Fighting the Last War

“The most instructive, indeed the only method of learning to bear with dignity the vicissitude of fortune, is to recall the catastrophe of others.” – Polybius

One of my favorite expressions about the behavior of investors is that we are constantly fighting the last war. The representative heuristic causes us to overweight recent events when we make forecasts and extrapolate the latest performance indefinitely into the future.

The reason it’s so easy to fall prey to this bias is because in the back of our minds it’s very easy to think, “If this same market scenario happens again I will be prepared and I know exactly how to position my portfolio. I will not get caught off-guard again.”

Unfortunately, no two market cycles are ever quite the same so the past is never prologue in precise terms. This causes investors to shift their tolerance for risk depending on market conditions.

The ‘fighting the last war’ saying came to mind because I just read a great book called Why We Don’t Learn From History by B.H. Liddell Hart. It’s a historical account of the strategy implications for war but the lessons are all about human nature and behavioral tendencies that involve many useful lessons for investors.

Here are some of my favorite words of wisdom from the book (in bold) followed by my comments.

A long historical view not only helps us to keep calm in a “time of trouble” but reminds us that there is an end to the longest tunnel. History has its limitations as a guiding signpost, however, for although it can show us what to avoid, even if it does not teach us what to do, by showing the most common mistakes that mankind is apt to make and repeat.

Studying market history won’t give you the exact tactics to use going forward, but it can help you define your tolerance for risk and understand the possibilities for gains and losses. Learning from your own mistakes and those others have made is a great way to develop your negative knowledge for what not to do.

Man seems to come into this world with an inalterable belief that he knows best and that he can make others think as he does by force. Those who read history tend to look for what proves them right and confirms their personal opinions. They defend loyalties. They read with a purpose to affirm or attack. They resist inconvenient truth since everyone wants to be on the side of the angels. Just as we start wars to end all wars.

These are the perma-arguers you should avoid at all costs as they bend the facts to conveniently fit their view of the world.

It is strange people assume that no training is needed in the pursuit of truth.

Investors are constantly searching for the secret formula for getting rich quickly in the markets. It doesn’t exist. The best investors are continuously learning in an effort to better understand themselves and the motivations of others in the markets in order to succeed in the long run.

All of us do foolish things, but the wiser realize what they do. The most dangerous error is failure to recognize our own tendency to error.

Investors are bound to make mistakes. The markets can make even the best investors look foolish at times. Being wrong it okay as long as lessons are learned. As John Wooden once said, “Failure is not fatal, but failure to change might be.”

An intellectual ought to realize the extent to which the world is shaped by human emotions, emotions uncontrolled by reason; his thinking must have been shallow, and his observation narrow, if he fails to realize that.

The most comprehensive financial models and valuation techniques are worthless is the person pulling the levers has no control over their emotional intelligence. This is why legendary investor Stanley Druckenmiller says, “I believe that good investors are successful not because of their IQ, but because they have an investing discipline.”

This is why your goal as an investor should first and foremost be to increase your emotional intelligence, not simply your knowledge of investing strategies and the financial markets.  Knowledge can become stale, but discipline and perspective tend to work over the long-term.

There are a number of factors that move the markets: trends, fundamentals, valuation, growth rates, economic activity, etc. None are more important to understand than the element of human nature.

The book also contains an excellent historical perspective on the strategies employed by some of the most well-known generals.  This was a pretty good hidden gem of a book.

Why we don’t learn from history


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  1. Our Favorite Non-Investing Books About Investing - Trade Basics commented on Jan 26

    […] Why Don’t We Learn From History by B.H. Liddell Hart This one focuses on the history of war and battle strategy and the many mistakes that have been made. It also includes many useful lessons from philosophy and human psychology. See my prior write-up here. […]