May 29, 2019 by Morgan Housel
https://www.collaborativefund.com/blog/five-lessons-from-history/
My excerpts:
The Great Depression began with a stock market crash. October 24th, 1929. That’s the story, at least.
It makes for a good story because it’s a specific event on a specific day. But if you were to go back to October 1929, during the crash, the average American might seem unfazed. Only 2.5% of Americans owned stocks in 1929.
The huge majority of Americans watched in amazement as the market collapsed, and perhaps lost a sense of hope that they, too, might someday cash in on Wall Street. But that was all they lost: a dream. They did not lose any money because they had no money invested.
The real pain came nearly two years later, when the banks started to fail. Just over 500 U.S. banks failed in 1929. Twenty-three hundred failed in 1931.
Lesson #1: People suffering from sudden, unexpected hardship are likely to adopt views they previously thought unthinkable.
It’s not until your life is upended, your hopes dashed, your dreams uncertain that people say, “You have a crazy new idea? Let’s give it a shot. Nothing else is working, might as well try.”
Nowhere was this more powerful than in Germany, where the Great Depression was preceded by a devastating hyperinflation that destroyed all paper wealth.
The same idea holds true for companies, careers, and relationships. Hard times make people do and think things they’d never imagine when things are calm.
Lesson #2: Reversion to the mean occurs because people persuasive enough to make something grow don’t have the kind of personalities that allow them to stop before pushing too far.
What kind of person makes their way to the top of a successful company, or a big country?
Someone who is determined, optimistic, doesn’t take “no” for an answer, and is relentlessly confident in their own abilities.
What kind of person is likely to go overboard, bite off more than they can chew, and discount risks that are blindingly obvious to others?
Someone who is determined, optimistic, doesn’t take “no” for an answer, and is relentlessly confident in their own abilities.
This is true for countries, particularly empires. They’ll keep pushing until they meet their match (usually Russia).
Long-term success in any endeavor requires two tasks: Getting something, and keeping it. Getting rich and staying rich. Getting market share and keeping market share.
These things are not only separate tasks, but often require contradictory skills.
Jason Zweig summed this up so well: “Being right is the enemy of staying right because it leads you to forget the way the world works.”
Identifying that something is unsustainable does not provide much information on when that thing will stop. To tie this into the last lesson: Knowing there will be a reversion to the mean does not mean you know when things will revert. Unsustainable things can sustain for a long time.
If you looked at the U.S. housing market in 2003 and said, “Prices are too high. Growth is being fueled by low interest rates that are going to rise soon. This is unsustainable,” you were 100% right. But the housing market kept rising for another four years.
Rule of thumb: The more unsustainable an industry gets, the more it relies on inexperienced workers pulled from less prosperous industries to expand. Exposed to pay they couldn’t dream of before, those workers become more susceptible to looking the other way as their industries go off the rails.
True story about a guy I knew well: A pizza delivery man who became a subprime mortgage banker in 2005. Virtually overnight he could earn more per day than the earned per month delivering pizza. The bar for him to say, “This is unsustainable so I’m going to quit and delivery pizza again” is unbelievably high. It would be high for most of us. I didn’t blame him then, and I don’t blame him now. A lot of people screwed up during the financial crisis. But an unpopular view I have is that most of us underestimate the extent to which we’d act similarly if we wandered into the same incentive pool.
If enough people believe something is true, unsustainable ideas can gain durable life support.
“Jim just made $300,000 flipping homes and can now retire early and his wife thinks he’s amazing” is a story. And it’s way more persuasive in the moment.
The solution is knowing the difference between expectations and forecasts. The former are good, the latter should be used sparingly. The difference between “That looks unsustainable so I don’t want to be a part of it,” and “That looks unsustainable so I’m going to bet that it will end by Q1 2020” is enormous.
Lesson #4: Progress happens too slowly for people to notice; setbacks happen too fast for people to ignore.
There are lots of overnight tragedies. There are rarely overnight miracles.
Several years went by before the public grasped what the Wrights were doing; people were so convinced that flying was impossible that most of those who saw them flying about Dayton [Ohio] in 1905 decided that what they had seen must be some trick without significance – somewhat as most people today would regard a demonstration of, say, telepathy. It was not until May, 1908 – nearly four and a half years after the Wright’s first flight – that experienced reporters were sent to observe what they were doing, experienced editors gave full credence to these reporters’ excited dispatches, and the world at last woke up to the fact that human flight had been successfully accomplished.
Even after people caught on to the plane’s wonder, they underestimated it for years.
First it was seen mainly as a military weapon. Then a rich person’s toy. Then, perhaps, used to transport a few people.
The Washington Post wrote in 1909: “There will never be such a thing as commercial aerial freighters. Freight will continue to drag its slow weight across the patient earth.” The first cargo plane took off five months later.
Now compare that slow, years-long awakening to how quickly people pay attention to a corporate bankruptcy.
Or a major war.
Or a plane crash. Some of the first mentions of the Wright’s plane came in 1908 when an Army Lieutenant named Thomas Selfridge was killed during a demonstration flight.
Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.
The irony is that growth – if you can stick around – is a more powerful force, because it compounds. But setbacks capture greater attention because they happen suddenly.
And in markets, where a 40% decline that takes place in six months will draw congressional investigations, but a 140% gain that takes place over six years can go virtually unnoticed.
Understanding the speed differences between growth and loss explains a lot of things, from why pessimism is seductive to why long-term thinking is so hard.
Those who survive calamities – an important distinction – have a remarkable ability to adapt and rebuild. It’s often far greater than you expect it to be at the end of the calamity.
A study of 20,000 people from 13 countries who lived through World War II were 3% more likely to have diabetes as adults and 6% more likely to suffer depression. Compared to those who avoid the war, they were less likely to marry and less satisfied with their lives as older adults.
The editors of Fortune wrote in 1936: “The present-day college generation is fatalistic . . . it will not stick its neck out. It keeps its pants buttoned, its chin up, and its mouth shut. If we take the mean average to be the truth, it is a cautious, subdued, unadventurous generation. . . .”
In 1952 Frederick Lewis Allen wrote about those who lived through the Great Depression: As time went on there was a continuing disposition among Americans old and young to look with a cynical eye upon the old Horatio Alger formula for success; to be dubious about taking chances for ambition’s sake; to look with a favorable eye upon a safe if unadventurous job, social insurance plans, pension plans. They had learned from bitter experience to crave security.
It is too easy to examine history and say, “Look, if you just held on and took a long-term view, things recovered and life went on,” without realizing that mindsets are harder to repair than buildings and cash flows.
We can see and measure just about everything in the world except people’s moods, fears, hopes, grudges, goals, triggers, and expectations. That’s partly why history is such a continuous chain of baffling events, and always will be.