This time is different

This article was first published in the National Post on October 23, 2021. It is being republished with permission.

by Tom Bradley

They’re known as the four most dangerous words in investing: This time is different. They’re dangerous because it usually isn’t different. What we think is new has happened before, and the situation will return to normal.

I’ve certainly been rethinking my use of the phrase. I recently heard Dennis Lynch speak about it at a Morningstar conference. He’s the head of Counterpoint Global at Morgan Stanley and a successful investor in new technologies. He prefers this saying: “It’s always different this time, it’s just a matter of degree.”

There are areas, cyclical industries, for instance, where the rule of thumb still applies. Their roller coaster cycles are as predictable as rain in Vancouver, but analysts and commentators still make grand pronouncements, usually near the top or bottom, about how the future will allow a different path.

There are other examples, but where my thinking keeps taking me is to an element of investing that is never different “this time.” I’m referring to investor behaviour.

“The technologies, trends, tragedies and winners — the events that take place — are always in flux and can be nearly impossible to predict,” Morgan Housel, a partner at Collaborative Fund Management, said in a recent piece. “But the behaviours that drive people into action, influence their thoughts and guide their beliefs, are stable. They’re the same today as they were 100 years ago and will be 100 years from now.”

Behaviours are reliable and important. A robust and regular routine will lead to good returns while poor and erratic behaviour can overwhelm other positive factors such as good fund performance and low fees.

It sounds like heresy, especially coming from an active manager who preaches fee awareness, but repeated mistakes or misunderstandings can more than offset all the good stuff you do.

Let me explain further by highlighting three behaviours, keeping in mind that I’m talking about investors in general.

Chasing performance: Investors take too much comfort from recent performance. They’re hardwired to pick funds and managers that have done well lately. Purchases are driven by one- to three-year returns instead of factors that last much longer, such as investment approach and quality of people.

The reality is that fund rankings can change without warning. A strategy that puts a manager on top this year may be the wrong one next year. There needs to be additional reasons behind your selection. If you feel compelled to purchase a fund strictly based on past performance, I encourage you to focus on 10-year returns.

Acting on fear and greed: Investors tend to do the opposite of what Warren Buffett preaches. They sell when they’re fearful, and they buy when they’re greedy.

Buffett does the opposite because of two factors. In fearful times, the bad news is known and expectations for the future, as reflected in valuations, are at rock bottom. It’s a beautiful combination.

Conversely, when markets are riding high, the focus is on the good things that might happen, while valuations are already assuming they will.

If you’re going to own stocks, you must be able to weather the inevitable storms. If you sell when prices are down, you’ve lost the benefit of taking the risk.

Moving the goalposts: Investors regularly change their objectives when markets go to extremes. In good times, an investment plan’s capital preservation part gets put aside in the pursuit of higher returns. And it’s all about avoiding further losses when prices are down. At highs and lows, investors become more confident in their views and short term in their strategies.

Your objectives shouldn’t change with the market’s ebb and flow. Your strategy should instead anticipate them. For example, if you have a longer time horizon, plan to make contributions in good and bad markets. The earlier and more you invest, the better. For shorter-term needs, setting aside a source of cash is necessary, even if it’s painful when markets are rising.

It’s hard to see supply-and-demand patterns changing in the resource industries, but you can make changes to your investment process. If you’re consistently making the same mistakes, it’s time to do things different this time.