In a 1996 review of Roger Lowenstein’s book about Warren Buffett (link), Bill Gates wrote that “when he [Buffett] invests in a company, he likes to read all of its annual reports going back as far as he can.” I was still in business school when I read Lowenstein’s The Making of an American Capitalist (1995), but it wasn’t until some ten years later that I learned to appreciate the power of going back as far as possible when analyzing a company for investment consideration. But as with anything else that takes tremendous effort, realizing the power of the effort doesn’t necessarily allow one to harness it. As Warren Buffett pointed out about investing, Arnold Schwarzenegger about body building, and Paychex founder Tom Golisano about entrepreneurship in his biography Built Not Born (2020), most people just don’t put in the effort necessary to achieve greatness.
While I credit Buffett for inspiring me to study the history of companies, it wasn’t until I read The Great Depression: A Diary (2009), that I realized the unique insights that living the past in chronological order can offer investors. Published by his son Daniel, the book is essentially a financial affairs diary kept by a solo attorney named Benjamin Roth, during the Great Depression. Unlike most other accounts I have read about the period, which were written after the fact and with the benefit of hindsight, this book consists of unaltered entries that Roth made to his diary, where he jotted down his thoughts and fears over the span of a decade as the Depression unfolded. The NYT wrote an excellent review of the book (link), which was titled The View from Inside a Depression.
What made Roth’s account especially precious to me were his observations on the stock market. While he barely had enough money to feed his family, and much less to buy stocks, he was obsessed with wealth creation through investing in stocks. His 1937 entries were my favorites, as this was the year when he pondered the most on what really mattered when it came to investing: “As a general rule, only strong companies are worth investing in,” he concluded in December 1937. “Most of the information deals with the daily ups and downs of the market – the waves and not the tides. These things are not important. The investor is interested only in the information which affects the long-time trend. … He must disregard the non-essential. He must discipline himself and realize that the investment of surplus funds is all-important and requires work and diligence.”
In my book The Outstanding Factor (2021), I wrote: “Since the past is the best guide as to what might happen in the future, replaying past events, such as a bad year or decade, as if they were happening to us in the present, is one of the most precious techniques I know in investing, and one that we systematically deploy as a team at Victori.” I did not come up with these ideas on my own and I appreciate that they are not novel. In The Marshmallow Test (2014), for instance, psychologist Walter Mischel writes that “to take the future into account, we have to heat it, make it imminent and vivid. To plan for the future, it helps to pre-live it at least briefly, to imagine the alternative possible scenarios as if they were unfolding in the present. This allows us to participate in the consequences of our choices, letting ourselves both feel hot and think cool.” In other words, living through the past as if it were in real time, can help one prepare for a better future, as well as cope with the worst of outcomes with equanimity. This is why one of my early mentors would often ask his analysts: what would make you sell this stock?
Another book that helped me appreciate the power of living through the past was Ray Dalio’s Principles (2017). In Chapter 3, titled My Abyss: 1979-1982, Dalio tells the story of when he blew up in 1982. “So there I was after eight years in business,” he recounts, “with nothing to show for it. Though I’d been right much more than I’d been wrong, I was all the way back to square one. At one point, I’d lost so much money I couldn’t afford to pay the people who worked with me. One by one, I had to let them go. We went down to two employees—Colman and me. Then Colman had to go. With tears from all, his family packed up and returned to Oklahoma. Bridgewater was now down to just one employee: me.” In retrospect, Dalio attributed his crash to three main factors: overconfidence, not appreciating how difficult it is to time markets, and not studying history close enough. The first and second are basically the same flaw, that Dalio addressed by getting Bridgewater out of the directional betting business. The third factor was the one that I took home.
Dalio’s account of how he came back from the abyss made for some great reading, but the single most important takeaway for me was how his failure led him to study hundreds of years of history to come up with carefully tested decision-making principles. “I took history books and old newspapers and went day by day through the Great Depression and the Weimar Republic,” he explained, “comparing what happened then with what was happening in the present.” I recall getting goosebumps as I read this sentence in 2017, because that is essentially what we do with our stocks at Victori. Except that instead of using old newspapers, we pour through old conference transcripts, quarter by quarter.
Over the years since starting Victori, my appreciation for history has only grown, while my efforts to benefit from it as an investor have only expanded. As with higher math, the more one learns about a subject matter, the easier it becomes to make connections to other fields. History is about a lot more that someone’s interpretation of what happened in the past. As James Banner claims in his fantastic book, The Ever Changing Past (2021), “all historians are revisionists.” From explaining the causes of wars and greatness of leaders, to rationalizing tragedies and justifying social injustices, historians always have a purpose for writing, and re-writing their histories. Margaret MacMillan, who is one of my favorite historians, wrote another fantastic book on this very subject, called Dangerous Games: The Uses and Abuses of History (2008), where she warns that “the past can be used for almost anything you want to do in the present.” MacMillan claims that “it is wiser to think of history not as a pile of dead leaves or a collection of dusty artifacts, but as a pool, sometimes benign, often sulfurous, that lies under the present, silently shaping our institutions, our ways of thought, our likes and dislikes.”
While I liked Banner’s and MacMillan’s portrayals of history, my own analogy is that history, like companies, is a living organism. And indeed, every time I check up on it, I find that it has changed and evolved. Especially for the companies that work for us, keeping an eye on this creature as it grows is a never-ending task. And I know of no better way of keeping the beast in check, but to join it in the past, and live with it through the present. “It takes a long time to bring the past up to the present,” Franklin D. Roosevelt observed in 1938, but I have learned from experience that it is time well spent.