The Study of History Matters for Successful Investing

I truly believe it. I have heard, time and again, from the world’s top investors — the No.1 thing for investing is studying history. I am very lucky, because I have a passion for studying history.

Why is history important? It is because documented history is perhaps the only reliable source of knowledge for developing an accurate understanding of the present. Said differently: If we want to understand what is going on now, we must understand history.

To me, studying history is a process of acquiring two things at once: 1) great ideas from great minds, and 2) materials for me to form new ideas. Both are key ingredients that feed my thinking process, allowing me to see what drives time forward — i.e., what makes the world move. From there, I can acquire a more accurate understanding of the present and I can structure a sensible framework to anticipate what might happen in the future.

Most investors claim that they are long-term investors. I say that you cannot be a long-term investor for the future if you don’t have a long-term perspective of the past. So, history matters for investing.

A Low Cost Basis Helps in Investing

In investing, a great company can end up as a bad investment if investors pay too much for it. So, a low cost basis is essential. A low cost basis is the mathematical foundation for achieving a high IRR. A low cost basis also helps investors sleep better during turbulent days.

Risk and Diversification

Investors should open their eyes to all possible forms of risks, including out-of-left-field policy shocks, like what we saw in 2021 for some Chinese stocks. Few investors were prepared for it.

Similarly, Investors should seek true diversification. Stocks that look different from without may share similar risk characteristics from within. They may still resonate with the market beta together, despite these companies being in different sectors, or having different business models. This problem could be particularly severe during critical times. The old idea of having “multiple arrows in the quiver” is no longer enough — after all, they are in the same quiver. For true diversification, investors should have “many arrows across multiple quivers carried by various archers.” For example, one approach I am currently exploring is to build a portfolio of stocks whose “true risk” axes are perpendicular to each other.

Disciplined and Analytical

“Do nothing when there is nothing to do” sounds easy, but is hard.

Do not lose. Most investors make some money here and lose some money there — all in all, they go nowhere and achieve little. Removing the worst accidents, every driver is a good driver. Removing the worst trades, almost all investors are great investors. Charley Ellis, the former chairperson of the Yale Endowment, once said that investors’ problem is that they make mistakes. What a powerful statement.

Investors must be analytical. Anything that cannot be measured is uncertain. Measurement is the key. Investors must see and acknowledge the uncertainties in front of us.

Successful Investing is a Customized Process

It is common sense that the shoes of highly successful athletes are customized depending on their foot and their activity levels. It should be the same for investing as well. How investors invest should be customized to the psychological makeup of each investor and to the natures of investment problems that are being tackled.

Investing can be learned but cannot be taught. Any tactic that is systematically taught has probably already been arbitraged away. Great investors learned by themselves. Investing is a highly customized and individualistic endeavor. We all have to figure it out by ourselves.

(END)