Not only is this time different, but it’s different every time. This is why so many investors are able to create market-beating strategies with the benefit of hindsight that go on to underperform in the real world. Markets are constantly evolving based on our updated knowledge of the past.
Outperformance can evaporate. Flows into certain products or strategies can change their fundamentals. Any asset can become a wonderful investment at one price and a terrible one at another.
Historical context is critical for understanding the financial markets. What else do investors have to go by? But you have to put things into perspective and realize that markets are a complex adaptive system. They’re not static and they don’t always follow preset rules.
Since we’re providing context, here is what Templeton was actually talking with his famous four words. This was the lead-in to that statement:
The only way to avoid mistakes is not to invest -- which is the biggest mistake of all. So forgive yourself for your errors. Don’t become discouraged, and certainly don’t try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience. Determine exactly what went wrong and how you can avoid the same mistake in the future.
And here’s the follow-up:
The big difference between those who are successful and those who are not is that successful people learn from their mistakes and the mistakes of others.
Templeton wasn’t talking about financial ratios or models when he stated that the four most dangerous words are “This time is different.” He was talking about human nature. That’s the one constant that remains in the markets.
One definition of insanity is doing the same thing again and again and expecting a different result. This is what Templeton was referring to with the four most costly words in the annals of investing.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.