What Can We Learn From The Past?

Published in Investing on 16 February 2012

Can we learn to behave differently in the future by looking back?

While having a clean-up the other day, I came across a couple of old newspapers with the finance sections open.

I've paraphrased some of the headlines:

  • The FTSE fell sharply below a "psychologically important level" after Bank of America's first-quarter results showed it had to set aside a $13.4bn to cover bad loans.
  • Man Group (LSE: EMG) lost (a good few pence) off its share price, as did Barclays (LSE: BARC), around renewed worries over huge financial sector debt.
  • Traditional safe haven gold rallied sharply.
  • Thomas Cook Group (LSE: TCG) was one of the biggest losers amid fears that the travel group will soon need more cash.
  • Lloyds Banking Group (LSE: LLOY) faces investor backlash over board pay and bonuses.
  • Tesco (LSE: TSCO) closed up as investors became more optimistic over the supermarket's prospects.

Guess the year

Any guess as to the date? Well, I'll tell you -- April 2009, close to the depths of the slump with the FTSE below 4,000, Man Group shares at 247p, Barclays at 209p, Thomas Cook at 253p (what a slump!), Lloyds at 104.5p (ditto -- and Lloyds shares had been down to a low of 42p a few weeks earlier) and Tesco at 332p.

Clearly, it was "fill your boots time", particularly with Thomas Cook (now 13.5p) and Lloyds (now 33.9p). The most interesting thing about these headlines is they could almost have been written last month. The gist was the same but many of the prices were a lot different.

Mining stocks were also suffering as base metal prices lost a bit of their shine. Xstrata (LSE: XTA) lost 65.5p to close at 524.5p, while Kazakhmys (LSE: KAZ) was down 50p at 464.5p. Best to avoid, then, obviously! But gold miner Randgold Resources (LSE: RRS) had a good day, up 237p at £30.60; time to take profits perhaps?

Of course, the rebound since then and continued demand from the world's fastest-developing large economies has seen these three rocket.

Further back…

And just briefly, I'll go back to an older newspaper still, this time to September 2000, when "London share fell to their lowest level for four months as investors again took fright at strong oil prices and a string of profit warnings. The FTSE closed 80 points weaker at 6,199".

As low as that -- really!?

  • "The President of the World Bank yesterday urged oil producers to act to bring down energy costs as fears mounted about the impact of price rises on the global economy. 'At $30-plus you have a significant effect on developing countries,' he said. 'I don't think it is in anyone's interest to see the oil price still in the thirties.'"

How did we afford petrol?

  • "Marconi continued its acquisition drive by paying £190m for a Californian company specialising in sophisticated devices to manage communications traffic. Shares closed down 40p at 945p."

A very shrewd acquisition no doubt. Three years later, the BBC said: "Marconi was once the jewel in the crown of British manufacturing. But disastrous investments have seen some of the worst losses in UK corporate history -- over £5bn."

  • "Shares in ARC International more than doubled on their debut prompting criticism that Goldman Sachs had pitched the 210 offer price too low." Laughably pessimistic, these investment banks -- ARC was taken over nine years later at 16.25p.
  • "BITS corporation, a developer of video games, rose to 65.5p on first day's dealings, valuing the company at over £120m." In bits is where the company ended up. Renamed Playwize, it cancelled its AIM listing in May 2010 with "negligible resources" to report back to its long-suffering shareholders.

Lessons from the past

So what can all this teach us?

The really frightening thing is that most shares lose money. The directors usually get paid handsomely as the company steadily fails, but you won't. This is the game. The market often gets valuations very wrong. When things seem way out of kilter, history usually shows us that they were just that.

Warren Buffett once suggested we should invest as though we were buying the whole company. He also said we should invest as though the stock market will be closed for the next five or ten years. From this perspective, forget share price performance and the short-term ups and downs. Instead, judge a company's worth on earnings, likely future profits, debt, assets, sales and cash-flow. Silly market pricing can work in your favour, too.

Is all history bunk, and can we learn to behave differently in the future by looking back? A resounding "yes" to both questions, I would say.

> Get the latest on investing and the markets from the desk of David Kuo -- join The Motley Fool Collective today.

More from David Holding:

> David owns shares in Barclays, Lloyds Banking and Tesco. The Motley Fool owns shares in Tesco.

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