I had made an exhaustive study of recessions so that I could form a timeless picture of an archetypal recession and then understand the difference among them. I did that for all economic and market movements and was inclined to do it for just about everything, because it helps me understand how things work.
One of my great frustrations in almost all market commentary irrespective of the market is the presence of recency bias and one example stand out lately – Bitcoin. Bitcoin is a wonderful example of a collection of factors from being a Ponzi scheme to greed to outright stupidity. All of this is locked in an inability to understand how the Bitcoin bubble fits into the history of bubbles and this occurs simply because the majority of traders are not students of history. One of the overarching themes of Principles is Dalio’s understanding that there is nothing new and from this understanding of history can be born an understanding of the present that is deeper and more precise than that possessed by others. And much of his success seems to be attributable to this understanding of deep time and the ability to synthesis what he has observed into cohesive systems.
For example when I made a video in London last year talking about the imminent decline in Bitcoin it wasn’t because I possessed any great psychic ability or some magic tool had told me the end was coming it was simply that almost four decades earlier I had wandered into the State Library and found all I could on the South Sea Bubble. I then transcribed what data I could into a chart and kept it. So when I saw a chart of Bitcoin I was able to overlay the two and notice that they looked the same. As had been the case with every other boom I had ever seen from Poseidon to 1987 to the Asian Economic Crisis to the Dot Com Boom all the way through to the GFC.
Traders fail to understand history and as a result they fail to understand where they stand in the timeline of market so to them everything is new and shiny and has never happened before. Part of this inability to look back at history is a function of cognitive ability – most people are simply too thick to find the necessary resources. But for the majority it is simply laziness. The past tells us a great deal about the present and it does so because people as a group do not change – they are motivated by the same things today as they were 2,000 years ago. My advice to all traders is to take the time and wade through books such as Manias, Panics, and Crashes: A History of Financial Crises or Against the Gods: The Remarkable Story of Risk
You will be surprised at how much you can learn by looking backwards as opposed to scouring the internet for new magic shiny indicators.