Broker Check

The Four Most Expensive Words in Investing

April 27, 2022
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“This time is different”

I hope this finds you well!

As of this writing, we are 32 days from summer, which will undoubtably look and feel different this year. There are many aspects of our current reality that are different. The COVID-19 pandemic and the subsequent economic shock it has caused seem entirely unique in our history – at least since 1918. But as long-term investors, the most dangerous words we can utter are: “this time is different”.

Every bear market (defined as a decline of 20% from a previous high) looks different when we’re inside it. The blended stock price of America’s 500 largest companies doesn’t decline by that much unless there is something significant going on. We are in the midst of a lot of unknowns: how deeply will earnings decline? By how much will dividends be cut? How long will it take for the economy to stabilize and return to a sustainable path of growth? Quite simply, we can’t begin to estimate a fair value for stocks with so many unanswered questions. We are lost in a Cloud of Unknowing.

In the resulting climate of fear, human nature defaults to the conclusion that this time is fundamentally different. That’s always human nature’s rationale for selling investments in a panic – and it’s panic on an epic scale that drove the S&P500 down 34% in 33 days. Instead of turning the to the news, let’s turn to history to see how this may play out in the economy and financial markets.

In recent history, there have been at least three comparable crises – each radically new and different, and each relatively fleeting in its effects once we got past it. I refer to the Global Financial Crisis of 2008-09, September 11, 2001, and the Crash of 1987.

During the Global Financial Crisis, the entire world’s financial system completely melted down. In response, the S&P500 declined a total of 57% from peak to trough. As the nation reeled from the events of 9/11, Americans feared we had our Pearl Harbor moment and that World War III had begun. The stock market remained closed for nearly a week. On Monday, October 19, 1987 (“Black Monday”), US stock markets fell by more than 20% that day, after tumbling lower the previous three trading days. Yet, today, the S&P500 is much higher than it was at the end of each of those crises. At the moment, it is extremely difficult - if not impossible – to envision that the COVID-19 crisis will one day shuffle off to join these “black swan” events as a distant memory, but it will, because it must.

This is in no way to be read as a prediction of the shape or timing of the inevitable recovery. It is a statement of the fact that when the economy and markets are freed again, the great curve of permanent advance will resume. There will be other crises, because there always are. But this time won’t be fundamentally different.

Thus, the great lesson of the current crisis, to the lifetime investor, will not be in it difference but in its essential sameness. “This time is different” will forever turn out to be the most four expensive and dangerous words in investing.