Investing Lessons from an Old Bathtub
Investing Lessons from an Old Bathtub
An old bathtub shouldn't offer much in the way of investing insights. Likewise, old plaster walls, crown molding, and fireplaces are also unusual sources for financial lessons. But my house—a small brick colonial built in 1929—has recently taught me surprising lessons. It's no mansion, but it’s well-constructed. Therefore, it and its original inanimate features have seen much over nearly 100 years.
A few days ago, and I’m not quite sure why, the wheels of this former history major’s mind began turning. I started thinking about all the significant world events that my simple clawfoot tub and the rest of the house’s original fixtures have seen and outlived. They include:
The Great Depression
The rise (…and fall) of Nazi Germany
World War II
The Holocaust and numerous lesser-studied genocides
The development of countless vaccines that have saved and prolonged so many lives
Presidencies ranging from Herbert Hoover’s to Joe Biden’s
Nearly the entire existence of the Soviet Union
The discovery of oil in the Middle East (…and the shift, via green technologies, away from Middle Eastern oil)
The invention and use of nuclear weapons (…and treaties banning or limiting nuclear weapons)
The invention of television (…and cord cutting)
The Civil Rights Act of 1964
The Vietnam War
The Moon landing
The Iranian Revolution (…and the JCPOA…and Donald Trump)
Rampant inflation in the 1970s and early 1980s (…and historically low inflation rates and negative inflation rates in Europe and Japan in recent memory, followed by the prospect of high inflation again today)
The fall of the Berlin Wall
The invention of the Internet
The rise of AI
9/11
The Great Recession
Both the Soviet and American invasions of and withdrawals from Afghanistan
The COVID-19 pandemic
The Russian invasion of Ukraine
Examining this list of calamities and breakthroughs (which is, of course, not exhaustive; I just grew exhausted listing them), I developed a deeper appreciation for studying history in college. History wasn't an immediately lucrative major, but the skills I gained and the mindset I refined by studying it continue to pay long-term dividends in investing.
History has taught me to think critically about various eras, cultures, movements, technological innovations, and ideas, helping me connect theories I might not have considered otherwise. This has prepared me to look beyond the numbers in a quarterly report and find insights about companies. It also taught me to rely on primary sources when available and to better spot bias, nonsense, and hidden motives in what’s presented as objective “scholarship," "investment research," or, if you’re still watching cable TV these days, “news.” But the greatest benefit of studying history, I’ve found, is that it expands your mind to think over time horizons that most people probably won’t—or can’t—consider.
During my honeymoon in Venice, for example, I stood in St. Mark’s Square and looked at the Doge’s Palace, built in 1340. I was amazed that the Doge's Palace isn't very old historically, yet it’s much older than I am and older than buildings that people in the U.S. usually consider "old." Plus, it will still be here long after I’m gone.
This increased nimbleness matters because long time horizons are key to successful investing. All else being equal, the most long-term oriented investor usually reaps the greatest rewards. When your time horizons are long, major events can seem like minor blips. Conversely, when they are short, minor blips can become major issues. If you’re investing for 100 years, you can dismiss calamities like World War II and the ongoing threat of nuclear war. However, if you’re investing for only 100 days, you can ill afford trivial events like a sharp fall in soybean futures, a small quarterly decline in German exports, or stocks dropping 5% on any given day without reason.
By studying history, I also developed a larger mental library of events that, while not exactly repeats, may rhyme enough with current events to be instructive. This has made me more resistant to the common claim that, today, in 2024 or whatever future year it is, we live in a new and significantly more complex world. In some ways, we do. In most ways, we don’t.
Some market participants, consultants, and other well-paid salesmen love variations of this line. As a former history major, I can't stand this line.
The details of modern life might seem new, but when it comes to human nature—or even economic activity—there is little that is truly new. As Yale post-doctoral fellow Scott Miller notes, “debt-deflation cycles hit first-century Rome and 20th-century New York in eerily similar ways. Sophisticated short-selling schemes and complex derivative contracts caused the US’s first financial crisis in 1791. Financial contagion spread from the UK to the European continent in 1846-47 as quickly as it did in 2008 (and then sparked widespread revolutions in 1848).” Even venture capital, often thought of as sleek, prophetic, visionary, relentlessly forward-looking, ultra-modern, and the midwife of Silicon Valley's brave new technological world, is much older than it might seem. Harvard Business School professor Tom Nicholas views whaling—an iconic 19th-century method for crazy people to make a fortune—as the earliest form of what we now call venture capital. There truly is very little new under the sun.
“People of the past,” Miller concludes in his earlier point about similarities between economic eras, “were not ignorant bumpkins.” This, of course, is another valuable lesson from economic history for today’s investors: the need for humility regarding our ancestors. Too often, convinced of our own superiority, we not only assume they were bumpkins but also, as a corollary, believe that we are brilliant—perhaps even infallible. Miller’s otherwise very smart Yale School of Management students make this cognitive mistake in class when they “routinely begin questions with some variation of, ‘We know that these people were less sophisticated than us, so…’” Miller interprets his students as saying, “‘we have better data, more developed analytic theory, and better computational tools, so I know that we would not have made these mistakes.’” Certainly, a confident group, aren't they?
Carmen Reinhart and Ken Rogoff, in This Time Is Different: Eight Centuries of Financial Folly, cautioned how dangerous this attitude is, and they credit the belief that "this time is different" with leading otherwise smart people into the throes of financial calamity. Many of our financial disasters, they contend, stem from the “firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply.” Presuming that you are the exception and not the rule can be very dangerous. Indeed, it reminds me of the mindset that leads numerous survey participants to believe that everyone else in the world is a bad driver…except themselves.
Regarding the ostensible complexity of our modern world, I’m sure every era of human life felt complex to those living through it in real time. For example, the internet drives a massive communications revolution today. Thanks to the internet, any idiot, as I deftly prove, can clang away on a keyboard and people the world over can read the words moments later. (It's always worth remembering that opposable thumbs are far from necessary to compose anything written on the internet.) While this may indeed be the greatest time in history to be a content creator, the printing press—in some ways a similarly revolutionary technology at the time—helped, in its own way, to pave a path to war, revolution, political change, enlightenment, social upheaval, and a vast religious reformation in Europe. I doubt many “bumpkins” living through the technological and social changes of the 15th and 16th centuries would consider that historical moment idyllic or simple.
All of this brings me back to my little old house. In it, I can literally reach out and touch plaster, crown molding, fireplaces, and a bathtub older than harrowing historical events like World War II. For me, this is fascinating. It's also humbling. Remembering history and my less-than-microscopic role in shaping it is an important perspective for an investor. Moreover, knowing what I know from my studies and continued reading over a decade later, I’m hard-pressed to believe that this time will ever be that different or that our world is fundamentally newer and more complex than it was centuries ago. Call me crazy, but I’m skeptical. And for this skepticism, I thank history--that superfluous liberal arts major your nervous parents warned you about.