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Fifteen favourite fallacies

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15. "This time it's different"

Every investor who has had a run of good luck starts to rate himself a genius. Every generation that enjoys a run of prosperity starts to believe it has gifts and talents that were never given to previous generations. These are fertile times for revivals of faith in a "new era". At bottom, this is nothing more than a glorified version of the notion that "this time it's different", only dressed up with spurious arguments drawn from economics or technology:

In all these cases the exciting story ended in overvaluation, a ghastly slump in share prices and a reversal of previously high expectations. In that sense, it has never been different in the past. Why should we expect it to be now or in the future?

The danger does not lie in the belief itself. It lies in the unspoken assumption that usually follows from the belief: "Because it's different this time, I can flout all the rules that applied in previous similar situations". This blinds you to overvaluation. You start to overpay. Then you start to take bigger bets on fashionable stocks. Perhaps you borrow money via credit cards or a remortgage. Finally, you pile into the overhyped stocks you would never touch in a saner frame of mind.

Repeated on a large scale, this is how a whole economy eventually loads up with too much debt supporting too many overpriced assets. The unwinding of this process is one of the leading causes of many recessions.

Just to complicate matters, sometimes it really is different in investment. Before the 1950s, shares always paid higher dividends than bonds. Then shares came to be perceived as less risky than bonds. Ever since, bonds have yielded more. You would have been a good deal worse off if you had failed to recognise this unprecedented turning point in stock market history and adjust your portfolio accordingly.

So in future, whenever you are tempted to utter the four words that have been termed the most expensive in the English language, be sure to distinguish between

  1. Genuine and lasting changes in circumstances
  2. Attempts on your part to excuse the inexcusable.

Finally, bear in mind that nothing (much) changes under the sun.

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