“The lesson of history,” it is said, “is that the lessons of history are never learned.” Does the same apply to investment? Investors, amateur and professional alike, spend a huge amount of time poring over charts, historical precedents, analogies and past behaviour to find clues to the future.
Regulators warn us that past performance is not indicative of future results but, as Baroness Helena Morrissey reminds us, “we are instinctively drawn to think that the past is a model for the future”. The problem is that history never repeats itself and, even if it did, the outcome would vary as people, perhaps drawing on past precedents, react differently.
Investors are better served by remembering Mark Twain’s observation that “history doesn’t repeat itself, but it often rhymes”, and by accumulating pearls of wisdom from their own experience, as I hope I have in the last 47 years, 42 of them in investment.
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Being good at sums, I started out qualifying as a chartered accountant at what is now KPMG, though I impetuously left after qualifying to spend two years in corporate advisory under Victor (aka “Lord”) Blank. Fortunately, I realised before he did that the varied skills and personal characteristics necessary in that career were conspicuously lacking in me and that I was more suited to the world of investment.
Good investment goes beyond the numbers
Still, those early years taught me priceless lessons, especially that, as any good accountant knows, the secret of good investment does not lie solely in the numbers. Many investment companies have a screening system to identify companies that combine good margins, high returns on capital, a solid balance sheet, revenue growth, cash generation and so on as part of their “process”. The problem is that these processes are all more or less the same, so the stocks identified are fully valued. The best opportunities are often in the stocks that the screens reject.
An early quote of Warren Buffett’s that I learned was that “when a management with a reputation for excellence encounters a business with a reputation for bad economics, it is the reputation of the business that survives”. It sounds great but management success is not necessarily transferable from one business to another. Simon Wolfson, CEO of Next, points out that 28 of his top 30 employees were promoted internally and have a combined 500 years of experience at Next.
“Bad economics” is not a given in any business. Companies fail because they prove incapable of adapting to change or just give up, rarely because their business has become obsolete. Woolworths continues to thrive in Australia and South Africa, where Wimpy, not McDonald’s, is the market-leading burger chain. 3i’s hugely successful European retail chain Action mimics Woolworths, as does the UK’s B&M. Tim Waterstone built up his chain of bookshops to market dominance when his competitors despaired of competing with Amazon and downloads.
Professional investors will often tell you that they never invest in a business they don’t understand. I doubt it is possible for any manager to really understand any business they invest in; an investor covering dozens or hundreds of companies cannot compete with a dedicated management team. The advantage investors have is objectivity, the ability to see the broader picture and the ability to walk away.
Investment-management companies boast of the number of analysts they employ globally, the number of company meetings they hold and the depth of their research. This often leads to overanalysis, whereby huge amounts of research improves the investor’s confidence but doesn’t result in a better decision. Many of my best investments were made almost on the spur of the moment from a single insight.
Hope is not an investment strategy
Nathan Rothschild said that the secret of his success was that “I never buy at the low and I always sell too soon”. Yet many investors try to finesse their investment decisions, holding back from an investment decision in the hope that a share price would revisit a high or low. I found it helpful to assume that any share I bought would promptly fall 10% and any I sold rise 10%. I would be pleasantly surprised if it turned out differently.
“Run your profits, cut your losses” has always been a popular dictum but is contradicted by “nobody ever went broke taking a profit”. True; they went broke selling a winner and reinvesting in a loser. It is incredibly hard to know when to sell. Most people sell too soon but selling a share in freefall is mortifying. “Up like a rocket, down like a stick,” the wags say. I sometimes top-slice holdings but am a reluctant seller. However, the market regularly reminds us that great companies and funds don’t outperform forever.
“The stock market can stay irrational for longer than you can stay solvent” is another popular favourite. Any professional investor will tell you that it can be a long, long wait before an investment comes good, so you have to be very patient.
They say this after it has come good, not after three or five years of dud performance when they are wondering if they have made a mistake. Also, remember that markets are irrational much less often than many professionals believe – investment sages are not known for their humility or lack of self-confidence.
“Cheap is not cheerful” is a strapline I picked up along the way. Investors are drawn to lowly valued shares or markets (like the UK) but they are usually cheap for a reason. Cheapness is the easiest excuse for a bad investment. That is not to belittle “value” investing but the best hunting ground for value is recovery – which is contrarian and risky – or undiscovered potential.
Go for growth
The opportunity in “growth” investment is the reluctance of investors to believe that high growth is sustainable. No analyst likes to predict sustainable growth above 15% per annum but, as the leading firms in the technology sector have shown, it does happen. Still, there are many blind alleys: companies whose technology is superseded by others, who fail to monetise the potential, whose big idea turns out to be less revolutionary than expected or just a fad.
An early lesson every investor needs to learn is that they will make mistakes and lose money. The two don’t always go together. A mistake can be profitable and a rational decision can lose money: you played the odds wrongly but got lucky, or the other way round. Learn the lessons of the mistakes and move on.
An early boss, hedge fund manager John Angelo, used to tell me, “opinions are like a**holes; everybody’s got one”. Much later, I learned that it was, broadly, an aphorism of Winston Churchill’s.
John’s point was that he was only interested in what was going to happen and what it meant for markets, not in subjective opinions. Good investors shy away from opinions on politics, economics and current affairs but listen to all the arguments, distrusting the consensus. You learn much more that way.
Bumps in the road
The greatest lesson of all is that markets go up in the long term. Time turns most bear markets and crashes, which seemed so serious at the time, into mere blips in the long upward path. Yet the narrative of the investment gurus, faithfully reported by the media, is always to talk down the outlook for markets, to warn of “bubbles” and predict disaster just around the corner.
It is a standing joke of investment professionals that headlines of “billions wiped off stockmarkets” and lurid magazine covers depicting an absence of hope are a signal to buy rather than sell. But retail investors in the UK are more easily influenced, which helps to explain why the British investment market struggles. Bad news sells and Britons are not known for their optimism.
“The more you know, the more you realise how little you know,” said Bertrand Russell, though the sentiment goes back to Aristotle and Socrates: “Wisdom is knowing how little you know.” Experience makes you come to terms with this more than it teaches you how to invest.
You will not be right all the time. Even Roger Federer won only 54% of the points he played in his tennis career and many of the points he lost were unforced errors, probably regularly repeated. As Baillie Gifford points out, a good investment can multiply your money but a bad one will only lose it once. A missed opportunity may be more painful than a loss.
One of my best investment decisions was back in 1992 when I correctly predicted Britain’s departure from the exchange rate mechanism (ERM) and, against the overwhelming consensus, the economic and market consequences of our exit. This laid the foundations of five years of great performance. All I did was recognise the close parallels with Britain’s departure from the gold standard in 1931, a lesson in economic history I had absorbed at university.
One of my worst decisions was to sell my holding in a gold mining fund two years ago, having held it for about ten years. I despaired of the failure of shares in gold miners to respond to a rising gold price and switched into an energy fund.
The fund I sold performed strongly last year and has doubled in 2025, while the energy fund has remained marooned. I daren’t switch out for fear of being whipsawed. You never learn all the lessons from experience that you should have.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.