Overview – Past Financial/Global Events Are a Treasure Trove of Investment Lessons
In the article Studying Financial History, I talked about why it’s so important for investors to study and understand past financial events. The Great Depression, the 1987 Stock Market Crash, the 2007-2008 Global Financial Crisis: these events not only rocked the financial world but the general populace as well; no doubt, they will continue to be remembered and studied for decades to come.
It’s easy to look at past events with awe and wonder how people lived through those times, but it’s easy to forget that every day, we are also creating new history. I know for a fact that the COVID-19 pandemic will serve as a case study for business, investing, medicine, law, public policy, and countless other fields for many years to come.
Studying how others reacted to a major event is one thing, but looking back and understanding your personal account of a major event takes on a whole new level of significance. As you may already have experienced in your life, you don’t truly understand the gravity of a situation or event until you live through it yourself.
The Power of Personal Accounts
Although I don’t do this myself, I know there are many people who maintain a personal journal.
People may choose to maintain a journal for several reasons: to serve as a tool for reminiscence, to look back and see how someone has grown over the course of a year or several years, and many more. Personal accounts are very telling and provide a treasure trove of information.
After a major event, such as a natural disaster, what is more impactful? A newscaster telling the events in a professional, composed manner, or the personal account of someone who just lost their home or a loved one?
The personal accounts are usually much more effective at getting the point across of how severe an event truly was, because the viewers can relate to these personal accounts – if a mother just lost their only child, then a viewer who has also lost their only child in the past will understand their pain, and will truly grasp the gravity of the situation.
Similarly, it’s easy to look at history through the perspective of an impartial observer, but we understand the weight of history much better if we can relate it back to ourselves and our own experiences.
When looking back at the major events we have lived through, the hope is that by looking back at our own words and experiences, we fully understand just how significant those past events were.
My Motivation for Recording Past Events
The idea of keeping a record of major events first crossed my mind in August 2019, when there was a one-day market crash because of a temporary U.S. Treasury Yield Curve Inversion.
Put simply, a yield curve inversion is when long-term debt instruments (in this case U.S. Treasury Notes) have lower yields than short-term debt instruments of the same credit quality, behaviour that should not happen (common wisdom dictates that, assuming equal credit quality, bonds with longer expiration dates will have higher yields than those with shorter ones).
When a yield curve inversion happens, this is usually taken as a warning sign for the economy and financial markets, such as a potential recession down the road, hence the panic that day.
I found the whole ordeal absolutely mind-boggling because all it took to turn markets upside down was for some debt instruments to exhibit one-time unusual behaviour. The yield curve returned to normal almost immediately the next day, and financial markets hummed along as usual.
The whole yield curve inversion fiasco was yet another testament to the irrationality of the market, yet there I was not even remotely concerned because I knew that what happens on one trading day won’t be enough to suddenly cause me to panic. I decided to record that event as a personal account of the irrationality of investors and the market.
Fast forward to September 2019, and tensions surrounding the U.S. – China Trade War are at all-time highs. This period proved to be especially astonishing to me because all it took to move the markets were new developments regarding the trade war. At the time, it seemed that the trade war was the center of the financial universe.
If one day, there was news of positive developments in the trade war, every major index would be in the green. If a few days later, there was news of trade war talks breaking down, every index would immediately retreat into the red, eliminating any gains that were made a few days prior.
Again, I was perplexed by how easy it was for markets to move when emotions were running high. During this time, I didn’t make any moves because I knew that everything surrounding the trade war was noise and that no developments from the trade war would directly impact my portfolio in any way.
So, I recorded my experience during this time as well, as a record of how irascible markets and investors become when two economic powers go head to head, even if investors don’t get affected at all.
Of course, there is the COVID-19 pandemic. At the time of this writing, markets have largely calmed down. However, at the peak of the pandemic from March – April 2020, it seemed that what would happen the next day was totally random. Mentioning that vaccines were in development was enough to inch markets up, but as more countries entered lockdowns and cases around the world climbed, markets continued their precipitous decline.
Now, the COVID-19 pandemic was such a black swan event that the unprecedented response to it arguably made a lot of sense. Never before had widespread lockdowns been implemented worldwide. However, as history has taught us time and time again, people like to panic first and then think later.
Virtually all stocks nosedived in the early days of the pandemic, but a deep breath and some common sense would’ve suggested that everything will be fine. People still need to use financial services, so banks will remain open and will continue to lend money. Not all transportation came to a halt, so there was still demand for oil and gas, albeit reduced.
Once again, I was astonished by how fast people panicked in the early days of the pandemic, and how many “investors” went on a panic selling spree. I admit, I was a bit nervous myself, but I didn’t perform any panic buying or selling. The pandemic simply became another entry in my log of major events.
The Purpose of Recording Major Events
By keeping a record of major events I have lived through, I hope to accomplish two things.
In the “Studying Financial History” article, I talked about how understanding the past can help us avoid repeating the same mistakes in the future. By maintaining a personal record of past events and studying what happened during those events, I’m essentially creating a repository of lessons for my future self to refer to. I like to think of it as making notes during a lecture – your notes make sense to you because they’re written in a way that you understand.
Let’s say that 30 years from now there is another global pandemic (knock on wood that doesn’t happen!) and people once again respond the same way they did back in March 2020.
The circumstances may not be the exact same as the current COVID-19 pandemic, but because I have a personal account of a previous pandemic and how I responded during that time, I’ll know how to respond better than most people because the actions and decisions I made 30 years ago were my own, and they should make sense to me.
When you come across a new, but seemingly similar, scenario, one of the first things you’ll probably do is refer to your past experiences. The same logic applies when recording major events: the goal is to document your experiences to serve as a potential source of guidance down the road.
It’s easy to say, “I’m not an emotional investor”, but do your words match your actions? Keeping a personal record of past events serves as an honest, unbiased record of whether that’s the case or not.
If you repeatedly tell yourself “I’m not an emotional investor”, but your personal accounts show that, for every major event, you proceeded to panic sell, then perhaps you aren’t as immune to emotional thinking as you think you are. Maintaining a record of how you acted in the past can help identify weaknesses and can help you determine which investing skills/traits you may still need to work on.
Wrapping Up
Keeping track of past events and how we responded during those times may seem like a trivial activity, but in truth, this activity has proven to be an irreplaceable element of my investing toolkit.
It’s one thing to study the past through the eyes of other people, but past events take on much greater significance when we experienced them ourselves.
Keeping a record of the past not only serves as a repository of experiences for us to refer to in the future but also as an unbiased check of whether our words align with our actions. It’s easy to say one thing, but end up doing something completely in contradiction to those words.
Therefore, I encourage you to start keeping track of major events you have lived through as soon as you can.
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