Those who do not understand history are condemned to repeat it. So goes an epigram that bears repeating, and that is highly relevant to the behavior of financial markets. Our US correspondent recently spoke to the author of a book giving a roadmap for avoiding making mistakes, and reassuring clients that doom is not at hand.

As an explanation of why the past can be a prologue, Investing in US Financial History: Understanding the Past to Forecast the Future by Mark Higgins is valuable, but the title is misleading.

As Higgins acknowledges, individuals are unlikely to beat, i.e. “forecast” the financial markets with any consistency, no matter how much background they have. And Higgins’ history certainly provides the reader with plenty of facts and figures, beginning with Alexander Hamilton’s financial programs in 1790.

A more accurate version of the book’s subtitle would read “How the Past Helps Us Understand the Present.”

“There’s almost nothing that happens in financial markets that hasn’t happened before,” Higgins said in an interview with Family Wealth Report.

This knowledge allows wealth managers to avoid being caught up in the frenzy, or panic of current events, reassuring clients that there is a precedent for whatever crisis may be freaking them out, according to Higgins. 

Plenty of precedents
Advisors who are familiar with historical events will be able to calm anxious clients and “make it very easy to give sound advice,” the author maintained.

Last year’s run on Silicon Valley Bank certainly spooked investors, for example. But, as Investing in US Financial History makes clear, the financial panics of 1819, 1839, 1907, 1929 and 2008 set precedents that enabled knowledgeable observers – including government regulators – to both appreciate the gravity of the crisis and  recognize the means to cope with it.

The recent Covid pandemic and subsequent financial fallout was also quite frightening – understandably, it put many clients on edge. But it turns out there were many parallels with the Great Global Influenza pandemic of 1919, Higgins points out. 

The lessons learned from that outbreak, and the additional tools at governments’ disposal, enabled policy makers to navigate both the health and financial crisis more skillfully than might have otherwise been anticipated.

Fighting inflation has been another major lesson learned from historical precedent. The book describes the history of, and reasons for, high inflation in the past and mistakes made by the Federal Reserve Board. “It was clear the Fed would get tight with monetary policy and stay tight, because they realized their past mistakes,” Higgins said.

Bubble trouble
Similarly, previous financial bubbles can help advisors be wary of potential asset bubbles on the horizon, such as stocks related to artificial intelligence.

The book identifies distinct phases of an asset bubble: emergence of an innovation with mass market appeal; boasts from early investors that fuel the mania; late adopters who inflate the bubble; a contraction of the money supply and an ensuing panic and crash.

Chastened investors pledge to never make the same mistake again, which they routinely do. Financial memory “should be assumed to last, at a maximum, no more than twenty years," according to famed economist John Kenneth Galbraith.

“Studying events like the dot-com bubble of the 1990s can enable advisors to help their clients not get caught up in a current mania and provide a lot of value,” Higgins said.

Lessons learned
Investing in US Financial History would have been better served by drilling down even deeper into key historical events such as past panics, bubbles and periods of inflation to shed more light on how the impact of the past is refracted into the future.

Higgins provides an extensive but often superficial reading of American economic history and the book could probably have been half the length of its 500-plus pages. 

But at its best, when illuminating lessons that can be gleaned from turbulent eras like the Gilded Age and the Great Depression, Investing in US Financial History helps us not only understand the relationship of the present with the past but provides a roadmap for avoiding making mistakes – and reassuring nervous clients that the end is probably not in sight.