“That which has been is that which will be, And that which has been done is that which will be done. So there is nothing new under the sun.” - Ecclesiastes 1:9
Many of you may not know this but I am a musician; I play the piano. In fact, back in high school and college, I was in a church band. So music has always been a passion of mine. One thing I realized while playing the piano is how understanding patterns can help with learning scales and music.
Here is a quick example. If you want to learn how to play a major scale, the progression from the first key to the last key always goes like this: whole step, whole step, half step, whole step, whole step, whole step, half step. No matter where you start on the piano, if you follow this pattern, you will play a major scale. Knowing this pattern is much easier to remember than trying to remember the major scales for 12 keys.
Similar to music, recognizing patterns is helpful with financial planning and investing. Much of what we see taking place year to year has already occured in the past. The only difference is that how it “looks” isn’t the same. Back to my music analogy, a historical financial event may have taken place in the key of “C” back in the 1980’s, but now it appears in the key of “A”. If you are focused on the specific “notes” of history, you will overlook the fact that the scale pattern is the same.
To be wise in stewarding your finances and investments means being able to know the patterns of history. As Solomon teaches us, there is nothing new under the sun. What we see as novel today really isn’t novel. It’s the same scale repackaged in a new key. For example: right now the S&P 500 is trading at fresh highs. Due to the immense success of the mega corporations, it has also become very top heavy. Right now, the top ten companies make up nearly 36% of the size of the S&P 5001. To put it another way, only 2% of the companies in the S&P 500 make up over a third of the size of the entire index! Has this happened before? Yes, it has. Back in 1999, the top ten companies in the S&P 500 accounted for a fifth (21% precisely) of the overall index size2. Here is another example: over the last 5 years (7/1/2019 – 7/1/2024) Nvidia stock is up 3003%. That’s unheard of growth! Or is it? From 4/1/1995 – 4/1/2000, a five-year period, Cisco was up 3029%. That’s an almost identical growth pattern to Nvidia. What happened the following three years? We fell into a recession in what was known as the dot-com bubble burst. During that period, Cisco lost over 70% of its stock value and the S&P 500 lost 29% of its value. At the height of the dot-com bubble, people were throwing away fundamental investment principles for the allure of quick gains. People were investing in companies they knew little about because the prior year performance was phenomenal and they didn’t want to miss the boat. Unfortunately for many of those people, rather than make a lot of money, they lost a lot of money.
Is what happened in 1999 exactly the same as what is happening right now? Of course not. However, we ought to be able to recognize the pattern in order to not fall into the same trap that many people fell into back then.
“But JP, this time is different.” I hear this a lot. Whenever some new financial fad comes out, we hear the same refrain, “It’s different.” Whenever people say that “this time it’s different” it almost always is not. The euphoria and zeitgeist that makes people think that this new investment fad is different from previous fads is the same zeitgeist that fooled people in prior fads. This is why understanding patterns become crucial.
In financial stewardship, oftentimes the person who is able to avoid falling for the zeitgeist ends up being the most successful. I’ve learned in my tenure as a financial planner that what it takes to avoid the trap is similar to what it takes to be a good musician; understanding the patterns rather than gettting lost in the specifics. If you can do that, you’ll be able to apply it in every scenario. More importantly, you can turn your current finances into your magnum opus.
1. https://www.slickcharts.com/sp500
2. https://www.bespokepremium.com/interactive/posts/think-big-blog/view-from-the-top-1999-vs-now#:~:text=Whereas%20currently%20there%20are%20only,%2C%20and%20Exxon%E2%80%94in%201999.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
Past performance is not an indication or guarantee of future results.