This Time It’s Different – 4 most dangerous words in Investment world

Three magical words ‘I Love You’ & Four most dangerous words This time it’s different – once you are married, you realise even magical words are a trap. 🙂

Sir John Templeton, the investing pioneer had famously said, ‘This time it’s different’ statement is very dangerous. It is very apt for investors – if you often start hearing ‘This time it’s different’ you should start getting worried.

Why people say ‘This time it’s different’ ?? Because there’s no other way to prove that they are right. This time it’s different can have many interpretations in the markets –

this time it's different1) Making the same mistakes again 

Investors tend to make the same mistakes again or make the mistakes other investors made earlier. They do not learn from mistakes. When markets are rising, they feel that “it will be different this time” and do not remember the crash earlier.

For example, in the year 2000, the dot-com bubble and some market manipulation led to the indices zooming upwards. Retail investors bought stocks at high prices. Then the Sensex lost 2000 points in 3 months leading to big losses for retail investors. They did not evaluate the market well. They went along with the herd to buy stocks without understanding the fundamentals.

In 2007, FIIs invested a huge amount in India, this led to a rise in the stock markets – valuation ran much ahead of the fundamentals. Investors again made the mistake of buying at high prices with the reasoning that “this time is different” as there are no dot-com movements and big institutions are investing. Media started publishing articles India needs Infrastructure & real estate blah blah so ‘This time it’s different’. In 2008, the stock market crashed and investors lost again. [ Keep away from too much news ]

No body was ready to invest in 2008 end because they thought ‘This time it’s different’ – the world is going to end.

Investors feel that this time it is different and they will not make the same mistake again. But this is a delusion.  Investors will lose money when they believe without any concrete evidence that ‘this time it’s different’!

Must Read – 7 types of investors in India

2) Historical Returns are important 

Past performance is not indicative of future returns – Most mutual funds and investment houses put forward this disclaimer. But past performance (I am not talking about recent past but historical data) is an important parameter to consider while investing. You cannot ignore historical performance by saying “it is different this time”. It gives some idea of the investment and the trend of returns given by the investment.

Read – How an Economic Crisis can be beneficial for Long-term investor

3) Valuations always matter 

There will be different bubbles and market conditions that will come and go. But the valuation of investments will remain in place. At different times, the market will be influenced by different conditions. But if your investments have been chosen after careful research, solid fundamentals and good management, the investments will stay on course in the long run. But be frank retail investors don’t have such capacities. It will be better if they have their investment policy statement & stick to that in all season. [ PE Ratio is one of the valuation methods – there are many others ]

4) Human Greed 

Usually retail investors are not able to overpower greed and fear when they invest. This is not different in any part of the world. They try to put all their money in one outperforming asset. They do not exit (rebalance) from the asset at the right time in a bullish market expecting more and more gains and end up losing money. Others fear losses and do not invest in the market at all till their friend bought a car after selling scooter. Some people hold on to bad investments as they are scared of losses.

It is good to want to optimize your returns and be cautious in the market. But at different times there will be different reasons for volatility in the market. It is important to recognize that and attach the requisite importance to valuation.

Read – The art of thinking clearly

SIP myth – investors are now mature

If you are investing through SIP in Mutual Funds, you may not like it. These days when we interact with fund managers & other people in Mutual Fund industry – they keep saying that ‘This time it’s different’ investors are now mature. They show the data of SIP numbers or may be some equity investment numbers in the last dip to prove their point. SIP is undoubtedly a great way to invest but this is now becoming more of a fancy item rather than means to achieve goals. Investor expectations are too high & at least I am not ready to buy that there is a relation between a number of SIP & investor maturity. I will be more than happy if I will be proved wrong 🙂 ReadGreater Fools Theory & Indian Real Estate

It is important to differentiate when things seem different and when things are really different. Is there really a reason that is making a difference leading to the rising or falling markets or is it just herd behaviour forcing the markets to behave in a certain manner which would of course be a temporary phase.

Please share your views & experience in the comment section – also try to recall what you thought about property investment in 2012 & gold investment in 2011.

2 COMMENTS

  1. SIP myth is interesting concept that you have introduced. Its the medium to attain your goals rather than the goal itself. Appreciate your point. That lead me to Greater Fool Theory another thought provoking concept.

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