Twenty One Lessons from Financial History

1. Analyze Supply and Demand Equally: It's vital to give equal importance to both supply and demand when evaluating markets.

2. No Relationship Between GDP Growth and Equity Returns: Historical data shows that GDP growth does not significantly correlate with equity market returns.

3. Use Pepper's Law: When assessing when a market trend will stop, double the assessment time and subtract a month.

4. Understand Incentives: Always consider the incentives behind individuals or institutions in the market as they can influence outcomes.

5. Corporate Profits to GDP Must Mean Revert: The ratio of corporate profits to GDP tends to revert to the mean over time.

6. Assess Both Price and Quantity of Money: Focus on both the interest rate and the quantity of money in evaluating monetary policy.

7. The Search for Yield is Dangerous: Investors often take additional risks in pursuit of yield, which can lead to significant losses.

8. Beware of Overvalued Exchange Rates: Never invest in emerging market equities if the exchange rate is overvalued.

9. Tourism as a Guide for Currency Valuation: Observing local behaviors during peak tourist seasons can indicate currency strength or weakness.

10. Buy Equities Below 10 Times Cap: Consider equities that are very cheap, unless facing extreme political or economic risks.

11. Democracy and Capital Controls: Democracies may be more susceptible to imposing capital controls if they do not support political objectives.

12. Historical Defaults Predict Future Defaults: Countries that have defaulted on their debts historically are likely to do so again.

13. Avoid Forecasts with Decimal Points: Precision gives a false sense of certainty; forecasts should be broad and probabilistic.

14. Inflation is a Monetary Phenomenon: Technology does not necessarily defeat inflation; inflation occurs through monetary policies.

15. Watch for Significant Monetary System Changes: Be prepared for potential failures or shifts in monetary systems every few decades.

16. Money is Often in Disequilibrium: Opportunities arise from disequilibriums, where state intervention can create imbalances.

17. Beware of the Illusion of Stability: Markets often appear stable before a sudden correction; be cautious in periods of apparent stability.

18. Adapt Strategies to Changing Environments: Flexibility and adaptability in strategies are crucial in response to structural market changes.

19. Financial History Holds Important Questions: Learn not just from the outcomes, but from the questions that the historical context raises.

20. Understand the Impact of Government Intervention: Government policies can significantly alter market conditions and should be analyzed closely.

21. Beware of Extrapolation of the Past to the Future: Straight-line predictions from past trends can be misleading; understanding current contexts and mechanisms is essential.

These lessons are derived from trends in financial history and highlight the dynamics that investors should consider when shaping their strategies for the future.