History On Repeat
- Ryan Bunn
- Oct 21, 2024
- 3 min read
Each new generation of investors repeat the mistakes of the past—These mistakes are repeated often for the exact same reasons—Financial history is a less expensive teacher than capital losses.
HISTORY ON REPEAT
Believing “this time is different” is a well known investment mistake. Despite the public warnings regarding this mistake though, it is often repeated. Surprisingly, not only do new generations of investors repeat this mistake, they often believe “this time is different” for the same reasons as prior generations.
Technological Revolutions
Over the past five years a number of exciting technologies have emerged including seamless video communication, autonomous driving, and the metaverse. The leading businesses behind these technologies have seen their share prices soar, plunge, and soar again as a new generation of shareholders dream of investment riches.
It is not surprising that the promises of revolutionary technology would excite investors. We’re all human after all. What is surprising though, is that these exact same revolutions excited prior generations of investors!
In 1959, investors were told “the office of tomorrow is sure to undergo a revolution...executive staff around the country will ‘get together’ on two-way closed circuit TV.”[1] An entire generation later, Zoom has finally arrived and video conferencing is functional for the first time.
How about our daily commutes? “Tomorrow’s driver may well be an [autonomous] gadget that straddles, electromagnetically, a cable buried in the middle of a traffic lane.”[1] In retrospect, simply paving roads with this cable may have been cheaper than the billions currently being spent on autonomous technologies.
Why do we even need to drive when we have “an online multimedia platform that allows people to create an avatar for themselves and have a second life in an online virtual world.”[2] Facebook’s Metaverse has arrived...but the preceding quote is actually from Second Life, the original metaverse, which launched in 2003. Thus far it appears Meta’s financial returns on the metaverse are no better than Second Life’s.
There Is No Equity Risk Premium
The infamous book “Dow 36,000” drew the conclusion that stocks “should rise in price as investors squeeze out the risk premium. If stocks and bonds are equally risky (as history suggests they are), then the risk premium...should be zero.”[3]
This logic was used to justify nearly infinite valuations for growth businesses. “As a long-term investor with a diversified portfolio, you should not be concerned about warnings of overvaluation or manias or bubbles—as long as P/Es are under 100 you’re within a margin of safety.”[3]
This advice was from the tech bubble in the early 2000’s, but we recently watched a new generation of investors make the same mistake as the Fed brought interest rates to zero after the Covid pandemic. IPO’s, SPAC’s, cryptocurrencies, and experimental technologies were valued to the moon as discount rates and equity risk premiums shrunk.
No Research Needed
Investment research is tedious. Every generation seeks a new method of getting rich quickly, without the effort. We’ve known this for at least 115 years.
In 1906, Thomas Gibson wrote “The Pitfalls of Speculation” and noted that “the willingness to accept the alleged thinking and knowledge of others frequently results in almost total elimination of thought and knowledge as a basis of operation. It is doubtful a single case of sustained success in speculative ventures can be pointed out that was not founded upon individual study and investigation.”[4]
Investing in meme stocks is easy, no research needed. A Reddit user that lost roughly $75,000 told Business Insider “I was always interested in the stock market. So then I saw the cool avatar, like the cool profile picture. I was like, ‘Wow, that should be my thing.’”[5]
Reddit message boards have educated a new generation on the importance of investment research and capital protection.
History More Than Rhymes
Reading financial history is a less expensive teacher than capital losses. Constant vigilance is required to not repeat mistakes of the past. Fortunately, we do not need to see into the future to simply avoid the exact same fallacies that duped yesterday’s investors.
1) Dexter Merriam Keezer, New Forces In American Business (United States: McGraw-Hill, 1959)
2) Wikipedia’s Second Life description
3) James K. Glassman and Kevin A. Hassett, Dow 36,000 (United States: Times Books, 1999)
4) Thomas Gibson, The Pitfalls of Speculations (The Moody Corporation, 1906)