A key part to being a successful athlete is practice. To practice technique and practice situations in order to be able to perform, and react quickly while making the correct decisions under pressure when stakes are on the line. The practice is also used to add to substitute for experience. Take for example a boxer, they can practice through a variety of ways such as combo drills, blocking and sparring which will better prepare them for their real fights. But how does a trader prepare/practice for markets?
Well to an extent, they can practice too! A bottoms up investor will get better over time by analyzing more and more companies. A technical trader can practice by analyzing more charts and backtesting strategies (can apply to more quant focused traders) but all traders and especially generalist/macro focused traders need experience! But that takes a long time, for instance if a brand new trader started in 2020 then they only had experience trading in a bull market until March of 2022 then they had to learn on the fly what trading in a bear market is like. Additionally, not all bear or bull markets are the same! Decision making in these scenarios come from experience.
Over time a trader will naturally gain experience but at the cost of both time and more than likely some money in the form of tuition fees to Mr. Market. And this is where the whole point of this piece comes in. There is absolutely no substitute for real experience but you can offset a lack of experience by studying history and in my opinion it’s one of the most important things someone can do.
Studying history for the purposes of trading is different than studying history for enjoyment or interest. When someone studies history for enjoyment they usually study it to understand just the event/period itself, and maybe if they go deep enough they’ll study the leading up to it and a little of what happened after. When studying history from a financial markets lens, there’s a lot more that can go into it. You can look into what monetary policy was like, how fiscal policy was deployed, different economic data points that ties into growth, inflation and liquidity, geopolitics and asset returns. By doing this you can familiarize yourself with the variables that are timeless and woven into the fabric of reality and human nature. From that understanding we can then better identify the points of discontinuity with the past. There is ALWAYS differences and similarities when comparing the now, to the past. By identifying what casual factors are similar from the past we can then identify actions (read:trades) that are statistically significant and by identifying the points of discontinuity we can deploy reasonable thinking to “this time is different” situations to determine the best courses of action.
What’s also important to keep in mind when studying history is to not look at it as x happened so y was the result and y will always be the result when x happens. We need to shift our minds to thinking in probabilistic functions and viewing history through a curiosity of how probabilities and and events develop into the outcome that occurred. By doing this we can create a framework to identify the significant data points and start our redundancy planning.
Something you’ll see a lot the longer this newsletter goes on for is the goal is stay in the game. It seems simple right? Stay in the game, don’t blow up. If you can avoid blow ups, eventually big wins will come. To stay in the game requires being resilient. The best way to be resilient is to think preemptively, to understand what can go wrong. We can understand that with history. Events aren’t ever really unique, the circumstances or specific factors may be unique the event at it’s core can often be compared to something that has happened before. When you can identify the core attributes you have a better base to build multiple scenario analysis’ and have redundancy plans in place and in general you are better prepared to stay in the game.
Resources to use
We understand the need to understand history from a financial lens point of view but what’s the best way to go about doing that? Let’s start off with understanding current events/policies/regimes and relating that to assets. A really good free resources is Prometheus Research that really does a good job of systemizing GIP (growth inflation and policy/liquidity) regimes and looking at how assets performed in past regimes.
Another way to do it would be to use TradingView and see how assets performed before, during and after significant events. This website is a great free resource to look at significant crisis’ throughout history to learn more about them and then use TradingView (or any other charting software) to study asset prices coinciding with those events.
Finally, we can also read various books and publications. Some of the best books I’ve read that I would recommend related to history in no order are:
The Price of Time by Edward Chancellor
Strange Rebels: 1979 and the birth of the 21st Century by Caryl
The Alchemy of Finance by George Soros (this one is less about history but good on tying everything into the flow of capital and asset prices)
The Economics of Inflation by Costantino Bresciani-Turroni
The Fall of the Euro by Jens
The Midas Paradox by Scott Summer
Macroeconomic Patterns and Stories - by Leamer
Monetary Policy, inflation and the business cycle by Gali
Manias, panics and crashes by Kindleburger
A short History of Paper Money and Banking in the United States by Gouge
A Monetary history of the United States by Milton Friedman
There is so many books on history, both directly related to finance and unrelated. Those unrelated will require more critical thinking skills, but are of the same importance.
Thank you so much for reading! If you haven’t done so, please like and subscribe, it really helps with growth! If you’d like to stay more updated on trades or other ideas that might not warrant a full article then follow me on twitter here. Alternatively, I’m a part of a discord that is completely free. It’s just a collection of traders from all different backgrounds that talk about the markets, so come check it out here!