Stock Market History from Benjamin Graham, Warren Buffett and Others: The Importance of Studying History

Many outstanding investors have been fanatical students of history because history teaches you to place events into perspective, to understand that industries boom and fade; cycles repeat and human folly is never-ending. Bill Gross of Pimco (The Fixed Income Money Manager) said that the history books in his office have been a better guide to making money in the bond markets than any financial analysis. Seth Klarman, value investor extraordinaire, has endowed a history chair (here: Warren Buffett sat for weeks in the Columbia University Library reading newspapers—including the ads!–from the 1930s to gain a sense of the Great Depression.

Jim Rogers, the peripatetic investor, speaks about the value of studying history as an investor in the foreword to Financial Reckoning Day Fallout (2009) by William Bonner and Addison Wiggin. Jim Rogers: ?The only other way (besides visiting countries around the world yourself) to know what is going on is to study history. When I teach or speak at universities, young people always ask me: “I want to be successful and travel around the world; what should I study?”

I always tell them the same thing: “Study history.”

And they always look at me very perplexed and say, “What are you talking about…what about economics, what about marketing?”

“If you want to be successful, “I always say, “You‘ve got to understand history. You will see how the world his always changing. You will see how a lot of the things we see today have happened before. Believe it or not, the stock market didn‘t begin the day you graduated from school. The stock market‘s been around for centuries. All markets have. These things have happened before. And will happen again.” (Editor: The players change, but the music never stops).

Alan Greenspan went on record before he left his post at the Federal Reserve saying he had never seen a bubble before. I know in his adult lifetime there have been several bubbles. There was a bubble in the late 1960s in the U.S. stock market; the oil bubble (in the late 1970s); the gold bubble (in the 1980s); the (stock) bubble in Kuwait; the bubble in Japan; the bubble in real estate in Texas. So what is he talking about? Had he not seen those things, he could have at least read some histories…all these things and others have been written about repeatedly.

Another lesson to learn from studying past market cycles is about market psychology. As the late Peter Bernstein observed, ?In their calmer moments, investors recognize their inability to know what the future holds. In moments of extreme panic or enthusiasm, however, they become remarkably bold in their predictions: they act as though
uncertainty has vanished and the outcome is beyond doubt. Reality is abruptly transformed into that hypothetical future where the outcome is known. These are rare occasions, but they are unforgettable: major tops and bottoms in markets are defined by this switch from doubt to certainty.”

The venerable Benjamin Graham argued that an investor should “have an adequate idea of stock market history, in terms, particularly, of the major fluctuations. With this background he may be in a position to form some worthwhile judgment of the attractiveness or dangers..of the market.”

John Templeton in the book, The Templeton Way by Lauren C. Templeton, said that understanding the history of the market is a huge asset for investing. This is the case not because events repeat themselves exactly but because patterns of events and the way the people who make up the market react can be typical and predictable. History shows that crises always appear worse at the outset and that all panics are subdued in time. When panics die down, stock prices rise.

The study of past financial history can be a rich source of inspiration and guidance for investors. A historical perspective has always underpinned his (John Templeton‘s) own impressive achievements as an investor. (Introduction to Engines That Move Markets by Alasdair Nairn.

The study of market and economic history is excellent preparation for an investor, but the study of past events without a coherent theory for human action can often lead to confusion. I highly recommend downloading, What Austrian Economics Can Teach Historians by Thomas Woods at the following link:

An excerpt:

But no record of facts, no matter how judiciously arranged, interprets itself. “History,” wrote Ludwig von Mises, “cannot be imagined without theory. The naïve belief that, unprejudiced by any theory, one can derive history directly from the sources is quite untenable… No explanations reveal themselves directly from the facts? (2003, pp. 107-108).

An epistemological dualist, Mises denied that methods appropriate to the natural sciences could be employed in the social sciences, where man, rather than inanimate objects, was the object of study. For one thing, the historian did not have the natural scientist‘s advantage of a laboratory in which he could observe the consequences of
isolating a single factor. “[H]istorical experience,” Mises wrote, “is always the experience of complex phenomena, of the joint effects brought about by the operation of a multiplicity of elements” (Mises 1985, p. 208; Mises 1998, p. 31). With laboratory methods unavailable to him, if he was to make sense of historical events the historian could not approach his subject with his mind a tabula rasa but instead needed some acquaintance with social theory, lest he be overwhelmed by data he was helpless to interpret. “The ‘pure fact‘ – let us set aside the epistemological question whether there is such a thing – is open to different interpretations. These interpretations require elucidation by ‘theoretical insight” (Mises 1990, p. 10).

However—if you study history, past facts and figures, you must have a theory or latticework of mental models in which to understand what you are looking at. If not, you will be lost or even learn the wrong lessons. I strongly suggest learning about Austrian Business Cycle Theory. Many free books are available at

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Stock Market History from Benjamin Graham, Warren Buffett and Others
Source: Investment Masters Class