The Lessons of History: Meditations

"The present is the past rolled up for action, and the past is the present unrolled for understanding.”

During the last two weeks, I read a little book called “The Lessons of History”, which is an exciting journey throughout the lessons that history accumulated for us in the last 5,000 years. While we should certainly be able to enjoy a read without consciously wondering about its application and practice for ourselves, I found myself unable to withstand the urge of taking notes in this instance due to the poetic and insightful writing of Will & Ariel Durant.

But why should lessons from history be of relevance for an investors’ mind?

In my pursuit of finding ideas and practices of the world’s greatest investors and capital allocators, I often find my myself with just a handful of ideas or concepts after reading a certain writing of wisdom. Willing to learn how these people gained this edge over so long periods of time, I eagerly searched for formulas that I could follow blindly in order to get the same results. Therefore, I felt a little bit disillusioned reading predominantly about mental models or conceptual thoughts that wouldn’t be able to solve my problems of practical nature. As I searched for the exactly right solution to the numerical exercise of fundamental analysis, I totally missed the fact that there was a simple reason for its absence.

Obviously historiography cannot be a science. It can only be an industry, an art, and a philosophy—an industry by ferreting out the facts, an art by establishing a meaningful order in the chaos of materials, a philosophy by seeking perspective and enlightenment.

Similar to historiography, investing cannot be a science. “It can only be an industry, an art, and a philosophy”, as described in the first pages of the book. Accordingly, our task is not to find the right answer, but moreover the pursuit of “establishing a meaningful order in the chaos of materials”. Throughout our journey of learning, we increasingly recognize that there is so much more depth to investing than solving a numerical exercise. It is therefore no surprise that a substantial amount of great investors were students of philosophy. From Carl Icahn and George Soros, to Peter Lynch and Bill Miller - all these investors have studied philosophy.

Analyzing annual reports is surely necessary, but not sufficient for achieving excess returns. Nurturing the mind through reading and thinking is indispensable for a great investor as it is enabling us to see patterns and links in the flood of information pieces to which we are continuously exposed.

History repeats itself in the large because human nature changes with geological leisureliness, and man is equipped to respond in stereotyped ways to frequently occurring situations and stimuli like hunger, danger, and sex. But in a developed and complex civilization individuals are more differentiated and unique than in a primitive society, and many situations contain novel circumstances requiring modifications of instinctive response; custom recedes, reasoning spreads; the results are less predictable. There is no certainty that the future will repeat the past. Every year is an adventure.

I find this a remarkable description of learning from history. While the human nature and its instinctive responses to certain circumstances do enable us to derive recurring themes, we must not lose the right perspective, namely that all lessons from history are by definition 100% hindsight. In the world of investing, this perspective on the past surely is inevitable due to our tendency to extrapolate current trends into the future. And it seems so reasonable to do so, but regardless of the current state being positive or negative, we’ll likely see a reaction in some way or the other. A business, which is currently growing in high double-digits will sooner or later revert to a “normal” growth path, while challenging times or even managerial mistakes are likely to be followed by changes and adjustments intending to fix the problems and get the business back on track. So while we should be cautiously extrapolating the past, we must also recognize a certain degree of uncertainty regarding the future that just can’t be included in discounting models or consensus estimates.

So as many times before, we’re reminded of how important resilience is to fundamental investing, especially with regard to the right people managing the business - as these are the ones that have to deal with the appearance of unforeseeable events.

In discussing the social evolution of man throughout history, the Durant’s describe a similar phenomenon in the recurring rise of new situations that require “novel, unstereotyped responses” and a “capacity for experiment and innovation” in the mind of human beings. Linked to the biological evolution these attributes are the equivalents of “variation and mutation”, thereby indicating a likelihood that some individuals will be better suited to adapt to these new situations.

“Here the initiative individual — the "great man," the "hero," the "genius" — regains his place as a formative force in history.”

We already talked about the topic of heroes in my notes on Rick Rubin’s book, however, in this case we’re regarding it from a different angle. Throughout the course of history, heroes were certain individuals that left their mark in the history books, often due to a very specific combination of personal characteristics, abilities and timing.

At times his eloquence, like Churchill's, may be worth a thousand regiments; his foresight in strategy and tactics, like Napoleon's, may win battles and campaigns and establish states.

Interestingly, timing is often less considered yet ultimately decisive. In the words of Will and Ariel Durant, “without some situation requiring a new response his new ideas would be untimely and impracticable”, which can certainly be stated equivalently for the financial world. A tribe of highly intellectual and analytical human beings is constantly pursuing to find the next prospering opportunity in the markets. And although certain businesses appear to be so obviously of high quality that we’d love to own them, we are not willing to bet on them as of right now as timing, or valuation in this case, comes into play.

During economic downturns or times when the individual growth prospects of a business become threatened in the public eye, we can see these windows of opportunities open up, however, they’re now increasingly hard to take. According to the our drawings from history, whether this challenge “will or will not be met […] depends upon the presence or absence of initiative and of creative individuals with clarity of mind and energy of will (which is almost a definition of genius), capable of effective responses to new situations (which is almost a definition of intelligence).” This clarity and self-confidence to act against the current reminded me immediately of François Rochon’s theory of the missing gene, which I recalled from a recently published interview. This gene “prompts most individuals to follow group behaviors instinctively,” which was quite useful in primitive societies when certain dangers arose, as asking too many questions and not running away immediately could end in misery. Following his analogy, however, there is a certain group of people that “lacks this gene, enabling them to act independently from the group.” What would be recognized as a handicap in history, can be seen as a behavioral advantage of an investor, today. Or to abstract even further, what we consider to be good or bad traits for success in the field of investing, would be rephrased in the light of nature and history; “they define good as that which survives, and bad as that which goes under,” as the Durant’s pointed out in their writing.

Survival appears to be a recurring theme of significant importance throughout various fields of wisdom. “Victory in our industry is spelled survival,” as Steve Jobs once remarked, or the popular saying of Andy Grove that “only the paranoid survive,” just to mention a few that came up to my mind. So interestingly, this broadly-shared perception of survival appears to be closely related to biological and social history of mankind. To this extend, we can find another wonderful analogy in the book:

Life has no inherent claim to eternity, whether in individuals or in states. Death is natural, and if it comes in due time it is forgivable and useful, and the mature mind will take no offense from its coming.

Similarly, we can recall that companies also do not have an “inherent claim to eternity”, although the best of them are able to revive the business through internal disruption before the external circumstances put an end to it. Yet, only a minority of business leaders and organizations are able to accomplish and survive such groundbreaking transitions. Think of Danaher: what started as a serial buyer of small industrial companies is now to be considered a market-leader in life sciences and diagnostics. Such an organizational agility and willingness to adapt constantly is outstanding (and vividly described by Mitch Rales in an episode of the “Art of Investing” podcast).

Finally, Will and Ariel Durant point out that “a great civilization does not entirely die.” There are some achievements that “have survived all the vicissitudes of rising and falling states”, e.g. language, art, family, social organization, morality, et cetera, because we make use of “teaching to transmit the lore of the family and the race.”

These are the elements of civilization, and they have been tenaciously maintained through the perilous passage from one civilization to the next. They are the connective tissue of human history.

Therefore, education can be defined as the “transmission of civilization” by handing down “our mental, moral, technical, and aesthetic heritage”, representing the true achievement of humanity. History, in this context, can be generally regarded as the “creation and recording of that heritage”, but also as “an encouraging remembrance of generative souls.” A true testament to the pursuit of making friends with the eminent dead, which is beautifully captured by the following excerpt:

[The past] becomes a celestial city, a spacious country of the mind, wherein a thousand saints, statesmen, inventors, scientists, poets, artists, musicians, lovers, and philosophers still live and speak, teach and carve and sing.

The ability to capture the essence of human history in such a poetic way is truly inspiring, and I hope that some of those outpourings flowed to me as I read this book—you will probably be the first to notice and benefit in future writings.

For now, I end my reflections on this great book with its remarkable ending, which seems like a compelling theme to live by and share our fruits of lifelong learning.

If a man is fortunate he will, before he dies, gather up as much as he can of his civilized heritage and transmit it to his children. And to his final breath he will be grateful for this inexhaustible legacy, knowing that it is our nourishing mother and our lasting life.

Thank you!