Accretive On: Market Lessons

August 27, 2019

“History doesn’t repeat itself, but it rhymes”

Mark Twain (attributed)

“Those who do not learn history are doomed to repeat it.”

George Santayana (attributed)

As an investor, knowledge of market and economic history matters.  What has happened in the past, in a lot of instances, can serve as an important reference point or parallel to what is currently happening.  A solid understanding of booms, busts, manias, panics, fads, frauds, and failures can help investors avoid making expensive mistakes with their portfolio.  Furthermore, being educated on historical market valuations, growth rates, and the level of interest rates can help inform the investment decision today.  

‘The four most expensive words in the English language are "this time it’s different."’

Sir John Templeton as quoted in The Four Pillars of Investing:  Lessons on Building a Winning Portfolio (2002) by William Bernstein

With interest rates so low, governments around the world are toying with the idea of issuing longer dated obligations.  The US Treasury is reportedly making some soft inquiries to market participants regarding a 50- or 100-year issuance.  Long dated debt is not new; the UK government used to issue perpetual Consols (bonds with no maturity date).  Although negative rates are a recent phenomenon, generally low longer-term rates are not.  In the 1800’s, the UK government borrowed long-term at or below 3%.

The Argentinian 100-year bond issued in 2017 is one of the best examples we can find of investors ignoring history and telling themselves “this time it’s different”.  Argentina has a history of defaulting on its obligations, having done so 8 times in its history with the most recent default occurring in 2014.  Despite this, the government was able to issue a 100-year bond with a coupon below 8%.  While market participants were optimistic about the new government at the time, history would suggest more caution.  Two years later, the government investors were so enthused about had failed to deliver and was voted out.  This led to a devaluation of the peso and a collapse in the 100-year (now 98-year) dollar denominated obligation.  

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”  

Charlie Munger, Vice Chairman Berkshire Hathaway

In the Argentina situation, lending money to a country with a history of populism, fiscal irresponsibility, and default led to somewhat predictable results.  One might be forgiven for wondering “how did this happen?”  In our view, it is a byproduct of a world awash in too much capital seeking a return and a dismissive disposition toward the risk involved in generating that return.  Investors, and their agents, get impatient waiting for the right opportunity and feel pressured to put capital to work.  What was surprising to us in this instance was how quickly the market opened up and how quickly the situation soured for investors.  We are not entirely surprised at the Argentina situation.  From our reading of financial history, markets (and market participants) tend to learn a lot over the short term, a modest amount over the intermediate term, and very little over the long run.  Having a good sense of history, and having the avoidance of folly as an objective, can help one avoid some pitfalls.

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