What Future Business Investors can Learn from Past Trends

The future of business is something every investor wants to be a part of; however, it is difficult to predict what it will look like. This is why investors should learn from the past to see how trends have shaped the business industry today.

This does not mean that the future would be a replay of the past. But investors can learn a great deal from foregoing patterns and make more strategic decisions for the future.

For example, what happens when markets plunge, and how should you react in such situations? You might find yourself in a bind. That's because there are many behavioral patterns that become unhealthy during crisis times.

As a result: buying on expectations rather than reality, selling on short-term emotions rather than long-term investments, delay in your withdrawals, resistance to change, and deterioration of values are all very dangerous.

In such conditions, we experience unfounded market optimism that lacks a real foundation of fundamental valuation but instead rests on psychological factors, blind optimism, and tunnel vision.

Globalization and the Future of Investment

According to consensus in the 21st century, with their passive long-term strategy, buy-and-hold investors, in the long run, tend to outperform active investors who focus on market timing.

However, insights from Global Financial Data show that this is not necessarily the case. For one, that consensus is derived from biased research, focused on the United State’s stock market only.

Apparently, since the 1950s, the United States has experienced a sustained momentum of economic growth due to political instability, despite the occasional setbacks. However, that has not been the case for most other countries that have continued to be plagued with a tense political and economic atmosphere.

In such situations, investing passively for the long term (buy and hold) is sure to deplete the value of one’s financial assets (stock returns, dividends, bonds, and all), especially with rising inflation.

Nevertheless, the 21st century is an era of globalization, and you cannot afford to be satisfied with a limited worldview. Taking a global approach to building your portfolio protects you against unnecessary volatility and protects your asset classes in the long run.

Growth vs Value Investing

Even amidst the current stability of developed markets, as Edward Morris claims, “It would be foolhardy to suggest that passive investing will continue unimpeded on its current trajectory.”

If you want to protect your assets and seize opportunities during major crises, you need to consider the consequences. Like historians, you often work with insufficient or bad data.  You have to extrapolate.  Remember, trend is not fate.

According to research by John Dowdee, between 2000 and 2013, the risk-adjusted returns for value stocks were higher than that of growth stocks at various levels of capitalization. And while the former was more volatile, growth stocks performed better at shorter terms.

As investors know, there are so many factors that determine how high or low the returns would be. If anything, the history of investing has consistently shown us that markets are too volatile for investors to hold on to changing rules of thumb. Investing is a strategic activity and you must always clarify your purposes, objectives, and expectations before taking the plunge.

Crisis, Business Resilience, and Investment Decisions

Periods of crisis strengthen an economy’s resilience and provide opportunities for innovation and surging business formation. In fact, some of the world’s biggest innovations today emerged out of the ashes of a preceding catastrophe.

For instance, successful companies such as WhatsApp, Uber, Venmo, Slack, Square, etc. are innovations out of the 2008 global recession. Other companies that were started during various economic catastrophes in history include Netflix (1997), Microsoft (1975), General Electric (1876), and so on.

Therefore, it is true that economic downturns provide significant opportunities to thrive; hence, these high-risk-high-reward situations can be transformative for investors. Of course, this does not mean that every investment during a crisis pays off eventually.

There has to be an enabling environment for sustainable growth if economic activities must flourish afterward. In addition, a company’s strategies before, during, and after a crisis are very telling of how spectacular its recovery would be. The FAMGA giants realize this and they have been investing even more heavily as the pandemic reached its high.

Volatility and Uncertainty

So, how exactly do you manage market uncertainty?

Volatility in a portfolio may prevent successful investment outcomes. As a matter of fact, the more volatility in your investment portfolio you have, the more difficult it is to achieve positive results. But by reducing your expected range of outcomes, you lower your anxiety and encourage more constructive and successful investment behavior.

The goal of diversification is to reduce your exposure to stock market risk by getting absorbed into a smaller set of assets. By keeping your financial footprint small, it becomes easier to manage your capital effectively over time. You can also focus on assets that matter more for your overall portfolio performance.

When markets are volatile, diversification can reduce destabilizing effects and increase returns. Sustaining long-term success requires disciplined and continuous effort. For this reason, investors must learn to identify their level of risk tolerance which enables them to direct their time, energy, and capital into a profitable activity.

Conclusion

When times are hard and there are no guarantees, having the right instincts is critical. Just as people make decisions in life by weighing up the pros and cons of various options, investors should think about their options through the lens of opportunity costs.

It is worrying - and somewhat disconcerting - to think about the near-term prospects for the global economy. But history shows that these problems tend to get smoothed out, even if we find ourselves in a situation where things look suddenly unworkable.

As a Financial Times author puts it, “trend is not destiny”. Yes, we are in the midst of a technological revolution, but the truth is that human history has always been a journey — a journey toward progress and prosperity, always driven by those willing to explore new frontiers and discover what lies ahead. This is what history has taught us.