Learning the (investment) lessons from history

“History, is just one damned thing after another” said one sceptic. For investors, it’s something else altogether. Studying history is a great way to learn to be a successful investor – and so improve your lifestyle.

Investment experts will remind you that past performance is no guarantee of future performance – and they’re right. But the past does have lessons to teach. Looking back at the last 50 years of the Australian share market history, many important lessons can be learned.

Lesson: ‘Chaos isn’t the pit, chaos is the ladder’

Over the past five decades the world has seen its share of chaos – wars, terrorism, economic crises, world-changing innovations and epochal elections.

However, it’s important to look beyond the emotions surrounding such events – crises like COVID, the 1987 crash or September 11, or bonanzas like the 90s dot-com revolution and the resources boom of the 2010s.

People become irrationally negative just as they become irrationally euphoric. If you take a long-term view when others are panicking, you can buy a business which is selling for well below its fundamental value.

Lesson: Bank on the balance sheet, not the banks

The balance sheet is the thing that stands between you and disaster. When times are good, markets throw caution to the wind and chase companies that have a lot of debt and so a lot of risk. You’re better off future proofing your portfolio by buying companies with a good balance sheet.

You want to be holding businesses that have cash on their books and aren’t dependent on the banks when things turn ugly. Banks are great at lending you an umbrella when it’s dry. As soon as it starts raining, they want it back again.

Lesson: Be born in Australia

Warren Buffett famously said two of the big reasons for his success were compound returns and being born in the US. You can make the same argument for Australia.

Australia has been a great place to buy shares. Credit Suisse’s Global Investment Yearbook tracks share market performance as far back as 1900. According to their research, Australia has been the world’s second-best source of real share market returns – generating an average, after-inflation return of 6.8 per cent a year over 121 years.

Source: Perpetual Investment Management Limited

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