A Practical History of Financial Markets | Russell Napier

0:05Demetri Kofinas:Russell Napier, welcome back to Hidden Forces. Demetri, it's good to be back and we're both surrounded by books. Yes, that's right. But your setup is way cooler. You've got four giant stacks of books in front of your shelves because it just shows you that it's overflowing. You're overflowing with knowledge, Russell, which is why we come to you. Overflowing with books is not necessarily the same thing as you know. I'm going to need a bigger boat if I can take that line from Jaws. Right. Right. That's right. So this is actually not an episode. I said, welcome back to Hidden Forces. It's not exactly an episode.

0:39Demetri Kofinas:And it's in fact the first time that I'm doing anything like this. And this is strictly a promotion of your course, A Practical History of Financial Markets, which I should note is listed under the title Advanced Valuation in Financial Markets on the Edinburgh University website. So, when you go to libraryofmistakes.com to sign up for the practical history of financial markets, you'll be redirected to the university's website to sign up for the course under a different name. So, don't let that dissuade you or confuse you. You're in the right place. So, back to what I was saying, Russell, we've promoted guests' work in the past.

1:13Demetri Kofinas:In small instances, we've run a previous promotion for you for this specific course that we're going to discuss today. And I've run similar discounts for the American Affairs Journal. and I cannot recall another instance where I've actually done this, where we've run an explicit promotion for someone else. And on that note, it's important to state up front that I don't get any kind of financial benefit or take any kind of profit from this course or from any of the sales of this course. All of those profits go to your nonprofit that supports the library of mistakes and makes donations and conducts other charitable work in the field of financial education.

1:51Demetri Kofinas:However, I have and continue to profit from your mentorship, Russell, and from all of the conversations that we've had both on and off the air over the years, and from the books you've written and your writings in the Solid Ground newsletter, which we're not here to promote today, but I have told many people this, that if I had to cancel all of my subscriptions except one, that's the one I would hold onto for dear life. Truly, it's been an incredible letter to get in my inbox. And I've been an enormous beneficiary of your thinking and of your writing over the years and our relationship, Russell.

2:27Demetri Kofinas:And it's had an outsized impact on how I've structured my own portfolio. So I've been an enormous beneficiary. And I'm grateful to you as are so many of our members and our audience members as well, which is why it's an honor to get to promote this course to them and to offer such a generous discount to our premium subscribers and genius members who want to take advantage of it. So let's just talk a little bit about what people can expect to get out of this course, because I've taken it. I took it around this time last year ahead of a similar promotion that we ran. Is this the same course that I've taken and that we promoted last year, or has anything changed in that time?

3:07Well, first of all, thank you for that introduction. It's quite something to live up to. This course evolves because it's taught by practitioners. So if you took this course, it would be virtually the same course, but it would have moved on because that's what practitioners do and what academics don't. So the course has been running since 2004. And actually, without ever having a revolution, it's actually significantly changed since 2004 because it has simply evolved as time has gone by. So it is the same course, yes, with slightly evolution and a little bit from me on the end, but the future, what we discovered a long time ago, and most of our students have been financial market practitioners, is it's virtually, and this I'm talking about the real live version now, it's virtually impossible to put practitioners in a room for two days and not talk about the future.

3:56So we finally capitulated and we also talk about the future as well. So that obviously has to be updated and changes.

4:03Demetri Kofinas:Yeah, I bet it's quite a treat getting to do these courses in person. As you know, a few members of our genius community have attended the in-person course in the past, and I know of at least one who will be attending in a few weeks. So if you haven't met him already at one of our previous dinners, I'm sure he'll make a point to introduce himself. And I should mention that you've been very generous in attending our genius events in the past, Russell. You're going to be at our next London dinner in 2026, and you're also joining me for a live Q &A in the genius community next month. This is a good opportunity to give out the discount code so people have it top of mind, and I'll make a point to mention it a few times during this conversation.

4:41Demetri Kofinas:Hidden Forces premium subscribers are eligible for a very generous 50 % discount when signing up using the email tied to their account, along with the code HF50 when signing up at libraryofmistakes.com slash course, or you can just go to libraryofmistakes.com and click take a course, and that will take you to the same landing page. Genius members are eligible for a 75 % discount and that's been posted in the open forum on our circle.so platform. So Russell, the course is taught by professionals who themselves are expert tutors, but this course isn't just for professionals, is it? Would you say that pretty much anyone could benefit from taking it?

5:23Yeah, it's not for professionals. This course runs in three different formats. So it runs at the Edinburgh Business School for students who are mainly post-grads, but actually we get a few undergrads in as well. So obviously they're not professionals. It runs in the online versions taken across the world. And to be frank, I don't know how many of those students are professionals and how many aren't. But certainly when we run the in-person version, which is the one that's coming up in London in November, there is a different, there is a professionals, and then there are other people there. And they are people with a desire to learn and a base degree of understanding about financial markets.

5:56And usually because they have skin in the game, Almost always, it's because they have skin in the game. They have investments. They are responsible for their own money. And being part of responsible, no doubt why they subscribe to Hidden Forces as well, is to try and get up that learning curve. Everybody feels responsible, if not to themselves, to their families for what they're doing with their money. So increasingly, actually, over the years, it's more and more of those people coming to the course. And I suspect probably taking the online version.

6:24Demetri Kofinas:Yeah, I know. Absolutely. I mean, that's exactly where I've come from. whether it's the course, or like I said, reading your other work or your newsletters or your fantastic book on the Asian financial crisis, which again, I'm not here to promote those things, but there's so many ways in which I think I and our audience have benefited from what you've put out. So what can people expect to learn from this course? The course is mainly focused on equities, but it's not exclusively on equities. So we'll be looking at a lot of long run data that you really won't come across anywhere else. I mean, some of our valuation data for the US stock market starts in 1801.

6:58And this data is available. You can go and find it. But there's not many people who teach it and say it has a relevance. But it does have a relevance. A history of valuation is where we begin this course. And we look at all of the available data on valuation. So as I said, we can start at 1801, but we've got pretty good earnings data for the S &P 500 from 1881. Obviously, we have bond yields for America going back to that same period and for other countries going back even further. So you effectively three asset classes here. You've got equities, bonds, and cash, of course, as well. And the role of the course is to give you some insights into what conditions you'll be making real returns in those three key asset classes.

7:40There's a little bit of gold in there. We cover a little bit of gold and a little bit of property, but effectively it's about those three liquid asset classes. And I would say it's not a trading course. I think, you know, you've been on the course. We're not really trying to help anybody trade financial instruments here. It's not one of those courses. There's plenty of those courses around. It has got a longer term time horizon. And that's the focus, I think, which is a realistic time horizon for most people who will be coming their principals. You know, it's really interesting, I think, when we run this course, because we have agents in the room, they are the professionals, and then we have principals, the people who own the money.

8:12It's really interesting to see the two of them together and how they interact. But I think most of the principals on the whole have a longer term time horizon, even than the agents that are in that room. They're looking about intergenerational wealth here as well. So it's a longer term time horizon. It's on those key asset classes. We use a lot. I mean, you can tell from what I've said already, we use a lot of American financial history, financial data, simply because it goes back a long way. But it's not exclusively about the American stock market. Actually, we also use the Dimson, Marsh, and Staunton database, which is for over 20 different countries for the returns for those three asset classes.

8:49In that case, starting in 1900. So we're looking through all of this valuation data to see if we can find a valuation that is better than others. And when we say better, we mean it telling the future. And then of course, the forces that would make that valuation mean revert.

9:04Demetri Kofinas:I should also mention, this is not a short course. I don't remember exactly how many hours it was, but can you tell us? It was quite a long course. It has five different modules as well. Yeah. If you come in person, you'll be there 8 a.m. to 8 p.m. for two days, and then 9 a.m. to 1 p.m. on the final half day. And if you take the online version, it's about 14 hours of material. We're trying to cover a long period of history and the building blocks and the mechanisms, and that's not a quick thing to do. I should probably say we've got lots of simple answers to difficult questions. I don't think we have simple answers to difficult questions.

9:39I often say about this course is what it's really about is learning how to ask the right questions. And that is crucial, in my opinion, after 36 years now of doing this. What should it profit a man if you get all the right answers to all the wrong questions? So I hope you leave with getting the right questions. Even that takes a long time to get through. And I wouldn't say we don't have any of the right answers. But the beauty of investment is you don't need the right answers. You just need better answers than the other people. So we give you the right questions and hopefully it leads you to getting better answers than other people.

10:08Demetri Kofinas:So how does your approach or the approach that you take of this course to stock valuations or bond valuations compare to what people might learn in a rudimentary college course on the subject or in some competing course? Well, it's really radically different. Most courses that I'm aware of anyway are based on a theory of how securities should be priced. And then they work, I mean, discounted cash flow would be the most obvious one. We don't have any of that. We work on the basis of how they have been valued as opposed to the theory of how they should be valued and then try to find in the history of the actual valuations, some guide as to what conditions or what changes in conditions change valuations.

10:48So the course actually has two titles. I'll explain that because it's rather ironic why it has two titles. So it's launched 2004 as a practical history of financial markets. And that was to differentiate it from these other courses, which really wouldn't have any financial history. I mean, we teach what happened to security prices during the Great Depression, during the Weimar Republic. We look a little bit at post-World War II. Japan actually is a very good indicator on the impact of monetary policy. You just don't get that on other courses. However, the word history on any course has always been seen as something that means it's not going to sell.

11:21So the actual online version at the behest of the university, and when we run it at the university, it's called Advanced Valuation of Financial Markets. And that's that word history again. But, and I think this is the really fascinating thing. I think it was risky to put the word history in a course all those years ago, because people thought, well, all available information is in the price. I don't want to read history. It's all academic. But in the world we live in today, Dimitri, I think the penny is dropping. Reality is dawning. That history and these huge geopolitical changes, didn't even just one, domestic political changes as well.

11:56These things are really, really important. And frankly, other courses simply don't do that in the context of financial markets, in the context of securities markets. I'm sure you can take a course on the history of the Great Depression, but we are very focused on how to make money in these different environments. And that's, I think, what sets us apart. And I would never have guessed when we launched in 2004, we'd still be the only course doing it because it seems to me such an obvious thing to be teaching.

12:21Demetri Kofinas:You took the words out of my mouth because that is my favorite section of the course, the part where you examine how financial markets respond to different monetary and inflationary regimes and what asset classes outperform or underperform, because you also have a really fantastic section on behavioral psychology. But again, you can find things elsewhere that speak to some of those topics. I have not come across anything that teaches you how to view investing in the context of different inflationary regimes, and that couldn't be more relevant. So let's just talk about that for a moment. What can people expect to learn here in terms of what, from an investment point of view, in terms of what works best during periods of inflation, deflation, or disinflation?

13:00Yeah. So we have a section in that, and it's taught by Peter Warbird, who has got even more experience than I have. There's some people who've been going even longer than me. It's hard to believe, but anyway, Peter has been doing that. And that piece is called Investing in Periods of Inflation, Disinflation, and Deflation. And one slight aside here, when we put this course together, we had asked lots of investment managers who had 30 years experience on PLUS, what they knew today that they wish they'd known. And they said, well, we wish we knew about this. And so I announced to the gathered masses that we were going to teach this.

13:33And there was a great laughing from the back of the room from some academic monetary historians who'd been along. And they said, remember, this is 2002. And they said, well, you can't teach deflation because you cannot have deflation in a fiat money system. Well, how wrong they were. And obviously, we found it relatively easy to get out of the deflation. But you will learn about not just Ohio market and which asset classes behave well in deflation, but also which sectors. And then we take that for inflation and disinflation as well. So we've got some really great sectoral data on performances really going back into the 1920s for the American market, more from the late 1960s for the global markets in terms of was it banks, Was it chemicals?

14:16Was it retail? Was it pharmaceuticals? Was it tobacco? So for each of the differing conditions, there are different sectors that did well or badly. And of course, the transition between sectors is pretty vital as well, which I cover in my first book. And also, we cover in my course as well, this transition from regimes. When do you know? Because that's important in terms of moving from this one sector to the other. But once again, not trading advice, investment advice for the long term when the regime changes. So I think one of the more exciting bits actually is the sector work and which sectors perform in different bits of this rather than just total asset classes, bond, equity, and cash.

14:56Demetri Kofinas:So there are five different sections in the course. One of them deals specifically with financial valuations, as we discussed. Another deals with behavioral psychology. Another deals with the effect of monetary policy on asset markets, inflation, disinflation, deflation. I think those two are actually separate modules in the course. And I might've missed one. Maybe I didn't, or maybe it's one explicitly on - Well, I think what you miss is just me winding up at the end, which is a humorous story in itself. Because when I pitched this to the Edinburgh Business School, they were quite enamored of the other four units and then said, and who's going to write the unifying theory?

15:32Well, I think if we really had a sort of coherent unifying theory, you'd probably get the Nobel Prize for that, given that we are so different. So I said, I'll just do that based on that. Basically, I run through a history of the mean reversion of a key equity valuation known as the Shiller PE. And that is me at the end doing that and also making some judgments about the future.

15:54Demetri Kofinas:So if someone is familiar with your work, if they've read your books, they're reading newsletters, What would this course add to their understanding or to their approach to investing? How does it add to and complement what you already do and what you've already done? It's funny. I was in Toronto last night having that very discussion with someone. And the most important thing, I think, in the markets is to have an idea how the thing works. I mean, that might sound just basic, but so often we spend so much time looking at the screen. So often we spend so much time looking at what's happening in the near term and also what dominates the headlines.

16:32This is crucial, as I discovered in the first book, what dominates the headlines may not actually be the news. So when I write for a living, for the solid ground or in my books, I'm writing about that near term, but it's in the context of how the thing works. Now, as you already said, to describe how the thing works, how we think it works, takes two and a half days. So I can't put that in every research report. So every research report is written in the context of a belief, or my belief, that that is how the system works. And it is really, I wouldn't say radically different. It's not radically different of your story, but certainly it's radically different from economic theory, finance theory, modern portfolio theory.

17:10So that's what the course is. It's working out a system, and you may agree or disagree bits with it, but it will add to your understanding of how the mechanism works. And then, of course, day to day, what we are in the trenches trying to fight. But you need to have that strategic overview of how this works. And that's why the course was put together. And of course, I put it together for completely the wrong reason. I didn't want to put together a course. I wanted to take it. But there was nobody offering it. So we built this course. And I do meet people all the time, professionals and non-professionals, who say, I took your course and it changed my career.

17:44And when they say that, I have to assume it changed their career for the better, or they probably wouldn't have mentioned it.

17:49Demetri Kofinas:Yeah. No, I can't say enough. But I don't feel like I need to say much, Russell, because anyone who knows who you are will probably be running to take this course. As I mentioned, Hidden Forces Premium Subscribers get 50 % off, which is an incredible, incredible discount to the course. This is a limited time offer. You have to subscribe using your Hidden Forces Premium Subscription email, the same email you use to sign up to the premium feed, and the code HF50 at libraryofmistakes.com slash course in order to get the discount. Genius members get a 75 % discount of the course. This is just for the online course.

18:26Demetri Kofinas:I can't imagine how awesome the in-person course is as well. Again, we're not promoting that here, but I'm sure that if you have an opportunity to go to Edinburgh and take the course in person. You also mentioned this, but I should state it as well. This is in conjunction with Edinburgh University. So when they take the course in person, that's at the Library of Mistakes or that's at Edinburgh University? Yeah, it doesn't get any easier to describe this, does it? So let me give you a little quirk of history. The Edinburgh Business School is not at Edinburgh University. That's who'd have thunk it, but it's at a sister university or another university, Edinburgh, called Harriet Watt University, and they got the name first.

19:00So our partner in that is Edinburgh, is Harriet Watt University. And that is that we run a version solely for their students, which I think is really great because it challenges all of us to communicate this to 22, 23 year olds. Now there's the two and a half day in-person course we run primarily in London. There's an occasional version that we run in the Library of Mistakes, Edinburgh, but actually we run in London. We've been running it in November. I think it's the 18th to 20th. I should know that. I should. I mean, it's been a few hectic weeks. I should know where I'm going to be on the 18th to 20th of November.

19:30That's the concise two and a half day version for people who've got busy lives rather than people who want to try and string this out like an academic subject, like the students would do over a whole semester. So those are the three versions it comes in. And I think the good thing about the in-person one is always you get to ask questions. We count the numbers. We don't let more than 30 people in, so it's interactive. But if you're coming as a principal, as I said, as a saver yourself, you get to mingle with professionals as well. And I think some of the learning is done in, we have breakout sessions and discussion sessions.

20:01I think a lot of it is done, learned in there, discussing these topics with professional investors as well.

20:06Demetri Kofinas:I bet it's a really great crowd. It's a self-selecting different crowd. Let's put it that way. Yeah. Self-selecting history geeks, financial history geeks. Yeah. And there's one other set, which is the older 25, 26-year-old kids that get sent by their boss who's a history geek. And that can be quite interesting as well, given that their background is in a very different form of finance. So yeah, it's an interesting mix. Lovely. Do you get a lot of emails from sub-30-year-olds, people, either kids in high school, college, or recent graduates who are sort of ambitious and want to learn and are looking for either mentorship or some kind of direction on where to go and what to study?

20:41Well, more and more we're getting that. And really, it's because of the library of mistakes, which I also run. And it's people asking for reading lists. And that's younger. I mean, just even I've spent 10 days now traveling around the US talking to institutional investors. And quite often, the younger ones come up at the end and say, can you recommend a couple of books? Can you point me in the right direction? Which is quite tricky to nail it down to just a couple. The number one question I get asked about the library, diverging slightly here is, what are the two books in this library I should read?

21:08Well, Dimitri, I'm looking at your library and I think you're looking at my library. I think we'd both be challenged to pick two. But anyway, there is a new thirst. If you're 25, 26 year old and you want a career in this business, I think everyone's realizing now that you need a skill set that is bigger than discounting cash flows. If you're not going to get that from financial history, where are you really going to get it from?