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Why are we convinced 'this time it's different'?

We’re at the stage of the investment cycle where, in times past, many investment advisers would be quoting with enthusiasm a comment John Templeton had made many years ago:

“The investor who says ‘this time is different’ … has uttered among the four most costly words in the annals of investing.”

Templeton was alerting investors to the dangers of the recurring view in markets that, because the big influences on investments are seen to have changed fundamentally, the future for investors will be very different from the past.

Some things are different, some are familiar

For young investors, I should point out John Templeton was an outstanding investor and fund manager—and a generous philanthropist—who did much in the 1950s to set up and popularise managed funds. In 1999, Money magazine called him “arguably the greatest stock picker” of the twentieth century.

And like Warren Buffett, John Templeton had studied at Yale under Benjamin Graham, the great teacher of value investing. His 16 rules for investment success, first outlined in 1933, also included his famous aphorism:

“Bull markets are born of pessimism, grow on scepticism, mature on optimism and die on euphoria.”

These days, many investors believe that COVID-19 has profoundly and permanently changed how investment markets work. In my view, this prevailing sentiment is over-stated: some things will be 'different' while others will stay familiar.

COVID-19 is the worst pandemic in a century and the first to occur in our now highly globalised world. The initial panic was heightened when some major health institutes projected multiple millions of deaths, and the future course of the pandemic is highly uncertain.

By early March, COVID-19 was already bringing about the quickest and deepest economic downturn in history, and one which would worsen as lockdowns and social distancing requirements were introduced. Around the world, governments and central banks announced an unprecedented easing in fiscal and monetary policies.

In five weeks from 20 February, average share prices plunged more than a third from record highs. Between 23 March and mid-June, much of the heavy drop in share market indexes was recovered, mainly at times when rates of new infections from COVID-19 in the US and Europe were falling. Share markets have been volatile and unusually uneven by sectors and across individual stocks.

As well, the pandemic has worsened the already tense relations between the US and China, and contributed indirectly to social unrest and riots, notably in the US.

John Templeton frequently reminded investors that share markets have a long history of over-reacting, both in the tough times and when investors turn optimistic. And Howard Marks, deservedly now one of the most-quoted by Australian investors, recently reminded us:

“… the most optimistic psychology is always applied when things are thought to be going well, compounding and exaggerating the positives, and the most depressed psychology is applied when things are going poorly, compounding the negatives. This guarantees that extreme highs and lows will always be the eventual result in cycles not the exception.”

Three reasons it's not just the Fed

As well, the long-familiar view 'Don’t fight the Fed' has had another airing. Certainly, the switch to a more positive sentiment in stock markets in late March owed a lot to the Fed’s aggressive programme of buying bonds. The further uptick in stock markets during June was attributed to the Fed’s direct purchases of a wider range of corporate debt including low-rated borrowings.


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But investors seem to be exaggerating the role of the Fed. This time around, relatively little attention has been paid to at least three other influences that affect share prices.

One is the massive fiscal boosts most countries have implemented, which will likely be extended on only a slightly reduced scale into 2021.

Two is that the early indications that the hit on global GDP from COVID-19 will be milder than expected earlier provided there’s not a second wave of infections in Europe and the US. High-frequency data suggest both the US and Australian economies have passed the low points of their slowdowns. Retail sales in May rose by 18% in the US and by 16% here.

Three, it appears to this elderly scribe that there is another familiar reprise.  It’s that this time any recovery in overall economic conditions won’t be V-shaped but instead will be more configured like an L or a W. Similar comments were made during economic slumps in 2009, 2003, the second half of the 1990s, 1983, the 1970s and even in Australia’s recession of 1961 (which at the time was said to mark the end of our post-war prosperity).

What to watch

Market sentiment will likely continue swinging widely in coming months. Gloom will re-appear whenever, for example:

  • the pandemic gathers momentum
  • well-liked companies report unexpectedly weak earnings
  • a cluster of reports is released with disappointing economic figures.

But share prices could well resume their bumpy recovery as investors recognise the global economic slump is somewhat milder than was feared and expected, particularly if the fiscal boosts are tapered rather than suddenly removed. Of course, share markets could move up noticeably if a vaccine is discovered.

Investors should reflect on John Templeton's advice when the prevailing market view is 'this time it’s different' and also bear in mind another of his investment principles:

“Don’t panic. The time to sell is before the crash, not after.”

 

Don Stammer has been involved with investing for many decades as an academic, a senior official of the Reserve Bank, an investment banker and the chairman of nine companies listed on the ASX. He is currently an adviser to Stanford Brown Private Wealth. This article is general information and does not consider the circumstances of any investor.

 

9 Comments
Bob Talbot-Stern
July 14, 2020

Templeton studying under Ben Graham at Yale is an odd statement as the common understanding among academics (I'm emeritus faculty at the Wharton School) is that Graham was at Columbia and UCLA, not Yale. Maybe Graham had a spell as visiting professor at Yale as he was at Wharton/Penn and other schools??? Doesn't really matter, but it tweaked my fact checking sensibility.

Ramon Vasquez
July 05, 2020

Punsters All ,

Remember, no one can foretell the future, hence take care with all "advice".

Good luck, and best wishes .

Scott
July 09, 2020

Love to hear Dr Don's comments on the Banking & Finance sector which have NOT had any meaningful share price recovery since the March lows. They are basically at GFC lows except for CBA & MQG
1. Does Dr Don see this sector as an area worth buying into?
I'm thinking ANZ, NAB, WBC are now around the $18 mark. ie. When things blow over in five years time, they could be back to $30-$40 and paying dividends?
2. The other question is, will these stocks ever recover? has something structurally changed since COVID19 and the royal commission that will prevent these companies from recovering and growing with the economy? There has been so so much hate speech and one sided talk against the banks from journalists the ABC with their own agendas. Then there are changes in financial technology going on that is difficult to understand what the outcome will be in the future ie. see what happened to Fairfax when they took their eyes off the ball, carsales and seek stepped in a BIG way.
Then you have insurance stock valuations that have also been hammered ?
3. How will the new world of Finance look in 5 years time?




Robert
July 03, 2020

Articles on any forum like this SHOULD always be thought-provoking and draw out different takes on highly uncertain outcomes. Don's article has done this, so it's hats off to you, Don. To an old economist like me, market participants must be ultra wary of unforseen tipping forces ...because it only takes a small push to topple a bucket of water! For the average player who is not the Buffet/Munger buy-and-put-it-in-the bottom-drawer type of investor, it's easy to buy in at the depressed-price point like between the 24th-27th March after the initial panic of 23 and 24 March 2020 subsided with the goal of selling into market market recovery...The hard bit though is deciding WHEN to re-SELL part/all of that recently purchased holding. Get the re-sell point wrong and a tip of the bucket can erode away money quantum-gained. Buffet and Charlie-M have the unique ["planet-Mars"] luxury of being super rich and being the investment godfathers for the predominantly [fellow] high-wealth clients on their books...for them, time now does not matter [apart from the fact that their own life expectancy is now quite low]. The average market punter in Australia-suburbia [especially those approaching, or in, retirement] doesn't have B-M's wealth and time luxury and a buy-sell mis-timing can have near terminal impact on an other-time sound wealth creation plan. This is particularly when they have gone all-in with available cash or line-of-credit reserves.
...This is not a current market for the unwary, and I'm sure we all can benefit from "reality medication" in these times of heightened market uncertainty and volatility....Tread carefully all!!

Tom
July 03, 2020

Surely governments cannot continue the current levels of fiscal stimulus? If they do however, won't inflation break out? Is inflation part of the solution for massive public and private debt? Surely, this economy will cannot withstand rising interest rates in response to inflation? Has the world gone crazy?

Dave the Brave
July 02, 2020

I love how these generalised comments are taken as gospel. Things are different now! We are indebted, we print money to defer an economic crisis, and have pathetic world leadership to boot. How do you stick your head in the sand and say that history rhymes. Most people haven't got a clue what is about to happen ( including me ), but I take no solace that trying to create the impression that we have been here before is any comfort.

SMSF Trustee
July 01, 2020

This might have been helpful back in March, but now that the market has recovered a long way, it seems that it's priced in this more optimistic view (so typical of Dr Don!) already. To sell into this rally isn't going against Sir John's advice near the end in that case, it's perhaps going with it.

Derrick Docherty
July 15, 2020


Good to read Don's insightful article. Long time no see.
Best wishes.

Jim Parker
July 19, 2020

I agree Derrick. Good to see we three are still alive and kicking in spite of Covid!
Another good one Don.

 

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