Henry Ford famously expressed the sentiment that “history is bunk.” But while Ford may have been one of America’s most iconic entrepreneurs – and his name still graces a Fortune 500 company more than a century after its founding – he was dead wrong about the usefulness of history, says Nicholas Vardy, editor of The Global Guru.
The books that rest on my library coffee table are not Peter Lynch’s Beating the Street (or even my own), but several books by historian Paul Johnson on the makings of the 19th and 20th centuries. There is no better teacher than history in determining the future
Whether it’s a bond investor like Bill Gross, a value investor like Charlie Munger, or a global investor like Jim Rogers, they all have agreed on one thing: A knowledge of history is more critical to successful investing than, say, mastering formulas from a finance textbook.
Why? History teaches patterns. Successful investing is all about recognizing patterns. And if you study financial history, you’ll learn to spot them.
History may not repeat itself. But it does rhyme. So, if you want to learn how a current speculative episode will end, study the history of tulip mania in the Netherlands in 1637...or the canal mania that followed the start of the Erie Canal construction in 1817...or the dot-com boom and bust of the late 1990s.
Learn the lessons from these historic episodes, and the answers to today’s headline-grabbing speculative manias – whether regarding the prospects for Tesla Inc. (TSLA) or Bitcoin – will reveal themselves.
Indeed, here’s my favorite story about translating historical perspective into billions. Shark Tank star Mark Cuban is a billionaire today because he knew financial history. Cuban made his first billion by selling his stake in dot-com bubble stock Broadcast to Yahoo.
But unlike many of his dot-com billionaire peers, Cuban also knew enough about financial manias to realize that the boom would inevitably turn into a bust. So, he carefully structured a trade involving 286,000 options to preserve the value of his billion-dollar stake.
The takeaway? Catchy, short-term predictions about a market or a stock are like intellectual junk food. They are sweet, addictive, and hard to resist. But in the end, you’re left flabby, depressed, and unsatisfied.
In contrast, when I read an excellent history book, it’s like gorging on an intellectual superfood. Afterward, I feel like I’ve gained 20 investment IQ points. To be a successful investor, curl up with a stack of books by Paul Johnson and become fluent in history.
