INSUBCONTINENT EXCLUSIVE:
Can one look at the past and tell what is going to happen in the future? The answer is NO.
Then what’s the point in studying history if it
has no predictive power? For the longest time I’ve been misinterpreting the quote: “History does not repeat, but it rhymes.”
I used to
believe it means events may not occur exactly like they did in the past, but something similar might happen
That is perhaps an incomplete way to look at history.
Then what should we look at when we study historical events? It doesn’t matter how
frequently or rarely an event occurred in the past
What matters is, when it occurred, how did people react to it
This gives a whole new meaning to the phrase – “history rhymes.”
It has been studied in behavioral experiments, that as humans we
still rely on our animal instincts when we react to events
Something we’ve been doing for millions of years
In a given historical event, it is always interesting to observe how people acted when they found themselves in that situation.
Imagine
being an investor during the dotcom boom or during the infrastructure boom just before the global financial crisis of 2008.
No matter how
experienced we may have been, if we do not participate in such a rally, it is natural to occur to us that there is something we are missing
and perhaps our ability to invest and make money has diminished.
That, when the whole world is getting paper rich, overnight!
Let’s
transport ourselves to the current times
Is there a bubble in quality stocks? Is there a bubble in private equity, VC or pre-IPO stocks? These questions are natural and can help us
define our own sense of value, which we give to future cash flows of these businesses
They also help us to define our behaviour when we come across such valuations.
Countless books and articles have been written on what
happened to the majority of dotcom investors
So the behaviour to participate in inflated valuations may seem stupid in hindsight
Not only does such a dilemma occur from time to time, but it also forces us to feel that it can end badly for us as well if we follow in
those footsteps.
What if someone who has not studied history ends up participating in such an inflated market?
The justifications they may
provide to themselves for their actions would matter more than the eventual fate of that investor
This is where history rhymes and provides the blueprint for the excuses that people provide when they act using only their instinct.
So, how
can we learn from history?
One way to learn from history may be to repeat the past behaviour in a controlled manner and let our instincts
We can’t ignore our emotions, nor can we control them
All we can do is commit small amounts of money and monitor our emotions while making these decisions and document them for future reference
That way we may enjoy the momentary benefits of the historical event and yet live long enough to learn from our own fate.
