7 Apr 2020
Lessons From History – And Why They Matter Now
By Jacob Wolt, Managing Partner Cambridge Partners
“The only thing in this world is the history you don’t know”. Harry Truman, the 33rd President of the United States had a profound love of history. Truman looked to history for guidance on many of the issues he faced during his presidency, including the establishment of the United Nations, the ending of World War II, the economy, civil rights, the recognition of Israel and the Korean War. Although each of these issues were “new”, in Truman’s view they were also “old”. Truman reflected on history to help make better decisions in the present.
The current Coronavirus pandemic is new, but a crisis having an impact on share markets is not new at all.
The table below shows all the major downturns on the S&P 500 since the start of WWII, and their subsequent recoveries.
Notes: This table is based on the price only version of the S&P 500 Index and therefore ignores the effects of dividends.
Returns after 12 and 36 months are shown on a total return basis i.e. they have not been annualised.
Given the wealth of historical information, what can we learn?
Here are a few important observations:
- In the past we’ve experienced events that have significantly impacted markets on average every five years. If you plan to be an investor over the next 20 years and this average is maintained, you could experience four or more market downturns.
- There’s never been a bad time for long term investors to buy into markets. Even if you had the worst timing in the world and bought in at the peak of the market in September 2000, and sold at the low point in December 2018, you would still have more than doubled your money.
- Since the end of WWII, approximately 75 years, the market has increased in value about 150 times. You might ask yourself, how could you possibly lose money in this sort of market? Yes, it would be hard, but those that did were probably trying to predict or avoid the downturns. They only succeeded in missing out on too many of the strong gains that occurred on either side of a downturn.
- Markets recover fast. Although we can never pick the bottom of the market, based on the data in the table above, the average return for the next 12 months, following a low point, has been positive 35%, and over 3 years it’s positive 61%. These historical recovery rates provide encouragement to all investors to stay in their seats in a crisis.
Investors may ask themselves, “Given all I can see throughout the history of capital markets, how should I respond to this latest drop in prices?”.
History is critical in answering this question; it provides an important basis for making better decisions. Although a history buff himself, Truman expressed his frustrations of humans often being too slow to learn from the past.
Truman once told the American author and novelist Merle Miller, “the next generation never learns anything from the previous one until it’s brought home with a hammer…. I’ve wondered why the next generation can’t profit from the generation before, but they never do until they get knocked in the head by experience.”
It’s fair to say that many investors have now been ‘knocked in the head’ by experience, and some younger investors are going through this for the first time. But here’s hoping, despite Truman’s scepticism, that we can all profit from the generations before us and use our knowledge of history to help us make better decisions today.
Our thanks to Consilium for helping to supply the original material in this article.