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What if History Doesn’t Repeat Itself?

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Back in 2006, I had a revelation. I was a software engineer and I made decent money. However, there was a lot of talk about off-shoring all kinds of software projects. I looked into it and with companies like Elance, I realized that there could be a major shift coming sooner than I thought. I looked at into my heart and it didn't take long to realize that software engineering didn't interest me enough to motivate me to be the expert I would have to become to justify my salary. That's why I started this site. I needed to find other ways to supplement my income for the day when I would transition out of software engineering. That day happened in October, 2007 and I haven't looked back. If I could talk to my old manager again, I'd give him a great big hug, say thanks, and ask if he'd do one more impression of the old child molester on Family Guy or sing a Kelly Clarkson song.

What does this have to do with history? The world is changing - extremely fast. Detroit used to be a thriving hotbed of wealth. Now it needs bailouts just to keep afloat for another few months. At last 2007's American Pharmacists Association, a distinguished speaker said that companies were exploring outsourcing clinical pharmacy studies oversea. Shoot the data over the Internet, have a pharmacist there analyze it and shoot the results back. It's that simple and a lot cheaper. At some level, either Americans have to start providing more value (how?) or one of two things is going to happen: American wages will drop or other countries' wages will rise. I imagine it will meet somewhere in the middle.

This has me thinking... for years financial advisers and Money magazine have repeated the 8-10% historic rate of return on stocks. Can we trust this history? What were the factors that contributed to that history? When I was growing up, I remember seeing things that said, Made in USA. I don't know if I've read that phrase in the last ten years. Might that impact the historical rate of return of US stocks? I think it might.

I often read the historical rates of return on real estate. It's had a big run and it seemed that around 2004 everyone was living by the "it always it goes up" credo. Well today we've learned that it's not entirely true. Perhaps the reason real estate jumped up over the 30 years is due to women getting more lucrative jobs and families finding themselves with more money. If people have more money, they can bid up the price of homes. If that theory is right, the blast of extra income was a one-time event. In the end, real estate prices have to track wages or people will be forced to stop buying.

What I take from this is that you should believe the popular mutual fund disclosure: past performance is no guarantee of future results. I'd take it a step further and say that past performance might not even be a good indicator of future results. Does that mean you should stop investing? I think you should look for opportunities in this changing world. If you think that television is going to go Internet via sites like Hulu and YouTube, perhaps a investing in Internet infrastructure is a good move (Cisco comes to mind). If you think that we are going to be slow to adopt solar technology, perhaps you should invest in oil. If you think that solar technology is going to be big in ten years (a point I wouldn't argue), perhaps you could invest in Claymore/MAC Global Solar Index or Market Vectors Solar Energy.

Does this mean that everyone in the United States is doomed? No. Now is the time to be proactive and think about the future of your field and your career. It's time to take a few minutes and not think about what's for dinner tonight, but what your long term plan is (unless you are already nearing retirement. In that case just carry on :-).

A final thought, this month's Money magazine points out that Japan has been in a bear market for 19 years - very much a whole generation. I wonder what the Japanese version of Money magazine says about historic rates of return.

Posted on December 18, 2008.

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14 Responses to “What if History Doesn’t Repeat Itself?”

  1. Sarah says:

    Maybe this is a new Medieval period? The question for me is learning a new balance — investment in the market and a greater focus on continuing education and investment in my own business ideas…one of my bosses in IB once told me there’s too much money in the world and not enough good ideas.

  2. I guess the main reason why I’m a believer is that people have been saying this for hundreds of years. That the market has changed, that the world is no longer the same one as before, that “this time” it’s fundamentally different.

    So what makes this time any different? Maybe something, maybe nothing. Like you say, it could be different this time around, but I trust we’ll still see 8% over the long term.

  3. plonkee says:

    I don’t know. House prices in the UK have increased on average at 2% above inflation – and have an average 13 year peak to peak boom bust cycle. I think this is because the population is slowly increasing, the number of new households is increasing more quickly but the number of new properties being built is not keeping up. Property is a good medium to long term investment over here.

    Similarly, I think that it’s likely that economies will grow over the long term, and I’d be interested to know whether investing in the stockmarket in Japan would have produced worse results that sticking the money in a (very low interest) Japanese savings account.

    Maybe history won’t repeat itself, but I’m at a loss to know how that means that our tactics should change. It doesn’t really matter whether the stockmarket performs better or worse over the next 20 years, it matters whether it’s likely to perform better or worse than the alternatives. The more unsure we are, the more we should diversify I guess.

    In short, spending less than you earn (or earning more than you spend) and saving and investing the difference is the only game in town. Diversification is one of the best ways of reducing risk. It’s actually deadly serious that continuous learning and development required in the information age. All of this is true now, but it was also true a year ago, and two years ago. It’ll still be true in a years time and two years time regardless of the markets.

  4. I wholeheartedly agree with you man, I don’t think history is at all a good indicator of what will happen. Control what you can and let the rest go where it may. 8-10% would look mighty good right now. :)

  5. Patrick says:

    I agree. Until a couple years ago, I was in the camp that stocks will return 8-10% on average over the long run. And they may. Or they may not. I will continue to invest in a well diversified portfolio centered on the stock market and other investment items, and I will invest with a long term goal. But I will also explore other avenues of generating and growing wealth, including ways to generate cash flow. I currently have my business, but eventually I would like to get into real estate or other methods of recurring cash low. People will always need a place to live.

  6. kosmo says:

    A good rule of thumb is to not rely too heavily on rules of thumb :)

    I think there is a very good chance that stocks will give 8-10% return over the long run, but it’s a good idea to keep your eyes open and be aware of the financial environment, rather than stick your head in the sand and assume a strong return.

  7. Slacker says:

    Things like real estate are a little complex, unless you’re investing in some kind of real estate index, a properties value drastically changes depending on the area, the type of property, etc. Overall though, I agree that real estate is typically not the best investment especially if you don’t have the cash to pony up to buy it, then you have all that interest to carry. Everybody seems to think if you deduct the interest that somehow you come out on top.

    History definitely is not good indicator of future performance especially if that future isn’t that much smaller than the historical reference we’re comparing to. For example, we know that the Dow Jones has only been around for what, 100 years or so? And we’re betting that we know what’s going to happen in the next 40 years based on 100 years? I don’t think so. That’s like winning 10 hands of black jack and thinking that you’re going to win the next four.

    – Slacker

  8. kosmo says:

    Over the years, I have had several discussions with people about mortgage interest (I have a degree in accounting, but work in IT).

    Some people don’t want to pay their house off, for fear of losing the mortgage interest deduction. Um, you’re spending $100 in interest to save $25 on your taxes – net loss of $75 on that deal. I can understand other arguments against paying off a house – such as the belief that you can get a better return by using the money in a different manner – but the mortgage interest deduction argument is typically a misunderstanding of deduction vs. credit.

    I took a retailing class in college. My prof told a good story. When she and her husband went to trade shows and such, they stayed at modest hotels. Her local competitor stayed at high end places, since the expense was tax deductible.

    One woman still has her store, the other hads long since gone out of business. Can you guess which one survived? :)

  9. Rich says:

    I completely agree with you on this. After reading the book Fewer, I realize this country is facing problems that we have literally never encountered.
    The national debt is skyrocketing to unprecedented levels, our population is aging to the oldest its ever been, and interest rates are as low as they can possibly go. That all spells nothing but trouble to me.
    In the past 20 years the fed has been able to respond to crisis by cutting interest rates. That’s not an option anymore.
    Honestly though I hope we’re both wrong.

  10. Eric says:

    Adaptation – the ability to survive in a changing environment. “…problems that we have literally never encounter…” is the exact environment that Americans generally meet and exceed expectations. This is the roughest quarter of the recession – from here we will build into a rocking 2010 and a new decade of prosperity. (not to say that 2009 will be great, it just won’t be as bad as the last six months)

  11. Dave, I think you must be the only one who read this as a sky is falling article. But anyway…

    Talk to your grandparents and they will tell you a much different story than the financial world has sold everyone. An average return can be VERY bumpy.

    By the way, the reasons you mention are why I worked to move from a technical role to be a business analyst and a project manager. Today I write software specifications and manage projects. Communication skills (+design and problem solving) are key, but they are even more important as jobs are outsourced.

  12. fathersez says:

    You never know.

    Japan should be a good indicator of this.

    Still some premises have worked for the longest time. If it is true that the Richest Man in Babylon was transcribed from tablets found from Babylonian times, what it says should work for now.

  13. Lazy Man says:

    I haven’t read the Richest Man in Babylon, but my comment was more about the macro economic climate. I’m pretty sure Babylonian tablets didn’t foresee the Information Age… and that the information could be outsourced cheaply and easily to people willing to do the work cheaply.

  14. Tom says:

    In case anybody cares, “The Richest Man in Babylon” is a cute book on thrift and wealth creation written by George Clayson in the mid-1950s, and published/promoted by Clement Stone. It was not transcribed from ancient tablets.

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