Enlightenment from (the Great) Depression

It’s hard to believe that exactly 80 years ago — nearly a century — our country was in the depths of the Great Depression. Although our world today is completely different in countless aspects, you can still get a lot of insight from finance and economics writings from that era. This is especially true for the years 1932 to 1934.

Risk, Uncertainty and Profit by Frank H. Knight was first published in 1921 and reprinted several times; each reprinting included a new preface. I think the prefaces contain more information than the actual book. In them you can see the author trying to make sense of the current world.

A “sort of medievalism” for Western civilization

The prefaces were written in 1921, 1933, 1948 and 1956.  Most of them address the use of economics to improve society, the limitations of economics as a science, etc. But the preface written in 1933 was markedly different from the others.

In August, 1933, Knight wrote, “It seems to me probable that the first historical age of humanitarian liberalism is passing, that Western civilization will in the near future largely go over a sort of medievalism, but with a political orthodoxy and priesthood in place of the religious in setting the criteria of thought and action.”

From an investment perspective, what is important to note is that this was the prevailing attitude at what ended up being the absolute best time during the entire century to invest in the stock market.

Fast-forward to the Great Recession

Wow. This premise is not too dissimilar from a lot of the economic opinion that was coming out in late 2008-early 2009. I distinctly remember Nicholas Nassim Taleb (author of “The Black Swan”) saying in 2008 that the economic situation could be the toughest challenge facing the country since the Revolutionary War.

Practical enlightenment

It is true that an investor is usually his own worst enemy. This doesn’t just apply to the uninformed, whimsical, emotional investor. It also applies to thoughtful, informed, logical investors. Thoughtful, rational analysis can easily lead an investor to an incorrect forecast. Investors are most successful when they stay in for the long term and specifically avoid the temptation to forecast at all.

Photo from The National Archives and Records Administration