40

I found this quote on a site. John Templeton says,

The four most dangerous words in investing are: 'this time it’s different'

What does he mean here?

  • 12
    It applies to public policy, too. – Anton Sherwood Nov 3 '16 at 3:53
  • 9
    And business strategies. – Zibbobz Nov 3 '16 at 13:05
  • 18
    And relationships. – corsiKa Nov 3 '16 at 16:03
  • 14
    He meant the four most dangerous words in investing are: 'this time it’s different' – Fattie Nov 3 '16 at 20:08
  • 12
    Einstein gave us a good quote... He defined insanity as doing the same thing over and over again and expecting different results..I think it ties in neatly to this quote. – Neil Meyer Nov 4 '16 at 11:57
55

Essentially, he means "one ignores history at their own peril".

We often hear people arguing that "the old rules no longer apply". Whether it be to valuations, borrowing, or any of the other common metrics, to ignore the lessons of the past is to invite disaster.

History shows us that major crises in the markets usually occur when the old rules are ignored and people believe that current exceptional market conditions are justified by special circumstances.

  • 3
    There are a lot of sayings similar to this one outside of investment - "Those who fail to learn from the past are doomed to repeat it", "The more things change, the more they stay the same", it's the wisdom of the past to respect...the wisdom of the past. – Zibbobz Nov 3 '16 at 13:24
  • 12
    Imagine it's 1999 you are an investor and you are looking at the numbers and the valuations of these stocks make no sense if you use the standard approach that has been validated over the past decades. A friend says "those old rules don't apply to these tech stock. It's a whole new economy" While 'this time it's different' might not literally be what people are saying, there a lot of things that are equivalent in meaning. There tend to be lots of conversations like this during bubbles although in 2008 it was more like "real estate never drops" which was easily shown to be false. – JimmyJames Nov 3 '16 at 14:33
  • specially when the "special circunstances" are just chalk powder mistaken by a blizzard for being too close to said powder cloud. – Mindwin Nov 3 '16 at 16:32
  • Interesting. Simply reading the quote I had assumed an entirely different meaning. More like the investment had already happened based on past patterns, but it turned out that "this time it's different". Stupid Hot Network Questions "forcing" me to learn. – DoubleDouble Nov 3 '16 at 17:32
  • @Zibbobz even the Wikipedia page for [French expressions in English] lists "plus ça change, plus c'est la même chose" -- in my humble opinion sounds way better and I do not even speak French at all. :) – chx Nov 5 '16 at 5:52
34

This refers to the faulty idea that the stock market will behave differently than it has in the past.

For example, in the late 1990s, internet stocks rose to ridiculous heights in price, to be followed soon after with the Dot-Com Bubble crash. In the future, it's likely that there will be another such bubble with another hot stock - we just don't know what kind.

Saying that "this time it will be different" could mean that you expect this bubble not to burst when, historically, that is never the case.

  • 3
    Essentially it explains why technical analysis and pattern recognition can be profitable ways to trade if done by a systematic and mechanical way with proper position sizing, money management and risk management in place. – Victor Nov 3 '16 at 0:37
  • 14
    The two common failures of predictions, financial or otherwise: predicting that it will be the same as the past, and predicting that it will be different this time. – MSalters Nov 3 '16 at 15:49
  • @MSalters - technical analysis and pattern recognition has more to do with statistics than prediction, when done properly in a systematic and mechanical way, without emotions and with proper risk management. – Victor Nov 4 '16 at 7:25
  • @MSalters: If the total amount consumers would be willing to pay for an unlimited quantity of some good will never exceed $X, but the price of the good times the quantity in existence vastly exceeds $X, then unless something happens to a lot of the goods, the total price is going to fall, sometime, to be in line with X. One might go broke betting it will happen within two years when it ends up taking five, but it will happen unless the total amount consumers are willing to pay becomes greater than $X. – supercat Nov 5 '16 at 22:01
16

It's a statement that seems to be true about our tendency to believe we won't make the same mistake twice, even though we do, and that somehow what's occurring in the present is completely different, even when the underlying fundamentals of the situation may be nearly identical. It's a form of self-delusion and, sometimes, mass-delusion, and it has been a major contributing factor to many of our worst financial disasters.

If you look at every housing bubble, for instance, we examine the aftermath, put new regulations and procedures into place, theoretically to prevent it from happening again, and then move forward. When the cycle starts to repeat itself, we ignore the signals, telling ourselves, "oh, that can't happen again -- this time it's different."

When investors begin to ignore the warning signs because they think the current situation is somehow totally different and therefore there will be a different outcome than the last disaster, that's when things actually do go bad.

The 2008 housing crisis was caused by the same essential forces that brought about similar (albeit smaller scale) housing disasters in the 80's and 90's -- greed caused banks and other participants in the housing sector to make loans they knew were no good (an oversimplification to be sure, but apt nonetheless), and eventually the roof caved in on the market. In 2008, the essential dynamics were the same, but everyone had convinced themselves that the markets were more sophisticated and could never allow things like that to happen again. So, everyone told themselves this was different, and they dove into the markets headlong, ignoring all of the warning signs along the way that clearly told the story of what was coming had anyone bothered to notice.

  • I profited from it. I waited for the crash then bought a house. – Joshua Nov 3 '16 at 18:13
  • You're not alone in that! (grin) The point, though, is that even when it's obvious that something's wrong, people have a tendency to ignore past history in the mistaken belief that it can't repeat itself. – Daniel Anderson Nov 3 '16 at 18:22
  • @joshua - just one house? – Victor Nov 3 '16 at 21:50
  • 1
    @Victor: It sucks to know exactly what the market's going to do but only have 20,000 to leverage. – Joshua Nov 3 '16 at 21:55
  • Could be worse, @Joshua. You could've only had 200 instead of 20,000! – Daniel Anderson Nov 3 '16 at 21:56
11

There's an elephant in the room that no one is addressing:

Suckers.

Usually when there's a bubble, many people are fully aware that its a bubble. "This time its different" is a sales pitch to the outsiders. It the dotcom boom for example a lot of people knew that the P/E was ridiculous but bought objectively valueless tech stocks with the idea of unloading them later to even bigger fools.

People view it like the children's game musical chairs: as long as I'm not standing when the music ends some other sucker gets left holding the bag.

But once you get that first hit of easy money, its sooo tempting to keep playing the game. Sometimes, if it lasts long enough, you start to drink your own kool-aid: gee maybe it really is different this time.

The best way to win a crooked game is not to play*.

*Just in case someone thinks I'm advising against the stock market in general, I'm not: I'm advocating not buying stocks that you know are worthless with the hope of unloading them on some other sucker.

  • 4
    You are absolutely right, @Jared, so upvote from me for it! It always takes a sizable pool of unsophisticated people ("suckers") to make such schemes work, and unfortunately there's always a population of those who can be easily parted from their money because they want to believe they know something nobody else does, and even if the game's rigged, they're smart enough to see it coming and get out before the roof falls in. Excellent point, though! – Daniel Anderson Nov 4 '16 at 13:59
4

A brief review of the financial collapses in the last 30 years will show that the following events take place in a fairly typical cycle:

  1. An innovation or significant change in the inputs affecting market conditions, such as:
  • Allowing commercial banks to do retail banking, including mortgage lending
  • Reducing capital reserve requirements for savings and loans
  • Junk Bonds
  • Collateralized Mortgage Obligations
  • Credit Default Swaps
  • Reinsurance
  • Oil Futures Contracts
  • Hedge Funds
  • Significantly-reduced Federal Reserve interest rates
  • Internet-based businesses
  • Significantly reduced capital gains taxes
  1. Overuse of that innovation (resulting in inadequate supply to meet demand, in most cases)

  2. Inadequate capacity in regulatory oversight for the new volume of demand, resulting in significant unregulated activity, and non-observance of regulations to a greater extent than normal

  3. Confusion regarding shifting standards and regulations, leading to inadequate regulatory reviews and/or lenient sanctions for infractions, in turn resulting in a more aggressive industry

  4. "Gaming" of investment vehicles, markets and/or buyers to generate additional demand once the market is saturated

  5. "Chickens coming home to roost" - A breakdown in financial stability, operational accuracy, or legality of the actions of one or more significant players in the market, leading to one or more investigations

  6. A reduction in demand due to the tarnished reputation of the instrument and/or market players, leading to an anticipation of a glut of excess product in the market

  7. "Cold feet" - Existing customers seeking to dump assets, and refusing to buy additional product in the pipeline, resulting in a glut of excess product

  8. "Wasteland" - Illiquid markets of product at collapsed prices, cratering of associated portfolio values, retirees living below subsistence incomes

Such investment bubbles are not limited to the last 30 years, of course; there was a bubble in silver prices (a 700% increase through one year, 1979) when the Hunt brothers attempted to corner the market, followed by a collapse on Silver Thursday in 1980.

The "poster child" of investment bubbles is the Tulip Mania that gripped the Netherlands in the early 1600's, in which a single tulip bulb was reported to command a price 16 times the annual salary of a skilled worker. The same cycle of events took place in each of these bubbles as well.

Templeton's caution is intended to alert new (especially younger) players in the market that these patterns are doomed to repeat, and that market cycles cannot be prevented or eradicated; they are an intrinsic effect of the cycles of supply and demand that are not in synch, and in which one or both are being influenced by intermediaries. Such influences have beneficial effects on short-term profits for the players, but adverse effects on the long-term viability of the market's profitability for investors who are ill-equipped to shed the investments before the trouble starts.

  • Sometimes the best answer sits at the bottom... – Fattie Nov 5 '16 at 14:14
  • A key point which is perhaps most easily understood in reference to real commodities (like tulip mania) is that the total value of all tulips in existence cannot exceed the total amount that people would be willing to pay for an unlimited quantity of tulips for purposes other than resale. – supercat Nov 5 '16 at 22:15
1

To play devil’s advocate to much of what has been written before, it's also worth noting that this is quite an important quote for a sort of reverse reason to what has been discussed before us, that of that fact that virtually every economic situation is different.

As it's such a reflexive problem, each and every set of exact circumstances is always different from before. Technology radically changes, monetary policy and economic thinking shift, social needs and market expectations change and thus change the very fabric of markets as they do. It's only in its most basic miss projections of growth that economics repeats, and much like warfare, has constant shifts that radically change the core assumptions about it and do create completely new circumstances that we have to struggle to deal with predicting.

People betting on the endless large scale mechanised warfare between western powers continuing post nuclear weapons would have been very, very wrong for example. That time it actually was different, and this actually happens with surprisingly often in finance in ways people quickly bury in the memories and adopt to the new norm.

Remember when public ownership of stock wasn't a thing? When bonds didn't exist? No mortgages? Pre insurance? These are all inventions and changes that did change the world forever and were genuinely different and have been ever since, creating huge structural changes in economies, growth rates and societies interactions.

As the endless aim of the game is predicting growth well, we often see people/groups over extend on one new thing, and/or under extend on another as they struggle to model these shifts and step changes. Talking as if the fact that people do this consistently as if it is some kind of obvious thing we can easily learn from (or easily take advantage of) in the context of such a vague and complex problem could be argued to be highly naïve and largely useless.

This time it is different. Last time it was too.

  • Although pedantically correct, this does not really address the OPs question. The problem is that its easy to see, in hindsight, which of the million new things happening all the time led to permanent structural changes. The point of the Templeton quote is that its dangerous to bet on which one of the new things right now will cause a permanent structural change. Plenty of people thought that CDOs were a permanent and stable change in the second-hand debt market. – Jared Smith Nov 4 '16 at 14:57
  • Well yes, but all investments are making that bet right now in varying amounts to varying degrees of certainty. That's what investing is. – Philip Nov 4 '16 at 15:16
  • that's one kind of investing (fundamental). The Templeton quote is about technical investors who confuse themselves with fundamental ones. – Jared Smith Nov 4 '16 at 15:19
  • 1
    @jared - someone using technical analysis properly would have gotten out of the market and would be shorting it. Pure technical traders use systematic and mechanical methods to trade and invest. The quote is more relavent to those investing or trading based purely on their emotions. From your comment it just shows you have no idea what you are talking about. – Victor Nov 5 '16 at 21:34

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