The Business Times, Wednesday 23 November, 2005

By JOSEPH CHONG

I HAVE always been fascinated by human history. As a 12-year-old, I found this section of the National Library my favourite. It was always relatively well stocked as it was presumably a very unpopular topic. Recently, I purchased online Winston Churchill's The Second World War, which helped him win a Nobel Prize. The six volumes contain a total of some 5,000 pages. Again, I have been lucky. Through a shipping muddle by the vendor, I ended up with a duplicate set of the six volumes - a case of history repeating itself?

Churchill's detailed work is refreshingly insightful. It is quite clear that global politics and decision making is still dominated by the apparent lessons derived from the unnecessary mistakes of 1933-46. Indeed, Churchill calls the Second World War the 'Unnecessary War''. One of the key lessons from the mistakes of that period is that one should never trust nor appease evil dictatorships, regimes which do not respect international law and treaties; and that democracy is central to world peace and progress as democratic societies do not go to war to settle their differences (historic foes but democratic Britain and France were allied during the 20th century).

ISeven deadly sins

Understanding this makes the US 'freedom'' campaign in Iraq and the Middle East appear more rational and less as naive evangelism - making sure that history does not repeat itself.

Although historical facts do not repeat themselves, there is a clear tendency for historical patterns to reassert themselves. I believe that this is driven by the nature of man and his vices - the seven deadly sins. Does this historical repetition, however, apply to investing, given that investors are supposed to be well-informed and disciplined?

Psychologically, the capital markets reward those investors who apologise quickly when they make mistakes (cutting losses quickly) and those that delay gratification (letting winners run). This is contrary to the human tendency to be proud, greedy and fearful.

Most capital market charts demonstrate historical pattern repetition - not exactly the same, but recognisable as such. Some of the charts here demonstrate this. Indeed, a whole sub-field of investing - technical analysis - has been built around this.

Chart 2 shows the pattern of corporate margins over 25 years as measured as a percentage of GDP. Again, an apparent pattern is the cyclical up-and-down movement repeating itself, but this time with the overall trend being up. Could we then assume that margins would always be going up?

I believe historical pattern repetition is exploitable but with certain caveats. As they say on Wall Street, 'a trend is your friend'; but friends can turn against you.

The first caveat is the need to win the psychological battle. Technical analysts will tell you that historical patterns reassert themselves because of investor emotion. As the capital markets reward those investors who repent quickly when they err and those who defer gratification, one needs to control the human tendency to be proud, greedy and fearful. One needs to be a psychological contrarian.

Modifiers

The second caveat is to study the facts to see what the modifiers are. A good example is the recent bond market behaviour which has confounded even US Federal Reserve chairman Alan Greenspan, who called it a 'conundrum'. Bond yields (see Chart 1) have not been rising as anticipated although headline inflation numbers and Fed interest rates have gone higher. The modifiers are India and China; and companies have been so profitable (see Chart 2) that not much has been borrowed to fund capital expenditures. One needs to do one's research homework - there is no shortcut.

The third caveat is the danger of no prior historical pattern. If no prior analogy exists, it does not necessarily mean that there is no danger. The Asian economic crisis and crash of 1997-98 is a good example of this. No one envisaged or predicted the depth of the collapse as no prior disaster of that magnitude had occurred before. The cure to this is the old saw: diversification.

The author is CEO of financial adviser New Independent. He welcomes feedback at josephchong@ni.com.sg This article is for information only. Readers should seek independent advice before making any investment decisions.