Investors tend to look at history in a one-sided way. They focus on a specific time frame in a selected geographic area. This generally means only the winners in history get studied properly. The lessons supposedly learned are used to predict the future.  History is seen as deterministic process with a certain outcome. If you study a similar looking event in the past you can use this to produce better forecasts and generate excess returns.

Investors generally look at American, and to a lesser extent Western European, economic history.  Over the last 100 year the stock markets in these areas moved in a healthy upward trend. Sure there were crashes but the market always recovered. The market taught itself that after a crash it was a good time to buy, because the market always recovered. On average an investor could get a yearly return of around 8%.

This might indeed be true but it is probably not the lesson that should have been learned from the past. To illustrate what I'm trying to say I will use two historic events that had or could have had a major impact on  the capitalist free world. The first one is very well known event but is often analysed in a very deterministic way.

The second world war influenced every nation in the world. The outbreak of this war is seen by many as inevitable. Nazi Germany and the other Axis powers were bound to start a war sooner or latter. At the same time the Axis powers were destined to lose this war against the combined economic weight of the Allies. The inevitability of war I will discuss later. On the outcome it is easy to think of many scenarios that might have let to an axis victory of some sort. A defeatist British government, a fully neutral USA and/or the development of the atomic bomb by the Axis for instance.

The second lesser well known fact is the Polish-Soviet war of 1919-21. The war was fought in the aftermath of the first World War. This war might have been more an accident then a planned affair but is significant nonetheless.  In an unexpected victory the Poles stopped the Soviets in the battle of Warsaw. Would this not have been the case Soviet leaders like Stalin, Trostky and Lenin might have thought it a good idea to export the Revolution further westward into a ruined Germany and eventually the Bourgeois Western Democracies.

Luckily this didn't happen and the lost war led to a more cautious stand from Stalin, a leader just as murderous as Hitler. Unexpected early setbacks could have lead to a more careful Nazi Germany and the avoidance of the Second World War as well.History is full of dangerous dictators with the potential to engulf the world in flames. It is however not easy to predict who will cause Armageddon in the end.  Hiler did it while Stalin became cautious.

We must judge economic history in the same way. Yes, the USA were the economic success story of the 20th century but could an investor predict this in 1900? Germany was rapidly becoming an Economic powerhouse,  Russia was developing with a massive railway expansion and the Argentinian GDP growing by 8% per year.  A global investor would have diversified his portfolio with stocks and bonds  from these countries.

Through revolutions, war and economic mismanagement an investor would have lost a small fortune by investing in one of more of the economic losers. The yearly return of 8% is therefore likely to be overstated because it is based on the assumption that the investor was only active in the successful American stock market and didn't invest im some of the promising losser

Will the American economy decline like the British economy did after the first World War?. Which emerging county will be hit by economic mismanagement, revolution and/or war?  We will know that there will be losers and winners. Some countries are more likely to be a winner then others but if they are unexpectedly a loser wouldn't it hurt so much harder? The investor might have the illusion that he can market time himself out of trouble. But just as the CIA failed to predict the fall of the Berlin wall, predicting is always difficult especially if it concerns the future.