Looking back, looking forward

It's the regular end-of-year ritual – looking back over the past 12 months to review the year that was.

One journey around the sun has no special relevance for investors – your money doesn't know that 365 days have passed since the beginning of the last year, and wouldn't care if it did.

And yet, 12 months is increasingly been seen as "long term" by investors. The great news for those of us with a longer time horizon – and with the desire to develop an appropriate investment temperament – is that a truly long-term perspective is becoming more of a competitive advantage for those (fewer) investors prepared to embrace it.

Everything old is new again

The other reality of investing is how few genuinely new problems – or opportunities – we have… and that's the first investing lesson from 2012.

Economies and investments move in cycles. And, as Mark Twain said: "History does not repeat itself, but it does rhyme."

Specifics change – each circumstance has different details – but the underpinning causes and the resultant impacts are rarely new. We may learn the lessons for the first time – or a second time if we failed to recognise the pattern before it occurred – but in almost all cases, events and outcomes are at best an echo of the past.

Investors should continually be seeking patterns – to look for historical examples that apply to today's circumstances. In almost all cases, finding those patterns will provide a clear sense of the likely next steps and outcomes.

The old, new normal

A simple example is the so-called "new normal" of a newly conservative consumer. Those of us old enough will remember the early 1990s, when we'd sworn off the "greed is good" conspicuous consumption of the 1980s.

It didn't last long, and the late 1990s and early 2000s were characterised by a return to lavish spending and growing credit card and mortgage debt. Now many commentators are telling us we've – again – learnt these lessons and that consumption patterns have permanently changed.

Remember, by the way, that the "go go" 1980s grew out of a deep recession in the early years of that decade. I guess we didn't heed the lessons then, either. Do you really think this time is different?

Dividends matter

Ah, the humble (and often tax-advantaged) dividend. Decried as boring and stodgy when animal spirits run unchecked, dividends become the investors' best friend when they run from risk and to the shelter of regular income.

Of course, every long-term study of investment returns clearly highlights the incredibly important role of reinvested dividends in building long-term wealth. It's a lesson that should be seared into the minds of all investors.

Yet, despite that, 2012 was characterised by an almost religious fervour for dividend paying shares – as if we'd suddenly discovered the benefits of such companies.

Debt can kill

This one is a lesson we rediscovered from only a few years back. The Australian listed property sector still carries the scars from the global financial crisis, during which most property business were forced to raise capital, cut dividends and, in some cases, scramble for survival.

2012 bought some scrambling from Fortescue Metals (ASX: FMG) as the company did some fancy footwork to refinance its debts and keep the bankers at bay. Corporate debt can put the bankers in charge – not a great position for investors to find themselves.

Fortescue seems to have wiggled its way out of danger – at least for now – but years of good work could have been undone in a matter of days if the bankers hadn't been convinced. Nathan Tinkler may well still find out exactly what that feels like.

Markets recover

If you ask most investors, they – like the property sector – still bear the mental scars of the GFC. Fresh in our minds are the steep share price falls of that period, and the sense that the sharemarket is a scary and unpredictable place.

Many investors took their money from shares and put it into the safety of term deposits – only to see deposit rates continue to be cut during the year. Meanwhile, Australian shares delivered a significantly above-average return, with the All Ordinaries so far adding 18.4 per cent since the beginning of the year (including dividends).

It's the classic buy-high, sell-low mistake – incredibly easy to make, given the psychological challenges of roller-coaster equity markets. Successful investment requires us to take control of fear and greed.

Foolish takeaway

Investing is a necessarily imperfect pursuit. We've all made mistakes, and we'll make plenty more in the years ahead. Investment success comes despite – not in the absence of – mistakes, but we need to do our best to minimise the unforced errors. Learning the lessons of the past without making them ourselves is a great way to do just that.

Because the markets are cyclical, next year's lessons will likely be different to the lessons of 2012, but will almost certainly echo investments past. The specifics will be different, but the themes will be timeless.

Investors who acknowledge that fact are likely to be in a much better position as we enter 2013.

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Scott Phillips is a Motley Fool investment analyst who has made his share of mistakes, but endeavours to learn from them. You can follow Scott on Twitter @TMFGilla. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).

This story Looking back, looking forward first appeared on The Sydney Morning Herald.