Ancient History Offers Investors Lessons About Market Volatility

It might not seem like it, but the market volatility seen over the past several months is a good reason to look back at history.

Deals made in Ancient Greece and during the European Renaissance hold important lessons for investing in the 21st century.

A few archetypal mistakes have been made by investors time and again, such as ignoring conflicts of interest or failing to diversify portfolios. Understanding what has happened in the past -- the successes and failures of investment history -- can help investors profit in the future.

Here are some moments in the history of investing that contain valuable lessons.

1. The first pensions in history were land grants given to retired Roman soldiers by the government to keep them occupied and uninvolved in politics in the capital. Some evidence suggests that this system became overextended and that Roman statesmen faced a pension dilemma reminiscent of current debates over Social Security and retirement age.

2. Investment managers 2,500 years ago in Ancient Greece were most likely servant or slaves, a far cry from today's professional investors. Many ancient landowners delegated the financial management of estates to slaves, and some slaves acted as truly professional managers, assisting multiple masters with their affairs.

3. The first recorded distressed turnaround operation was described in the 300s B.C., in Xenophon's Oeconomicus. Similarly to today's buyout managers, an investor purchased problematic properties, implemented changes to improve them and sold them to new buyers who wouldn't have purchased them before the repair.

4. Diversification has always been a way to reduce risk. Both the Bible and Shakespeare reference it.

But there have always been those who ignore it at their peril.

In 14th-century Italy, two prominent banking houses piled into the military exploits of English King Edward III. His default contributed to the failure of both banks.

5. Ancient Phoenician sailors inspired today's standard 20% performance fee for hedge funds and other private-investment vehicles. When A.W. Jones opened the first hedge fund in 1949, he based his 20% fee on the cut that Phoenician captains took from successful voyages several thousand years ago.

6. From the Dutch tulip craze of the 1600s to the housing bubble of the early 2000s, we still get caught up in single asset-driven mania from time to time. Investors must strip their emotions from investment decisions as much as possible.

7. We have learned a lot about economic crisis management over the past 100 years. The U.S. government's reforms in the decades since the Great Depression served to promote the economic well-being of citizens and to democratize the investment process.

Without these new ideas in crisis management, the Great Recession of 2008 would likely have been a deeper and longer period of economic contraction. We still have work to do, but we have learned a great deal about managing economic crises since the 1920s and 1930s.

8. It was only under William Cary, the Securities and Exchange Commission chairman appointed by President John F. Kennedy in 1961, that the federal government cracked down on insider trading. This development was a landmark case against unfair financial dealings.

Over the years, we have made progress at spotting and punishing unscrupulous market behavior, but much work remains.

Decade after decade, we see markets collapse and fortunes vanish for the same basic reasons, and most of the time failure isn't caused by a complex technical error but by a new flavor of poor judgment and emotional reaction. If investors today want to succeed, they should understand the triumphs and cataclysms of yesterday.

This article is commentary by an independent contributor.

Norton Reamer and Jesse Downing are the authors of Investment: A History. Reamer is the former CEO of Putnam Investments, and the founder and long-time CEO of United Asset Management. Downing is an investment professional in Boston.

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