Defining ‘This Time is Different’

“The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.” – Howard Marks

In John Templeton’s timeless 16 rules for Investment Success (published in 1933) he states:

“The investor who says, ‘This time is different,’ when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.”

This time is different is an all-timer. It’s been used to describe financial markets, economic cycles, valuation measures, individual companies, sentiment indicators and the list goes on. The phrase generally describes a situation in which someone makes the case that there’s been a permanent shift which makes the current or future environment noticeably different than the past.

There are investors that have been claiming for some time now that valuation in the stock market is much too high and needs to contract in a big way for stocks to become attractive investments. Company profit margins are much higher than historical averages so they need to fall as well.

Argue with this contention and the refrain is a resounding, ‘SO YOU’RE SAYING THIS TIME IS DIFFERENT??? IT’S NEVER DIFFERENT!  THIS WILL END BADLY!’

(Side note: Since markets have always moved higher over the long-term, things never end badly.  It’s how you define your end point that matters.  But I digress.)

Yet many are using this phrase in the wrong context.

Here’s a little secret for you: This time is never different and this time is always different. It just depends on what you’re talking about. We need a better definition of ‘this time is different’ since it’s used far too broadly any time there is a disagreement on the current state of the markets.  It’s turned into a defense mechanism.

I’m not making the claim that stocks and margins can’t or won’t fall. Markets ebb and flow, as always. I don’t think stocks are egregiously overvalued, but they’ve risen at a nice clip so it will be tough to keep up the same pace.  So it goes. I’ll leave it up to Jesse Livermore (both past and present) to explain the difference in the definitions of ‘this time is different.’

Blogger Jesse Livermore (it’s a pseudonym) at Philosophical Economics had this to say on the topic last week:

“Not only is this time different, every time is different.  That’s why so many investors are able to outperform the market looking backwards, using curve-fitted rules and strategies. But when you take them out of their familiar historical data sets, and into the messiness of reality, where conditions change over time, the outperformance evaporates.”

He continues:

“Now, in hearing this suggestion, readers will scoff: “So you’re saying this time is different?” Of course I am.  Of course this time is different.  By suppressing this conclusion, even when the data is screaming it in our faces, we hinder our ability to adapt and evolve as investors.  Reality doesn’t care if “this time is different” will upset people’s assumptions and models for how things are supposed to happen. It will do whatever it wants to do.”

Legendary investor Jesse Livermore (the original, no relation to the blogger) uttered this classic phrase:

“Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”

Another great Templeton quote that isn’t as well-known:

“Successful investing is only common sense. Each system for investing will eventually become obsolete.”

There are so many variables to consider that make each cycle unique: the level of the market, interest rates, inflation, demographics, trends, sentiment, economic activity, growth rates, industry leadership, fiscal & monetary policy, innovation, technology and a plethora of other factors that keep markets moving.

Plus, the variable that is by far the most important: human nature. This is what Templeton and Livermore (the original) were talking about with their famous quotes. They weren’t talking about valuation models or mean reversion in company margins. This time is never different because investors will continue to act irrationally and that’s never going to change.

A ‘this time is different’ mindset is costly if you believe that getting caught up in the collective fear and greed of market participants will work out this time. Our irrational impulses lead to overconfidence, herd mentality, overreactions to short-term events, loss aversion and extrapolating the recent past into the future.  It’s why we’ve always had manias and panics and we always will.

Investors that blindly follow valuation metrics based purely on past averages are falling prey to their own psychological issues even though they think they are acting rationally by following their models.

You can’t simply look back historically at a valuation metrics and say we’re below average, so buy everything or we’re above average so sell everything. It’s never that neat and tidy. If it was everyone would simply follow those easy models. It’s far too difficult to use one or even a handful of indicators to know exactly when a cycle is at a major inflection point and about to change directions because they are driven by fragile human emotions.

This doesn’t mean that you give up because the investing environment is always different.  There are elements of the investment process that never go out of style. The price you pay for an investment is still the most important determinant of your future returns.

Investment success will always involve some combination of patience, long-term thinking, risk control through diversification, the importance of asset allocation, keeping your wits about you at market extremes, a focus on your time horizon and an understanding of your own behavioral biases.

There’s just no easy answer to give you an all-clear signal on a short-term basis and there never will be. In sum, this time is always different in terms of the current state of the markets because they’re complex and adaptable. But it’s never different when it comes to our inherent behavioral biases.

Source:
The Shiller CAPE: Addressing the Responses (Philosophical Economics)

Further Reading:
Timeless Advice from Jesse Livermore
John Templeton’s 16 Rules for Investment Success