Investing is a large part of the foundation of our society. In their recently published book: Investment: A History, Norton Reamer and Jesse Downing expertly explore the last five thousand years of our financial story. This fascinating read explores some long-neglected pieces of history, explaining key policies that have shaped our finances, as well as innovations and lessons that are still relevant to investors today.
‘Investment underpins our entire economic engine’ and determines where capital flows and which projects receive investment. It offers a picture of our values that reflects social progression and lifestyles through the ages. Investing has not only changed the way we plan our lives, from business to pensions, investment has shaped communities and underpinned our world view.
Investing has not only changed the way we plan our lives, from business to pensions, investment has shaped communities and underpinned our world view.
There is a plethora of useful data in this book — too much to cover in this post. However, I agree so wholeheartedly that I can’t leave out the ‘five archetypal mistakes that have bedevilled investors for millennia’.
- Not diversifying enough
- Buying into asset bubbles
- Using leverage inappropriately
- Ignoring or engaging in conflicts of interest
- Succumbing to emotional biases
These historical lessons are topics that I have covered in previous posts. Simply following these will lead to higher returns, while a better understanding of them will provide investors with the knowledge they need to invest their money wisely.
Investment: A History begins in Mesopotamia and the first couple of thousand years, where ownership of almost everything, including the power to invest, belonged to the very elite. My role as a wealth manager would have been the job of a slave! It wasn’t until the Roman period that investment managers held any social standing, as wealth began to be more dispersed. This period notably introduced the first pensions, although it wasn’t until the 1759 Presbyterian Ministers’ Fund that provided an insurance-style approach which subsequently developed the system of retirement that we have today.
Investment underpins our entire economic engine and determines where capital flows and which projects receive investment.
However, it was the European Renaissance that gave us the prerequisites of our modern financial system along with merchant banks and double-entry bookkeeping. According to the book, there were three key events that make up our financial history. The creation of the first joint-stock companies around 1500 which ‘demonstrated the hallmarks of business as we know it today – shared ownership, permanent existence, transferability and possession and limited liability.’ Next was the advent of public markets which began with a financial exchange in Antwerp in 1531 and culminated in the stock exchange in 1787. And finally, the Industrial Revolution that provided the public with a share of economic surplus and ‘a trend towards savings that could then be invested.’ Despite poor working conditions, ‘the period brought long-term economic benefits for society’.
The twentieth century gave us great economists. Innovators like Louis Bachelier, the pioneer of financial mathematics and the long-established principles of market efficiency which I have mentioned in previous posts. His work was fundamental to the calculation of the value of derivatives. And Irving Fisher, Paul Samuelson, Alfred Cowles and the father of modern portfolio theory, Harry Markowitz. Read Dominic Lobo’s post celebrating his 25th Anniversary of the Nobel Prize for Economics.
Our most recent fiscal policies, which have led to quantitative easing, are attributed to the lessons of The Great Depression. Before the market crash in October 1929, governments exercised restrictive measures which most scholars now agree worsened the recession. Since the UK had not experienced the boom that characterised the US and was far from recovered from the effects of the First World War, the decline felt less severe. However, the debt of financing the war contributed to the financial instability. Britain’s world trade fell by half and industrial and mining areas of the north reached 70% unemployment. The deflationary tactics taken by governments around the world merely reduced buying power and created a cycle of cuts in spending and wages that further destabilised the gold standard. The decade-long recovery was followed by social reforms, the growth of government-funded benefits and radical changes to banking laws.
The second half of our last century was a seismic shift for investing. Financial vehicles were created, including hedge funds, private equity, venture capital and Real Estate Investment Trusts like the British Property Federation. Alongside these innovations, Reamer and Downing describe the behaviour of borrowing money to finance investment: ‘financial leverage, magnifies risk exposure; it magnifies profits if the investment is successful and magnifies losses when the investment is badly analysed or ill-timed.’
As an example of unsuccessful investing the authors cite ‘the spectacular investment failure of Long-Term Capital Management,’ in 1998. Their leverage ratios had been $100 of debt to every $1 of equity. In this case, the risk was so high that without a ‘government-organised bailout,’ the hedge fund management firm would have collapsed completely.
In comparison, an example of successful financial leveraging can be seen in the investments of the famous investor, Warren Buffet. Reamer and Downing write that his, ‘exceptional performance over the years can, in part, be attributed to a leverage ratio of about 1.6 [debt] to 1 [equity]’. This low-risk leverage ratio ensured he became one of the wealthiest people in the world.
The great financial pioneer, John Bogle established Vanguard in 1976, creating the first index fund and subsequently in 1993 exchange traded funds (ETFs). These are the cornerstone of low-fee investing without the use of active management. Of course, I have written numerous articles on the benefits of ‘passive investing’ which form some of the key principles of our Wealth Partnership and products.
The book concludes with a description of our current market as, ‘short-term-orientated, momentum driven, or high-frequency enabled, leaving only a minor percentage to be based on fundamental analysis.’ It is not surprising that many of the new clients who come to us do so with a great sense of unease about their existing investments. This may be due to a bad experience or poor advice in the past, a sense of fear of what might happen in the markets to their hard earned money, a lingering doubt that how they are invested currently may be less than optimal, or confusion about what they are actually trying to achieve.
Our advisers offer an approach to investing tailored to the lifestyle goals that you want your money to achieve. In turn, these lifestyle goals can be translated into financial goals against which your portfolio may deliver suitable mid- to longer-term returns. It is defining this sense of purpose that sits at the heart of good financial planning and which allows for the construction of a portfolio strategy based on historical evidence and that you will be able to live with, both emotionally and financially.
Learn more about Investment: A History and how to purchase it on the book’s website.
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This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.
