07 June 2024

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Financial Advice That Has Worked for 300 Years

Luigi Campopiano

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Five academics have undertaken the task of reading and synthesizing three centuries of financial advisory history into a new literary effort that represents the "summa" of financial advice: "Invested: How Three Centuries of Stock Market Advice Reshaped Our Money, Markets, and Minds." Considering the authors' conclusions, these might be the last 382 pages worth reading on the subject: because in the last three centuries, the main arguments on how to invest have not changed much.

Each publication on the "secrets" to successful investing revolves around the same concepts: on the other hand, the demand from readers wanting to understand "how to get rich" through investing has never waned. Usually, the number of "operational" publications dedicated to the markets increases when interest rates are low. The reason is simple: if low-risk returns (current account and/or short-term government bonds) are high, there is less need to get involved with riskier assets like stocks or private equity. If the choice is between no return and a high exposure to equities (as has been the case for much of the post-2008 period), then the demand for information on how to navigate the markets increases. Yet, the approaches of those teaching personal finance remain largely unchanged.

Here are the recurring principles of investment guides since the 18th century:

• In the field of stock investment, it is better to prefer shares of high-quality companies at reasonable prices and sell them when they are no longer so, without being influenced by emotions (the rule underlying so-called value investing);
• Ignore short-term forecasts. The chances of missing a forecast are extremely high, especially since market behavior often changes with completely unforeseen events, or at least contrary to expectations;
• Think long-term. It's not difficult to earn in the markets. What is difficult is resisting the tempting urge to squander money in short speculative operations for immediate gains (economist Burton Malkiel, author of the classic "A Random Walk Down Wall Street") — an obvious lesson, but often ignored;
• Diversify. It is a strategy practiced since the beginning (in 1849 T.S. Harvey wrote in his "What Should I Do with My Money" to "not be content with a single safe investment").

For 300 years, financial advice has been repeated with few changes, but the effort necessary to effectively convey these messages never seems sufficient. The problem is that putting good financial advice into practice often proves problematic, much like following a healthy and balanced diet. Excessive confidence or suspicion easily distances one from the expected economic results from investments, even when the "right" books have been read.

In these 300 years of manuals on learning to invest, many have "sold" harmful and misleading fantasies, with unrealistic visions of easy profits and the certainty of success, trying to hide the fact that there is no formula to avoid life's uncertainties and economic calamities.