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Insight | Practical history lessons for financial markets

21 March 2017

In our drive to distill finance into the assumed pure spirit of numbers, Russell Napier argues we’ve overlooked what history can teach investors today.

There was a time when investors believed numbers had all the answers. Back when we thought the days of boom and bust were over, Trump just was a name on reality TV, the threat of fascism in Europe seamed long dead and QE was only the name of a cruise ship.

Before the Great Financial Crisis, all any financier worth their salt needed was faith in their electric slide rule and confidence in the seemingly pure spirit of numbers. Any talk of history teaching us a lesson about the behavior of asset prices was met with a heavy dose of scepticism.

But fast-forward to 2017 and we find ourselves in a very different place. With the global economic slowdown and the shifting social and political landscape that has followed, the investment community is once again looking to history for solutions.

So what can it tell us? By looking to the lessons from the past, the long-term investor may learn there are measures of equity valuation that have provided good guides to the range of future returns. Analysis of the longest run equity data available, for example, debunks the efficient markets hypothesis’ assertion we can find all we need to know about an asset from its price.

Of course, few professional investors get to play the game of the long-term, but financial history can still help understand the forces that drive equity prices around fair value over shorter-term time horizons. In particular, changing inflationary expectations have been crucial in influencing asset markets in shorter-term time horizons.  Inflation, itself is hugely impacted by sociopolitical forces.

Today we see a political system struggling to generate the inflation necessary to spirit away record high global debt to GDP ratios.  Yet history shows how, at least in short-term horizons, politicians do not always get the inflation they desire. What will be the implications for financial markets and society in general if they fail or succeed?

The Practical History of Financial Markets masterclass will look through these long-term trends, to assess the outlook for financial markets without stripping away the complexity of human endeavor.

What we think is new is often not. How financial markets will react to what we think is new is more than just guesswork.  Perhaps Winston Churchill was right- ‘The longer you can look back, the farther you can look forward’”?

Russel Napier is an investment practitioner turned financial historian and strategist. Author of Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottoms, he is also keeper of the Library of Mistakes, the world’s first free public library of global financial and business history.

He is Course Director for A Practical History of Financial Markets. The three-day masterclass begins at the Business School on 8 June 2017.

Image source: @iStockphoto/fazon1


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