Two Lessons from History

As a child, I found history class to be an insufferable bore. The study of people well before my time in circumstances far different than anything I would likely encounter seemed like an act in futility. But age brings wisdom, and as a chronologically gifted person, I now find history enthralling. Younger me was caught up in the specifics: “This exact thing won’t ever happen again.” Older me now realizes, as Voltaire once said: “History never repeats itself; people do.”

Events of late bring to mind two lessons I want to discuss: the Great Depression and the birth of aviation.

The Great Depression was arguably the result of bad Federal Reserve policies and congressional missteps resulting in a decade-long calamity. The original Black Monday on October 28, 1929, brought one of the largest single-day market declines ever. By November, the Dow had lost almost half its value, though most Americans were immune from this pain. Few owned stocks (2.5%), so a decline scarcely affected the working class. It wasn’t until 1931, two years later, that 2,300 banks suddenly failed. As the banks went under, so did the savings of millions. Without money to spend, businesses started to fail, and an insurmountable downward spiral began. Ultimately this led to the creation of the FDIC and the insurance people now expect on their deposits.

This introduces a primary lesson: Sudden shocks create a herd mentality. Even if you can resist the herd, you may end up trampled by it.

The recent turmoil surrounding Silicon Valley Bank stirred up a similar level of fear and uncertainty. Seemingly overnight, the 16^th largest bank in the United States closed its doors and handed its keys over to the FDIC. While the exact events leading up to that moment are still being investigated, the general notion is that a group of well-connected depositors, fearing the bank’s insolvency, requested to withdraw most if not all their money at once. Those unlucky depositors who weren’t on that text thread were left scrambling, trying to access funds for their businesses’ payroll, among other purposes. The herd trampled, and people got hurt.

In the days following, much was said about “contagion,” effectively another word for herd mentality. The sole focus became: What can the government and Fed do to convince people that the banks are not teetering on the edge?

The fear seems to be contained for the moment. Let’s hope it stays that way.

Our next lesson is a simple one: Progress happens slowly, while setbacks happen quickly. The overnight disaster is much more common than the overnight invention. As a result, people are more cognizant of the setback than the progress.

In 1889, The Detroit Free Press wrote many articles about the impossibility of air travel. Nature had reached “its limit.” Even if it were possible to create some sort of aircraft, the most it could ever carry would be 50 pounds. Six months later, two brothers were tinkering in their backyard shed, working on a printing press and what they called an airplane. While they first took flight in 1903, it is said that reporters witnessed a flight in 1905. Still, it was not until 1908 that the media wrote about the breakthrough. As the publisher of a nearby newspaper would later admit about the previous flights, “Frankly, none of us believed it.”

Contrast how long it takes to recognize an invention versus how quickly it takes to see a bank collapse or a war break out. Growth is driven by compounding, and confidence is built slowly. Yet failure happens quickly, creating a loss of confidence, sometimes in an instant.

The same thing happens with investing. Growth can be a more powerful force because it compounds. The key is you must stick with investing over time for it to work.

Medicine is another example. Looking back over the past year, it is hard to see any progress. Sometimes even a decade does not illustrate much change. But when we zoom out to a 50-year time horizon, we see that heart disease has declined by more than 70% thanks to advances in healthcare, according to the National Institute of Health. As a result, roughly 500,000 people (the population of Atlanta!) avoid an early death.

Progress happens slowly and does not capture attention like a quick, sudden crash or event. The same happens in business: It can take years to realize the importance of a product, yet failures happen overnight. Markets are no different: A 40% decline in the market calls for a congressional investigation, yet a 140% gain that takes place over six years goes unnoticed.

In today’s seemingly data-driven world, it’s easy to dismiss behavior. Yet behavior is the root cause of so many of our outcomes, both in and out of the stock market. Your challenge as an investor is to account for the inevitable missteps in the behaviors of yourself and those around you. When disaster strikes, take a deep breath, gather perspective, and remember that progress continues, even if it’s hard to see.