It’s Not Different This Time

A catchphrase one hears in bull markets is “It’s different this time.” According to this sentiment, the stock market will continue to go up because the economy has changed or people have changed or some other fundamental shift has occurred.

But it’s never different this time. Bubbles form and burst. The laws of economics are not repealed, no matter how innovative or interesting a company might be.

Sure, over years, you do see fundamental changes in how the economy works. New technology supplants old. Industries die and new industries are born. Job skills change generation to generation.

Remember that when you read headlines about the recent downturn in stocks, because the logic of a bear market is the same as the logic of a bull market.

You will hear a lot of reasons why this latest decline in stock valuations is unusual. One of a kind. Something to worry about. You will hear why “It’s different this time.”

It’s different because of China. It’s different because of an election year. It’s different because of the Federal Reserve.

The list is endless, and everyone betting on an even bigger market decline ahead will have a reason, some reason, why this decline will be epic, a game-changer, different.

Think carefully, however, about the actual transactions behind the day-to-day movements of the stock market. Some people are selling stocks. Some are buying.

In fact, you need both parties, or there is no transaction. If things are “different” this time, why do sellers find ready buyers? Because the buyers are wrong?

No, they find buyers because those buyers have a different conception of the risk.

If your idea of acceptable risk in the stock market is “zero,” then you are likely to be a seller on any given day of the year. In fact, you shouldn’t own stock at all.

If you own stock, it’s for one of two reasons. Either you have bought into specific stock or stock market sector, say, oil or real estate, because you think you understand something about that investment.

Or, you believe that stock ownership represents your best chance to grow your investment faster than the rate of inflation over a period of decades.

Intense emotions

One of these views is short-term and one is long. The short-term view, the one that relies on “knowledge” of the stock or sector, is prone to panic. Most of what you think you know about your investments can be influenced by intense emotions.

What if you are wrong? What if the investment fails? What if things are “different” this time. The short-term investor is subject to overreacting on fear.

The long-term investor, however, understands that emotions are costly. In the bear market scenario, the long-term investor is the buyer, the person with the different conception of risk who is happy to catch investments as they fall, layering in for the long run.

Are things different this time? Things are never different. The motivations of investors run hot and cold, changing much more rapidly than the economy itself, and that can be a huge advantage for the retirement investor who can keep cool as others panic.