We all know that history is a study of change which is used ironically as a map of the future.

Things that have never happened before get to happen all the time. This means that history is mostly the study of surprising events.
Which is often used by investors and economists as an unassailable(not to be taken by assault or storm) guide to the future.

— Have you seen where the ironic part of it comes from? And this is exactly where the problem stems from. We always think is smart to have a deep appreciation for economic and investing history.

Because history is what helps us to calibrate our expectations, have a good study of where people tend to go wrong, and probably offer a rough guide of what tends to work.

With this concept, we all think is a map of the future. But I don’t think it is. Or is it? No, it is not, in any way a map of the future.

Let’s consider this trap I think most investors do fall into. And it is the trap of “Historians are prophets” which stands as a big fallacy.

It is a big fallacy in the sense that overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress is unimaginable.

And investors are not to be blamed for thinking in this format. This is because most of us investors view investing as a hard science. So to any investor who sees investing in this format, history will become the perfect caliberator and guide to the future.

And what makes science seem hard is the fact that most scientific elements have no feelings.
Imagine how hard it would be to study physics if electrons had feelings.

Well, quite a few investors have feelings because they are not electrons.
And that is why it is hard to predict what they will do next based solely on what they did in the past (history).

Remember, the invisible hand hates anything that stays too good or too bad indefinitely because the cornerstone of economics is that things change over time.

So few things stay the same for a very long time, and this has opened our eyes to the fact that we can’t treat historians as prophets.

Things don’t tend to stay still, they change with culture and generation. Yes, things are always changing and always will.

Then let us consider two dangerous things that will happen when one relies too heavily on investment or economic history as a true guide to what’s going to happen next:

Follow the table of content below to quickly navigate:

1). Likely You Will Miss The Outlier(separate) Events Which Moves Things The Most:-

The great depression, World War two, the dot-com era, and September 11th (9/11) are all important historical data that represent the outliers, these are the record-breaking events.

These events are what moves the needle in the economy and equally the stock market.
They play an enormous role because they influence so many unrelated events in their wake (occurrence).

As a common plot of economic history, the role of those events is called surprises.
Surprises occur not because our models are wrong or our intelligence is low.

No not at all. They become a problem because we often use events like the great depression as guides to our views on worst-case scenarios when thinking about future investments.

Let us use the Fukushima nuclear reactor plant as a case study, an analysis, and a reference point.
This nuclear reactor plant experienced a catastrophic failure in 2011 when a heavy tsunami occurred.

And the funny thing here is that this plant was built to withstand the worst past historical earthquake.

So this made the builder never imagine much worse. And was unable to think that the worst past event had to be a surprise, as it had no precedent(history may not serve as an example to guarantee a subsequent act of the same kind).

Now, should we conclude that this is a failure of analysis or imagination?
Well, it is not a failure of analysis. It is a failure of imagination.

Because, if the builders of the Fukushima plant were able to imagine and realize that the future might not look anything like the past, it wouldn’t have been all that disastrous.

Unfortunately, realizing the future might not look anything like the past is a special skill that is most times generally overlooked highly by the financial forecasting community.

There is one particular thing we should learn as investors when we make a mistake.
And that thing is; “The world is difficult to anticipate.” The world is surprising.

This should be the correct lesson everybody should learn from surprises not just the investors.
I want you to remember this brethren, the most important economic events of the future, and I mean things that will move the needle the most, are things that history gives us little to no guide about.

So these are unprecedented events. This means we are not prepared for them, which makes them unprecedented. Truly, this is what makes them so impactful on our world.

Then let’s get to analyze the second dangerous thing that will happen when we rely heavily on investment or economic history as a true guide to what’s going to happen next.

2). Due To Structural Changes That Are Relevant To Today’s World, History Tends To Be a Misleading Guide To The Future Of The Economy And Investing:-

Take Venture Capitalist(VC) as an example here. They barely existed 30 years ago.
Today, there are single venture capitalist funds that are larger than the entire industry could claim to be a generation ago.

This is a big illustration that all historical data going back just a few decades about how startups are financed is out of date.

Because there is such a new historical paradigm shift about how companies are funded today.
Also, rules in accounting, disclosures, auditing, and the amount of market liquidity have all changed. Remember, things do change always.

We all have seen how technology made information more accessible, and industries as well changed when the economy shifted from industrial to technology sectors.

And these changes ushered in different business cycles and capital uses in these sectors. Things will always change remember.

Let me leave us with the four most dangerous words in investing and they are, “It’s different this time.”
But this does not mean we should ignore history when we think about money.

You should be general while looking back on history, which should be based on general things like people’s relationship to something like fear and greed, and how people behave under stress.

Things like specific trends, specific trades, specific sectors, market relationships, and how we should manage our money are always typical examples of evolution in progress.

Have this in mind brethren, “Historians are never prophets and will never be.“
Then let me leave us with one major question to battle with; “How should we be thinking about the future and plan for it?” See you in the next lesson dear.

ATTENTION PLEASE!

1). What is the problem you want me to write an article about? Drop it in the comment section.
2). Do you need any of my services? Check out my service page here. HIRE ME
3). Do not forget to subscribe below and get my e-book offer: “HOW TO START AND STAY BLOGGING AND NEVER LEAVE IN THE 2020s” as well as my weekly newsletter.
4). Equally drop your comments, and share this content if you like what I do.