It's hard to believe history when numbers conflict
Do you read history? Believe almost all of it? Use it as a guide to the future?
Me, too. But let's consider something. Take these two statements:
1. "Eleven million jobs have been created since 2009. The stock market has tripled. The unemployment rate nearly cut in half. The U.S. economy has enjoyed a strong recovery under President Obama."
2. "The recovery since 2009 has been one of the weakest on record. The national debt has ballooned. Wages are stagnant. Millions of Americans have given up looking for work. The economy has been a disappointment under President Obama.
Both of these statements are true. They are both history. Which one is right?
It's a weird question, because history is supposed to be objective. There's only supposed to be one "right."
But that's seldom the case, especially when an emotional topic like your opinion of the president is included. Everyone chooses the version of history that fits what they want to believe, which tends to be a reflection of how they were raised, which is different for everybody. We do this with the economy, the stock market, politics -- everything.
It can make history dangerous. What starts as an honest attempt to objectively study the past quickly becomes a field day of confirming your existing beliefs. This is like steroids for inflating your confidence and puts you on a path to misguided, regrettable decisions. (Misguided and regrettable decisions being the one thing everyone agrees history is filled with.)
In his book "Why Don't We Learn From History?," B.H. Liddell Hart wrote:
"(History) cannot be interpreted without the aid of imagination and intuition. The sheer quantity of evidence is so overwhelming that selection is inevitable. Where there is selection there is art.
"Those who read history tend to look for what proves them right and confirms their opinions. They defend loyalties. They read with a purpose to affirm or to attack. They resist inconvenient truth, since everyone wants to be on the side of the angels. Just as we start wars to end all wars."
I see this all the time in investing. The amount of investing data is incomprehensible and growing by the day. Anyone can think up a narrative, then sift through mountains of historical data to find examples backing it up.
Think stocks are expensive? History agrees. Think stocks are cheap? History agrees. Think tax cuts spur economic growth? History agrees. Think tax cuts don't spur economic growth? History agrees. History shows that raising interest rates is both good and bad for stocks. It proves that buy-and-hold investing is the best and the worst strategy. In the age of big data, no idea is so absurd that a good spreadsheet can't make it look right.
And a lot of the historical events investors try to study -- recessions, bear markets, bouts of hyperinflation -- are rare enough that we don't have many episodes to draw conclusions from.
To know a lot about recessions, for example, you'd ideally want hundreds of examples to study. But there have only been 33 recessions in the last 150 years. And the data we have on most of them is dubious. Estimates on how much the economy contracted during the 1920 recession range from 2.4 percent to 6.9 percent, which is the difference between a moderate recession and a near-depression. In the last 50 years, when data is more reliable, there have been just seven U.S. recessions. So how are we supposed to take seriously any historical statistic about the average recession? How long the average recession lasts? How frequently they occur? How high unemployment goes? We're talking about something that has occurred just seven times in the last half-century.
So, what good does looking at history do us?
A lot, in fact. You just can't take it too far.
People get history wrong when they look back at specific events and expect them to repeat in the future. It's so easy to underestimate how much past events were caused by trivia and accident rather than trends that should repeat in some clean way. Investors who have unshakable faith in markets reverting back to specific historical averages have some of the worst track records you can imagine. This goes into overdrive when you acknowledge the subjectiveness of historical record keeping. "I have written too much history to believe in it," historian Henry Adams once said.
But history can be great at teaching broad, unspecific lessons. Here are five:
• Something usually occurs to keep good news and bad news from going on forever. Recessions end because excess gets washed away; booms end because everything gets priced in. Most people wake up every morning wanting to make the world a better place, but psychopaths, idiots, charlatans and quacks are persuasive enough to occasionally shake things up.
• Unsustainable things last longer than you think. Every war was supposed to be over in a month, every boom was surely going to pop any day and every round of Federal Reserve money printing meant high inflation right around the corner. In reality, things that look unsustainable can last for years or decades longer than seems reasonable. "I was right, just early," are famous last words, and indistinguishable from "wrong."
• Normal things change faster than you expect. "History doesn't crawl," Nassim Taleb writes, "it leaps." Things "go from fracture to fracture, with a few vibrations in between. Yet we like to believe in the predictable, small incremental progression."
• Irrationality spreads at the worst possible times. Most people can keep their heads straight when things are calm. It's when things get exciting -- bull markets, bear markets, wars, recessions, panics -- that emotions take over. Importantly, decisions made during those crazy moments are the most important decisions you make over the long run.
• Nothing is stronger than self-interest. When someone in charge of lots of people gains the most by promoting their own interests, you get inefficiencies at best, disaster more often. What everyone knows is the truth or the right thing to do is ignored because a few people can get ahead doing something else. This describes most organizations.
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