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Paul Kedrosky has a very good post on the uselessness of financial history. I think he’s exactly right. Finance people tend to be very loose with historical comparisons. I’ll often hear that some situation is “eerily similar” to some year. I don’t buy it—all these historical scenarios are incredibly different. That’s also why I don’t buy the “madness of crowds” explanations about speculative bubbles (there’s another overrated book).

Paul writes:

I’m torn on the subject, but I’m also increasing skeptical of any and all comparisons to prior historical periods. I don’t buy trough P/E, or recession length, or relative valuation, or interest rate, or sectoral rotation arguments, or… you get the picture. I love data, but I’m increasingly close to being an outright nihilist when it comes to over-reliance on historical financial data without any truly coherent supporting rationale. We are in a grand experiment with no real history to draw on, and anyone who pretends otherwise is deluded or selling something, or both.

My view is all these models and comparisons are useful fictions. To put it succinctly: Some are more useful than others. The danger is thinking they’re overly determinant. All comparisons need to be put in context, and context changes constantly. The more I study investing, the more I admire a truly independent mind.

David Merkel has more.

Posted by edelfenbein at January 5, 2009 1:36 AM