And you tell me over and over and over again my friend
Ah, you don’t believe we’re on the eve of destruction.
–Protest song written by P.F. Sloan in 1965, recorded by Barry McGuire.
Eve of Destruction (Watch it performed if you really want to hear it again.)
The four most dangerous words in investing are “This time it’s different.”
— Sir John Templeton
From the Wikipedia entry on Benjamin Graham’s 1949 seminal work on value investing, The Intelligent Investor:
Graham’s favorite allegory is that of Mr. Market, an obliging fellow who turns up every day at the share holder’s door offering to buy or sell his shares at a different price. Often, the price quoted by Mr. Market seems plausible, but sometimes it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or ignore him completely. Mr. Market doesn’t mind this, and will be back the following day to quote another price.
The point of this anecdote is that the investor should not regard the whims of Mr. Market as a determining factor in the value of the shares the investor owns. He should profit from market folly rather than participate in it. The investor is advised to concentrate on the real life performance of his companies and receiving dividends, rather than be too concerned with Mr. Market’s often irrational behavior.1
So what is this all about – back to the 40s or the 60s? Are we having a bout of nostalgia? No. To put it quite simply, we can learn from history or repeat past mistakes, our choice. Which do you choose?
The strident voice in this famous song represents a high level of conviction in a point of view, so high, in fact, that he keeps shoving the fact that the listener disagrees back at him as if even a dolt like him must see his own folly. Those of us old enough to remember the 60s remember this attitude, people with a monopoly on the truth and not shy in letting us know about it in loud voices.
Well, turns out we were not on the “eve of destruction.” It was not different that time. As compelling a case as they tried to make for the end of everything, they were wrong. The world did not end, unfortunately, because what followed was even worse – the 70s! Can you say “polyester?”
Fast forward to now
Moving right along, how about now? Is it different this time? Are we on the “eve of destruction”? Or, perhaps worse, are we facing PIMCO’s “New Normal” of deleveraging, low returns, high risk, and the heavy hand of government taxation and regulation suppressing business growth? Let me respond to that with two facts:
1. The New Normal stuff rolled out in 2009 or so, just in time for the biggest equity rally in a very long time. They were calling for a long, slow recovery, if any.
2. This year PIMCO, based on these views, sold out of treasuries in their Total Return fund, used by many of our clients. That move cost the fund some return, as treasuries performed very well. More on that below.
Based on the record, I would suggest that we ought to be fairly skeptical of market forecasts, especially ones that explain why this time is different. We can all see the problems, this is not an easy situation, and much of the analysis done by PIMCO and others may be correct, but what we can see is that having a solid and plausible analysis does not seem to enable you to predict where the market is going to go, or what future returns are going to be. I keep hearing they will be very low – are we really so sure of that?
Wisdom from the past
The two small pieces of wisdom above have a lot to teach us, as we contemplate our famously New Normal world.
First of all, why in the world are we ever willing to accept “it’s different this time”? It never was before, not on the upside when all appeared rosy, nor on the downside when the end of life as we know it loomed, nor when a New Normal called for “new strategies”. We seem to get the same result every time – the market defies the forecasters and surprises us.
Secondly, long-term investing turns out to be about healthy businesses earning profits and ultimately paying dividends for investors. Thus the piece from Graham’s famous work, where his Mr. Market character makes up new prices every day, but that does not distract the intelligent investor, who looks at the businesses he owns, not the fluctuations in the market. If you own healthy businesses (purchased at a reasonable price) for a long time, you make a good return; that is fundamental.