and future life that others learned the hard way is challenging. This means ignoring the daily noise as you invest for the long term with a time horizon that is forever. Whether you earn 10.6% in the markets in the future is unknown. It could be lower OR it could be higher. Time will tell as you create a history of your own that others can learn from. Take control of YOU.
