Why we look
History and statistics sometimes help us to understand the present and perhaps estimate the future. It will help us to know how history came to be.
How we look matters
Context is crucial. There is no meaning without context. When assessing information you should assess how it came to be.
Today the p/e ratio of the S&P500 is around 25. In 1980 it was about 7 and in 1995 about 15. Is it too high now or too low earlier? To know one must assess context
All investments have a context
All investments are a choice among several. When p/e was 7, 10-year treasury bonds paid about 12%, when 25, bonds pay less than 2%. These are competing products and price reflects that. The difference between bond and stock yield represents the value of other factors.
Money changes too.
When I was young, I could buy a coffee and a donut and get change from a quarter. Not now. More like $3.00. Style has changed. Coffee servings are bigger and donuts more varied. That accounts for some of it.
The money itself is worth about a tenth.
When we say a coffee and donut are not worth the money, in part it is because the money is not worth the money. Comparing values based on price becomes non-intuitive as you age. It is a problem.
We change too.
If an investor has bought, sold and kept a hundred stocks, they will deal with risk differently than someone who has owned none. They will assess value in a more nuanced way. Experience changes our “now context.”
So does knowledge learned from other’s experience.
How we use context
When we study the past, we intuitively assign our present context to the past situation. That causes problems. The context when the action was taken could have been much different.
If an advisor is sued for advice given, it will be on the basis of current context, not as it was ten years ago. The argument may be that a client’s best interest has always been the same and that may be true. The problem is both the client and the surrounding environment are not constant and it is hard to assess how they have changed.
Find the cause
Causation is cumulative. To make current cause and effect make sense we must know not just the cause, but also what caused the cause we see and maybe more iterations of that.
Change takes a long time.
Because it does, we don’t notice the details of how it came to be. Think about our attitude to impaired driving. It was once commonplace and is no more. What caused the change? There are many apparent from MADD to stiffer penalties. People now see it as wrong. At one time people would have been unconcerned.
Statistics look formidable.
Numbers, especially with decimal parts, look right and accurate. Within their limits, they are. Keep in mind they arose due to specific circumstances. If the conditions never appear again, should they be meaningful. Are all relevant conditions included or excluded for a reason you know?
History is mostly guessing, the rest is prejudice. Will Durant
Use history sparingly. It may mislead you.