Judging history - Mawer

Last week, I stumbled upon the “radical thoughts” podcast by Dan Carlin. Carlin is the enigmatic creator behind Hardcore History, a series of popular and deeply engrossing podcasts that consider various historical events and figures.

In Radical Thoughts, Carlin discusses the Red Scares, two periods in US history, one during the 1920s and one after World War II, when fears about the spread of communist ideas gripped the nation and authorities responded with a brutal crushing of civil liberties. He examines how disruptive ideas can spread in society and how authorities have historically responded when they do. He draws comparisons to the French and Russian revolutions, two periods of major social upheaval that were presaged by the very spreading of ideas that the US leaders so feared during the red scares (but which ultimately never manifested).

One particular insight of Carlin’s is the imperfect way in which history recalls these moments. Often, we look back at times of heightened public hubris or panic with reproach. But as Carlin notes, while the boogeymen of past generations often look overblown and over-hyped in light of the way things turn out, this is because we forget how potent the emotions were at the time. Investors must be careful not to fall into this same trap. It is easy to look back on events and claim that we would’ve known better or done things differently. But more often than not, we’re just kidding ourselves.

As Carlin reminds us, we shouldn’t underestimate how much emotion and uncertainty can distort decision making. “You can’t understand the period of the second Red Scare,” he notes, “unless you can get in touch with the fear that those people felt. It is an integral part in the motivations. It’s one of the things that makes history so hard to convert into a science - because people and emotions play such a role in why things unfold the way they do.” Carlin could just as easily be talking about a financial crisis.

It can be very difficult during an event to know whether a particular emotion is appropriate. Carlin makes this case by asking the audience to consider two cave men societies:

“[Let’s say that] Cave Man society #1 fears Cave Man Society #2 may want to attack it. So it devotes scarce resources to building a wall that wards off the attack. In this case, fear is an incredibly useful emotion for that society to have… as long as Cave Man society #2 really was going to attack it.

If that wasn’t the case, then the fear wasn’t rational but irrational. Instead of important resources used wisely for prudent purposes, those vital materials were wasted to foster protection against a threat that was never there.

How can you tell the difference in advance though?”

This is a key point. Just because something seems obvious after the fact, doesn’t mean that you could have known what was to come – nor does it mean that you will be any better at predicting anything in the moment the next time around!

Consider some of the fearmongering around communism propagated by J Edgar Hoover and Senator McCarthy during the Red Scare. Their fears seem totally irrational in current light. We judge these actors harshly, in part, because some of them behaved in a truly awful manner during this era, but also because the red scares turned out to be red herrings. But we forget that the potential threat of communism was an unknown back then. The level of concern that Hoover displayed may seem irrational now, but at the time no one really knew how communism might spread and what its impact might be. What if things had gone the way of the French Revolution? What if the ideas brewing took hold in the populace in the same way that they did in France in 1790, causing a comparable level of violence, unrest and socioeconomic upheaval?  In the 1950s, no one knew for sure how things would play out. Looking back, the men and women who feared communism look foolish but they appear this way because history turned out one way versus another.

From an investment perspective, the lesson is to be careful about judging history. As BREXIT highlighted this year, rational thought and economic interest do not always prevail. Sometimes we have manias and sometimes we have panics. Conversely, sometimes rational thinking does triumph. But unfortunately, a lot of the time we don’t know how things will unfold.

There is a lot we can learn from history.  One of the things we must remember when we look back at the past that is we are coming at it from an imperfect vantage point. Just because things seem “obvious” in retrospect does not mean they were clear then. Carlin illustrates that often they are not.