"There are decades where nothing happens, and then there are weeks where decades happen."
- Vladimir Ilyich Ulyanov Lenin
Lessons from history
More than thirty million people -- about the population of California -- died over four years on the Eastern Front during World War II. The dozen or so territories that made up the Soviet Republic represented about 10% of the world’s population in 1940. By 1945, 13.7% of that group was dead. Forty thousand villages were completely destroyed. But most of the physical damage was cleared away and rebuilt by 1960. There are stories of people still finding bones, bullets, and bombs today. But the physical damage of the war was cleaned up. Industries rebuilt. People reorganized. Total population surpassed its pre-war level less than a decade after the war ended.
With those words, Morgan Housel starts his commentary on the fifth and final lesson in his paper, Five Lessons from History, which he calls “Wounds heal, scars last” – in fact quite aptly named in the context of the current pandemic.
Although this is indeed a massive crisis, at least in the world of economics, I cannot think of many incidents that have left bigger scars than the combination if hyperinflation and depression did in Germany in the 1920s. To this day, Germans are amongst the biggest savers in the world and German central bankers are truly paranoid of inflation.
Before digging in, let me finish these opening comments with another quote from Morgan Housel. As he wraps up his paper, he finishes with the following lines on lesson #5:
It is too easy to examine history and say, “Look, if you just held on and took a long-term view, things recovered and life went on,” without realizing that mindsets are harder to repair than buildings and cash flows. We can see and measure just about everything in the world except people’s moods, fears, hopes, grudges, goals, triggers, and expectations. That’s partly why history is such a continuous chain of baffling events, and always will be.
Let me give you a simple example. I sit on three investment committees (ICs), all of which are quite conservative in nature, meaning that we rarely take a massive amount of equity beta risk. Usually, during more benign times, the IC may decide that next time there is a set-back, we must add to our equity beta risk. Guess what happens when the buying opportunity actually materialises, as it did recently. Suddenly, the appetite for equity beta vanishes faster than you can count to ten, and I am not pointing fingers at anyone. I am as bad, if not worse, than anybody else.
It goes back to Morgan Housel’s last point – we can see and measure just about everything in the world except people’s moods. As investors, we are very much under the control of our emotions, even if logic tells us to be rational. In my experience, the best investors are those who can control their emotions. Warren Buffett is a great example of that.