I’ve finally got around to reading Ray Dalio’s Principles. One of the things I found most interesting was his approach to learning about the history of market events (in order to better understand the dynamics of these events so he could respond to them better as an investor). Dalio describes the genesis of this approach as follows:
‘On Sunday August 15 1971, President Nixon went on television to announce to announce that the U.S. would renege on its promise to allow dollars to be turned into gold, which led the dollar to plummet…
Monday morning I walked into the floor of the exchange expecting pandemonium. There was pandemonium all right, but not the sort I expected. Instead of falling, the stock market jumped about 4 percent, a significant daily gain.
To try and understand what was happening, I spent the rest of that summer studying past currency devaluations. I learned that everything that was going on – the currency breaking its link to gold and devaluing, the stock market soaring in response – had happened before, and that logical cause-effect relationships made those developments inevitable. My failure to anticipate this, I realized, was due to my being surprised at something that hadn’t happened in my lifetime, though it had happened many times before’.
Despite this experience, Dalio goes on to describe how he made a series of further forecasting blunders, including a mistaken (and very public) call in the wake of the 1982 Mexican government debt default. In the wake of this, Dalio writes:
‘I again saw the value of studying history. What had happened, after all, was ‘another one of those’… I had failed to recognise the lessons of history’.
Later on, Dalio describes how:
‘That experience also drove me to learn a lot about debt crises and their effect of the markets…[Later, in 2007, as the financial crisis was drawing nearer] with the help of my teammates at Bridgewater, I took history books and old newspapers and went day by day through the Great Depression and the Weimar Republic, comparing what happened then with what was happening in the present. The exercise only confirmed my worst fears. It seemed inevitable to me that large numbers of individuals, companies, and banks were about to have serious debt problems’.
Dalio’s point is largely about repetitions in history, the long-run patterns that are particularly relevant to financial market dynamics. However, what interests me about this passage is the day-by-day approach to looking at history. It’s very easy when reading history casually to see events as forming an inevitable sequence, and to imagine that things could not have been any different. But this is not how those events seemed to the people living them. Like us at the present moment, those people had expectations, and hopes, and worries, but they didn’t know what the future held. Reading history ‘as it happened’ reminds us how uncertain things can be and how differently events can unfold compared to our expectations.
I recently read Orlando Figes’ Revolutionary Russia. In Figes’ description of the Bolshevik Revolution I was particularly struck by this section describing the events leading up to the seizure of the Winter Palace:
‘It is one of the ironies of the Bolshevik insurrection that hardly any of its leaders had wanted it to happen how and when it did. Until late in the evening of 24 October the majority of the Central Committee…had not envisaged the overthrow of the Provisional Government [that had forced the Tsar to abdicate earlier in the year]…
Lenin’s intervention was decisive. Disguised in a wig and cap with a bandage wrapped around his head, he left his hiding place in Petrograd and set off for the Bolsheviks’ headquarters…to force the start of the uprising. On his way across town…he was stopped by a government patrol, but they mistook him for a harmless drunk and let him pass. One can only ask how different history might have been had Lenin been arrested’.
The following day the Bolsheviks seized the Winter Palace. When the rival Menshevik and Socialist Revolutionary groups walked out of the Soviet Congress, the Bolsheviks took the initiative. As Figes writes:
‘Few people thought that the new regime could last. ‘Caliphs for an hour’ was the verdict of much of the press’.
You can read this a number of ways. It’s a story about near-misses: what if Lenin had been captured? It’s also a parable about the importance of decisive and visionary leadership. But there’s also a fascinating story about how a group of people in the thick of events completely missed what was about to happen. It may well be that they would eventually have been proven right, but I think there is an important reminder here about how unexpected events can be.
Even in our own recent experience, how many people would have scoffed at the idea that Donald Trump – or Emmanuel Macron – could be elected presidents of their respective countries? Or how many people – as oil prices marched upwards from a low of $27/barrel in late 2001 to a high of $160/barrel in mid-2008, with the background of a ‘peak oil’ narrative – would have predicted oil prices in the $50-$70/barrel range in 2018?*
Equally, though, as soon as these things do happen, we typically experience a brief period of surprise, followed by acceptance and rationalisation. In a relatively brief time, we come to view the events that have unfolded as – if not inevitable – then certainly not worthy of questioning too deeply. We take the backwards looking view of history.
We are living in a period of relative turbulence and uncertainty. By studying history on a day-by-day basis, we can remind ourselves of how far off our expectations can be if we miss the big picture, and how – time after time – many things that previously seemed unlikely came to pass.
*All prices WTI/NYMEX
