The Most Important Lesson in Financial History

The Most Important Lesson in Financial History …And 3 Essential Tools for Understanding It

By Dr. Steve Sjuggerud, President, Investment U
Friday, November 7, 2003: Issue #287

‘It is not natural for us to learn from history. Children will cease to touch a burning stove only when they are themselves burned; no possible warning by others can lead to developing the smallest form of cautiousness.’ – Stock market speculator N.M. Taleb in his book Fooled by Randomness

Knowledge in science is cumulative… yet somehow, when it comes to investing, knowledge isn’t cumulative…

For example: People are excited about investment possibilities in China right now – as if this is the first time anyone had ever thought of this. I remember the China boom back in 1993, when everyone was going crazy for China-related stocks. People made many times their money back then.

Then the China craze peaked in 1994, and the bust came. From 1994 to early 2003, Chinese stocks (according to www.mscidata.com) lost 90% of their value. Now, here in 2003, I hear the exact same stories I heard a decade ago (‘If every person in China bought an air conditioner, your investment would go up eight-fold!’).

My friend, it has all happened before…

The most important lesson in financial history may be that it has all happened before

Maybe not exactly as it is happening now… But it has happened. And if you are aware of what the outcome was the last time around, chances are you won’t ‘get burned’ in your investments this time.

3 Tools for Understanding this Most Important of Lessons

While it may not be natural to learn from history, it may be the best thing you can do. Today, I’ll share three outstanding books that give you the proper historical perspective I’m talking about.

These books are extremely well written – a joy to read. And the message imparted is worth more than anything you’ll learn from your broker, watching CNBC, or reading some ‘get rich quick’ book in your local bookstore.

Read them. Gain the perspective… and you’ll never wonder again if things are a good buy, or if it’s time to sell. Because you’ll know…

1. Devil Take the Hindmost

For the historical perspective, Edward Chancellor’s Devil Take the Hindmost is a short trip through a handful of the major booms and busts of investment history. Chancellor tells it as a storyteller, and not as a schoolteacher. It is all the understanding of financial history you need to know, in one compact place.

2. Adventure Capitalist

Jim Rogers is one of the most successful investors of our lifetimes. Starting out in his twenties with $600 in his pocket, he ‘retired’ at age 37 with more money than anyone could possibly spend. This year he wrote Adventure Capitalist – The Ultimate Investor’s Road Trip. It’s the story of his drive through 116 countries over the last 3 years.

Jim’s stories are entertaining… from eating snake (many times), to stopping at a Christian church in China (think about that one for a second), to the chase for his South American broker who ran off with his money a dozen years before. But the conclusions and investment discoveries Jim comes to are the real value… Thumbs down on investing in Russia and India, for example, regardless of natural resources or technology skills. Thumbs up on China, Uruguay, Mongolia and Tanzania, he says.

Woven into the stories are his views on the world’s major investment themes of today, like the dollar and oil prices, among others.

To complete the big picture, you need my next book recommendation… Jim Rogers actually writes the introduction, saying: ‘It’s almost as though he wrote parts of my book and I wrote some of his.’

3. Financial Reckoning Day

The last recommendation is Financial Reckoning Day, by Bill Bonner with Addison Wiggin. While Chancellor sizes up the past, and Rogers shows us the present, my friends Bonner and Wiggin try to bring it together and make some guesses about the future.

Investors of our generation might believe that stocks will always do well over the long run, based on how stocks have performed over the last 20-plus years. If you believe that, you would be true to your own experience, but you’d be going against all of history…

Bonner and Wiggin make a compelling case that the next 15 years or so will not be as friendly to financial assets as the last 20 years. The case is part cyclical (winter follows summer, bad times follow good) and part ’structural.’ The structural case is the scary part.

Bonner and Wiggin make the structural case very well, with metaphors that make what should be difficult information easy to swallow. Quite frankly, when you’re done reading their book and you understand the structural problems inherent in the global economy, you’ll think twice about adding another stock to your portfolio.

However, if you do think twice about investing, they’ve done their job

Throwing Away Traditional Investment Advice – For Fun and Profit

You now have perspective. You’ll recognize a hot stove when you see it, without touching it.

In my opinion, at this moment in time (while stocks are still extremely expensive based on history), these three books are the best way you can spend your time becoming a better investor today. You will recognize the ‘traditional’ investment advice as worthless in the coming years.

Ultimately, the education and perspective in these three books is more useful and more valuable than anything else you can do to become a better investor.

Buy ‘em and read ‘em.

Good investing,

Steve

Today’s Investment U Cribsheet

For more on the work of Bill Bonner and Addison Wiggin, you should definitely check out their web site (www.dailyreckoning.com), or consider picking up their New York Times bestseller Financial Reckoning Day by visiting http://www.bn.com/financialreckoning/
To pick up a copy of Jim Rogers’ Adventure Capitalist – The Ultimate Investor’s Road Trip, or, for Edward Chancellor’s Devil Take the Hindmost, visit http://www.investmentu.com/resources/Reading.html

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