Morgan Housel is out with an interesting post, basically claiming that if you study past history you will learn a lot about history, but very little about the future. The lessons from the past financial crisis are not going to help us with the next financial crises. Life is full of surprises. There is very little we can do to be fully prepared for them. As an ancient proverb goes “when men make plans, gods are laughing”.
He makes some good points. The events and processes that caused the last market correction or bubble are probably never going to repeat in their literal form. Does this mean that studying financial history is futile?
You can learn more relevant lessons that are more likely to pass the test of time if you dig deeper; if you go straight to the source of market corrections and booms – human psychology. When it comes to fear and greed, nothing ever changes. What caused fear of losing and fear of missing out 100 years ago causes the same emotions and reactions today and it’ll cause the same attitude 100 years from now.
The reasons for market corrections might change, the names of the winning and losing stocks might change, but human emotions and psychology are likely to remain the same. One of the best and the most unbiased reflection of human emotions is price action. Technical analysis continues to be an underappreciated tool for risk management, market timing, and equity selection.
What we know with almost 100% confidence is that there will be other big market corrections and bubbles in the future. They will probably be caused by events and processes no one can predict. Most people will react similarly to wild price gyrations. Some will view market crashes and booms as irrational exuberance, others will be prepared better and see in them incredible opportunities.
