Market Rules - This Time Is Always Different

There’s an old Wall Street axiom that says the four most dangerous words in the investment language are “this time is different.” On the surface its logic and wisdom seem obvious: markets are filled with recurring human behaviors — greed, fear, leverage, exuberance, panic — which generate the reasonable conclusion that what was is most likely what will be. History may not repeat itself exactly, but it rhymes often enough to make skepticism toward claims of difference a useful investment discipline. The problem comes, however, when a useful warning becomes an absolute rule.

By Degree

Sometimes this time really is different — by degree. The forces at work may be familiar, but their size, speed, reach, duration, or intensity may be substantially different from anything that came before. To illustrate, a market falling 5% and one falling 50% are both declining markets. Nothing new has been introduced; the difference is entirely one of degree. Yet the consequences can be profoundly different. A 5% decline may unsettle investors. A 50% decline can destroy wealth, force liquidations, impair credit, alter corporate behavior, and affect the economy itself. Same phenomenon. Different degree. Different outcome. Different.

By Kind

Other times the difference is of kind. A genuinely new technology, market structure, or source of capital can alter the way the system itself functions. For example, the rotary phone enabled one person to call another, but so does a smartphone. Yet a smartphone is not merely a better telephone. It is also a computer, camera, television, bank, store, newspaper, map, and communications network sitting in your pocket. The old function remains, but something fundamentally new has been added. It is different — by kind.

Think Different

The investor’s challenge, therefore, is not to choose between “this time is different” and “this time is never different.” The challenge is to identify the difference — whether of degree or kind — and determine whether it is meaningful enough to alter the expected outcome. Differences are a constant in the markets. Recognizing the difference — and recognizing it in time — can make all the difference in the investment decision-making process. Or do you beg to differ?