Why Investors Should Study History
Yuan Yong
What indicators do you focus on when investing?
P/E and P/S?
Or candles and candlesticks?
According to Bridgewater founder Ray Dalio, there is another perspective that can play an important role, and that is history.
In 2008, when the international financial crisis broke out, many large funds suffered heavy losses, and some even disappeared from the market.
Dalio successfully predicted the arrival of the crisis, and Bridgewater also achieved positive returns in the financial turmoil. One of its flagship funds even had a yield of 14%, leading the world's major hedge funds.
Dalio attributes this achievement to his in-depth study of history.
Recently, CITIC Publishing House published Dalio's book "Principles: Coping with a Changing World Order".
In his book, Dalio answers a question that he considers extremely important: Why should investors study history?
Understanding the market is never easy.
In the eyes of many people, it is sometimes excited, sometimes violent, and unpredictable.
Dalio believes that our lack of understanding of the market is largely due to a single perspective. "Like an ant, in his short life, he was engrossed in carrying bread crumbs, but he had no time to broaden his horizons and discover the development of things. The macro-level laws and cycles and the important correlations behind them, where we are in the cycle, and what might happen in the future.”
Just as it is difficult for ants to pay attention to the "world beyond breadcrumbs", if investors cannot observe the market from a higher dimension, it will be difficult for investors to truly understand the market, resulting in taking more risks and losing more returns.
Dalio has been "loving and killing each other" with the market for decades, and has concluded such a law: a person's ability to predict and deal with the future depends on his understanding of the causal relationships behind changes in things; a person's ability to understand these causal relationships , from his research on the mechanisms by which past changes occurred.
In his view, to broaden his horizons and gain insight into the laws of market operation, studying history is an extremely effective path.
Historical research can help people jump out of the limitations of individual experience and pay attention to those recurring historical events in a longer time span, so as to grasp the law of development of things and cope with the changing world order.
Dalio said bluntly: "As a global macroeconomic investor, I know that without a deep understanding of the causal relationships between economic events rooted in historical patterns, I will not be able to understand and judge what is currently happening - more Not to mention what might happen in the future." This sentence also answers the question "why should investors study history".
Dalio is not the only investment guru with similar views. Peter Lynch is also keen to improve his investment ability by studying history and philosophy.
He even believes that history and philosophy are more useful than statistics and mathematics in helping him make investment decisions.
Of course, history is like a sea, vast and boundless, and no one can make an in-depth study of all history without making a choice.
Dalio's historical research also has a clear main line. He takes the history of major countries in the world as samples, focusing on the rise and fall of countries and their underlying mechanisms. His main experience is the "big cycle theory".
In his view, historical development has a significant cyclicality. To invest well, you must know your coordinate position in the historical cycle.
After studying the history of 10 major countries after 1900, he found that 7 of them have experienced at least one situation in which "almost all wealth disappeared", and the losses often came from the out-of-control and chaos of social order.
This gives investors an important warning: People tend to focus too much on the gains and losses in the market, while often forgetting the risks outside the market, which are likely to cost investors their money.
The value of investors studying history is not only to remind risks, but also to better find investment targets.
Dalio spends a lot of time studying Chinese history in the book, and believes that China is in a stage of peace and prosperity.
In recent years, Dalio has repeatedly expressed his bullishness on China in public, and Bridgewater Fund has also made a large-scale deployment in the Chinese market.
Going long and going long on China is exactly Dalio's practical move to use his research results.
However, investors should also pay attention to this problem when learning from Dalio: History can teach us, but it is not a simple cycle.
If history is used as the only criterion for explaining the present and predicting the future, then history will become another kind of "breadcrumbs" that obscure our vision.
The vast majority of people can't reach Dalio's heights in the investment world, and everyone's conclusions from historical research are not the same.
However, this does not prevent us from "learning" from Dalio's methodology.
Therefore, while investing, you might as well pick up a history book to give yourself another perspective on the market.