Stock Market History: A Crash Course for Investors, Part 1

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Human beings have always invested for the future. From the caveman storing food for his family for the winter, to the 21st century office worker providing for his or her retirement, investors have shared the same goals and emotions, the same hopes and fears. They’ve made the same mistakes, enjoyed the same highs and suffered the same lows. So what can investors today learn from this almost bottomless well of human experience?

Well, we at Sensible Investing have gauged the opinions of some of the most highly regarded investment experts and market historians in the world. And, over the next eight videos, we’ll be finding out what the key lessons of market history are… and what steps you can take to maximise your chances of success as an investor.

‘One of the problems that investors face is that they learn too much from that experience. So the end of the 1990’s, people knew that shares would always go up. By the end of the 2000s, they knew that shares were a bad idea. What the historian can do is enable them to learn from the critical decade that their parents had.’

Although a primitive stock market existed in ancient Rome, markets as we know them today had their origins in medieval Europe. The first brokers as such were the courretiers de change, who managed farm debts for French banks in the 12th century. In the 14th century, bankers in Venice started trading in government securities. In the 15th, commodities were traded in Antwerp, Ghent and Rotterdam. In 1602 the Dutch East India Company founded the first stock exchange, in Amsterdam. And, in the decades that followed, trading developed apace there, as well as in Paris and London, and internationally.

Then, suddenly, came an almighty shock to the system… caused by the emerging middle classes’ unlikely obsession with tulips.

‘They were very rare, they were new to Europe in the middle of the 16th Century. The top prices that I’ve seen were about 5,000 guilders per bulb and that comes to about 9,000 euros. For that kind of money you could buy a very, very nice house in Amsterdam.’

Yes, you heard that right. for the price of a single bulb, you could buy a nice house in Amsterdam. At least you could until February 1637 when the world’s first recorded speculative bubble burst and prices crashed.

‘When you look back at different stages in Stock Market History, you see a repeatable pattern which is: markets crash and they crash frequently. Having a real depth insight into the sheer magnitude of some of those falls and the frequency with which the occur is really critical.’

‘I think the most important lesson that investors should take from history is that they should learn from history and often the problem is that they don’t learn from history and that so many of the swings in asset valuations that we’ve seen, we’ve seen it all before. A classic example of that would have been the technology bubble in the late 90s where on very standard valuation ratio models, it looked as if stocks were looking for a correction but people managed to convince themselves that this time it’s different.’

But let’s not forget the context of Tulip Mania. Yes, it was a very painful experience for many investors. But the crisis was preceded and followed by many, many years of healthy investment returns.

‘After a crash there’s hope because after every crash there’s been a recovery. It might be smaller or larger, but in the end markets tend to inexorably go up.’

So, in a nutshell, crashes are inevitable, and we need to be prepared for them. But more important are the periods in between, the long-term trends. Investors who grumble about downturns are like the British complaining about the weather. Even in summer, the next rain shower is never far away. But the climate, at least, is benign.

‘Weather is what’s going to happen today. Climate is what’s going to happen in the following years. We should choose a climate that we would like to live in and not worry about the unusual weather that sometimes comes along. The same way we ought to be thinking about investing in the longer term and not get so excited about what happens day to day.’

Between them, our experts have identified six key lessons to learn from market history. What’s the first lesson? Find out in Part 2.

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