I’ve noticed a recurring pattern in how we interpret events—whether it’s the weather, the economy, or even cultural shifts. We often call the present moment “unprecedented,” as if the world has never faced similar circumstances before. This inclination is what I refer to as “Focal Bias.”
Essentially, once something becomes important to us personally, we begin seeing it through the lens of immediacy and novelty, which can distort our view of the bigger picture.
Take the weather. Most of us begin paying closer attention to forecasts when they directly impact our plans—like a wedding, a road trip, or a beach vacation. Suddenly, a hot summer or a fierce storm feels like a once-in-a-lifetime event. But if you look at historical records, you’ll find that extreme conditions have occurred many times before. What’s changed isn’t necessarily the weather’s intensity; it’s our level of personal involvement.
I’ve observed the same dynamic in financial markets. A new generation of investors or homeowners enters the scene, experiences a volatile market for the first time, and declares it completely unprecedented. It is hard to see the forest through the trees.
When your own money, family, or future is on the line, every fluctuation takes on a whole new level of significance. But if you step back and study past cycles, you’ll realize that markets have always gone through ebbs and flows.
The antidote, I’ve found, is historical perspective. Old news articles, financial memos, or even diaries from people who navigated similar waters in the past can be a guide to reference. Seeing their reactions—how panicked or hopeful they were—helps calibrate our own emotions. If they called their time the “most uncertain” or “most dramatic” period on record, and yet life moved on, it reminds me that we too can find a path forward, and even thrive. Even the numbers can provide skewed perspective if we do not dig deeper into their relationship to their surrounding. Inflation, relative percentages, and the skewing of ratios can all provide a jarring representation if not further analyzed against the times in which they were collected.
Another principle important to build into your approach is the emphasis of the macro view of systems. We tend to experience things on the micro level. Day to day, with a ground level perspective. Taking a step back, viewing the bigger picture, gives us a better understanding of how these interconnected mechanisms effect each other. Macro statistics are a solid tool, but their relationship to the current world vs. past worlds must be considered when viewing them.
For example, when analyzing a stock, price to earnings ratio is a tool that can help provide a view of the companies value. This ratio is one that can hold well across time, as both sides of the ratio "should be" equally effected by inflation and market gyrations. Even so, it is important to consider whether the buy side of whatever the company sells for earnings has been skewed by a current supply / demand condition or more inflation in a certain sector due to a historical event, like say a ramping in oil prices due to a conflict in the oil provider region that would increase sales and earnings on a product that requires oil for production or transportation for delivery. This may effect earnings before it effects price, providing a skewed ratio (and possibly an opportunity to take advantage of that ratio through a buy). If historically, that stock lives at a PE of 20 and its currently trading at 15 due to a larger denominator (earnings per share), we can use that historical perspective to determine an opportunity to buy in anticipation for the long life of the market as a weighing machine to balance that ratio out. These kinds of perspectives can be lost if we stay at the ground level, assuming the now is special....
--- Remember the old adage from Sir John Templeton: “the four most dangerous words in investing are: ‘this time it’s different.’” ---
We humans tend to think our problems, our storms, or our crashes are uniquely severe because we’re personally invested. While it’s natural to feel that way—there’s a reason we become so focused— and it can skew our judgment...
Strike a balance: be attentive and proactive about present-day challenges, but also remember that countless generations before us have weathered “unprecedented” times. Look for patterns in history, as Mark Twain said, "History doesn't repeat itself, but it often does rhyme.
I often think of the wisdom the sport of surfing almost forces you to gain. When I was young, I would get my wetsuit on as fast as possible and charge out into the water with my board in hand. Headfirst, I'd crash into whatever set happened to be pumping at that moment. No regard for the rhythms of the ocean. As this backfired on me MANY times in the early years, in a physically painful way, I learned to take a different approach. I would drive up to the beach and park. Sit for 10-20 minutes and watch the waves. I learned to count the time in between sets, to better understand the cycles of the ocean on that day. I observed the water and possible entry paths to the best position in the ocean to catch waves, and when those paths opened in the wave cycles. I found myself having to use little to no effort to get out to my spot, whereas in the past I could get caught in a set, pounded by waves relentlessly, and burn all my energy getting out to my spot, leaving me nothing left in the tank when it was time to get on a wave. Even once out at my spot, I had already preplanned land markers to judge where I was and how the water was shifting.
This macro approach to strategy saved me time, energy, and kept my risks much lower than my previous approach.
....By consciously seeking out historical context, we gain a steadier, more informed perspective on where we are, which in turn leads to better decisions. And in my book, better decisions are always the ultimate goal.
-Gene James McAward, 2nd Order Thinking
Kommentare