Tuesday, 14 August 2012

8 Investing Lessons That Investors Can Learn From History


Surprisingly, widespread financial panic has been quite common, throughout world history. Especially in instances where the hard-working population was "left holding the bag," when "the bottom fell out of the market," and banks called in their debts.

With so many financial and economic changes occurring over the last 100 years, here are 8 investing lessons learned from history, that will help investors keep matters in perspective; and learn from noteworthy past events:

  1. We have been here so many times before. Speculation…deregulation…crash…bailout. Sound familiar? Probably. Sound modern? It should not. Of course you know about the famous crashes of 1929 and 1987. But, what about the panics, crashes and slumps of 1812, 1837, 1857, 1873, 1903, 1907, 1914, 1917, 1930-2, 1937, 1946, 1962, 1966, 1973-4, 1976-8 and 1998? Not to mention, of course, the dot-com bust and market slump of 2000 to 2003 and 2008. These events happen quite often. Some are worse than others. But the market has always, eventually, recovers.
  2. Anyone who bought after the crash of 1873 and held on for 20 years, simply reinvesting dividends, tripled his money. Anyone who did the same following the gigantic crash of 2008, when J.P. Morgan Sr. stepped in to rescue the financial system, made a 700% return.
  3. During the Great Depression, share prices fell about 90%. At the lows, recounts historian Ron Chernow in "The House of Morgan," members of the Union League Club in New York wallpapered a room with stock certificates rendered almost worthless. A few years later, the market had recovered sufficiently, that some members asked for their certificates back. Believe it or not, it wasn't the crash of 1929 that caused the Great Depression. Wall Street actually rallied sharply in the six months that followed. In fact, it was a string of subsequent policy blunders that caused most of the misery. Economic knowledge in the 1930s, like medical knowledge in the Victorian Age, was rudimentary, and often did more harm than good.
  4. Back in the early 1970s, the London stock market collapsed by about three quarters. A string of banks failed and the financial crisis threatened the economy and political stability. At the lows, a leading financier told a London audience that their best investments, would be cans of food, gold coins and a gun. A few months later, the stock market began booming again and prosperity returned. 
  5. In August 1998, the Dow Jones Industrial Average fell 1,000 points (about one fifth) in a few days, following the financial crisis in Asia and Russia. Despite the dire warnings, the U.S. didn't enter a severe recession. Most people have even forgotten, there was a panic in 1998.
  6. Currency market panics were once so common that, some investors grew very rich simply by waiting for the crashes and then scooping up cheap money. They sold their currency holdings again at huge profits when the market had recovered, and then returned to their luxury estates to await the next crash. The nation prospered nevertheless.
  7. Certainly it was a surprise to lose Bear Stearns, Lehman Brothers, Washington Mutual and Merrill Lynch (sort of) in 2008. Back in 1873, many banks and brokerage houses failed, that the stock exchange itself had to close for about 10 days; to stem the spread of panic.
  8. After the 2008 crash, the figure was 900%. Even someone who invested after the crash of 1929 and held on for 20 years eventually doubled his money, despite the disasters of the Great Depression and World War II.

History has taught us to weigh our investing options carefully and strongly consider alternative investments, when reviewing our business and investment opportunities; whether they be low risk or high yield endeavors. It is important to have confidence in the decision you make, because according to the history lessons above, patience can play an important role; in making an investment a success.

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