The 4 Most Dangerous Words for Your Portfolio

Are you worried yet?

Does the fact that we've come roaring off the market bottom bother you?

Does the really severe recession we've been in with its banking crisis, government takeover of companies, and near-double-digit unemployment make you think that this time, it really is different?

John Mauldin believes it is. In a column written last June, he outlined several reasons why he believes that, why he thinks we are going to reset to a "new normal," one that involves lower consumer spending and a longer-than-usual recovery.

He could be right. Japan's economy, held up by many as an example of what we might be headed toward, has gone essentially nowhere for many years. The Nikkei index is actually down, a lot, over the past 10 and 20 years. More than 40% and 70%, respectively, in case you're interested.

However.

I have a fundamental problem with arguments pinned upon the phrase: "This time it's different."

How it's been "different"
When I first started investing nearly 10 years ago, people were using that phrase to justify investing in Internet companies without earnings. Luckily I stayed away from those, but I did buy shares of Cisco and Intel (Nasdaq: INTC  ) , believing their hypergrowth stories would hold true. "This time it's different." That worked out well.

The last few years, we watched housing prices go up and up and up. Models used by companies like Bank of America (NYSE: BAC  ) and Fannie Mae (NYSE: FNM  ) assumed those prices wouldn't decline. Television shows were based on this belief. "This time it's different." Not the banks' best idea.

One more. Prior to the crash in commodity prices in mid-2008, we were told the place to invest was in commodity companies such as fertilizer makers Agrium or Mosaic (NYSE: MOS  ) , or miners like Vale (NYSE: VALE  ) or Rio Tinto. The emerging markets in Brazil, Russia, India, and China -- the BRIC nations -- would need everything they could produce and prices would continue to rise. "This time it's different." Well, you get the idea.

Do you notice a pattern here? Each time investors believed that phrase, they got burned. And there's no reason to believe that the same won't hold true on the downside.

According to Robert Arnott, chairman of the asset management firm Research Affiliates, "The words 'This time it's different' are always a little alarming because they are used to justify poor investment choices." The late Sir John Templeton called them, "The four most expensive words in the English language." And he should know: He lived through, and invested during, a lot of periods that could be called "different."

Plus ca change, plus c'est le meme chose
Sure, the Japanese market has been a basket case over a long period. But does that mean every company was terrible? Honda Motor, for instance, is up nearly 500% over the past 20 years, with an early 2007 peak performance of just more than 700%. And that's neither an obscure company, nor the only example.

My colleague Ilan Moscovitz pointed out that since the last recession, an investment in Apple (Nasdaq: AAPL  ) returned more than 1,000% to investors, while one in priceline.com, one of those "different" dot-com companies that managed to survive, gave back more than 800%.

Mauldin could be right. Maybe this time it really is different. But as those examples show you, if you stop investing, you miss out on chances like these. Our job as investors is to try to find companies that perform well and that we can feel comfortable investing in.

One such, a recommendation of Motley Fool Stock Advisor, is Amazon.com (Nasdaq: AMZN  ) . It started out as an online bookseller, but has since branched out into music, movies, even kid's clothing. Its solid balance sheet, ability to generate tons of free cash flow, and money-saving offers for cash-strapped consumers make it an investment worth considering regardless of whether it's different this time.

If you'd like some help finding other high-quality companies, consider joining Fool co-founders David and Tom Gardner at our Stock Advisor investing service. You'll receive two top stock picks each month, as well as guidance on investing through the most challenging times we've seen. Click here for more information.

Jim Mueller owns shares of Apple and Agrium, but none of the others mentioned. Apple, Amazon, and priceline are Stock Advisor selections. Intel is an Inside Value selection. The Fool's disclosure policy is probably no different from the last time you read it, but you might want to check.


Read/Post Comments (15) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 10, 2009, at 4:30 AM, ozzfan1317 wrote:

    Fear and greed are the most dangerous emotions to any investor. The only thing worse is blind hope. In my opinion we have already seen the worst of this crisis. No promises that you will see anymore major upside to the indexes however there are still bargains to be had you just need to know where to look.

  • Report this Comment On October 10, 2009, at 4:30 AM, ozzfan1317 wrote:

    Fear and greed are the most dangerous emotions to any investor. The only thing worse is blind hope. In my opinion we have already seen the worst of this crisis. No promises that you will see anymore major upside to the indexes however there are still bargains to be had you just need to know where to look.

  • Report this Comment On October 10, 2009, at 12:56 PM, gustavoelperro wrote:

    "when I started trading 10 years ago"

    Wow did he really say that? And we're supposed to trust his vast wisdom?

    Uhhuun.

  • Report this Comment On October 10, 2009, at 1:59 PM, TMFTortoise wrote:

    Um, no, you must have misread that part. "When I first started investing nearly 10 years ago" is what I wrote.

    Whether or not you trust my "vast wisdom" is, of course, up to you.

    Cheers,

    Jim

  • Report this Comment On October 11, 2009, at 10:46 AM, thisislabor wrote:

    You know, this Jim Mueller guy.... I like him.

    yep, I think I do.

  • Report this Comment On October 11, 2009, at 12:48 PM, Gorm wrote:

    Yes, I believe things are different!

    Our economy is no longer robust. We have exported industries and jobs, ie the MEANS to grow wealth. We import more than export and the greatest risk is ENERGY, the lifeblood of our economy.

    As our middle class eroded we employed equity in housing and debt as a means to S T R E T C H our standard of living by using our homes as ATMs. SO with consumers scared, leveraged, feeling poor an vulnerable, our exports incapable of sustaining us, how can we RELY on 2/3 of our GDP from consumers?

    And Congress is so misguided, we can't count on them. They see spending the same as investment. They see effort the same as success. All they will do is go through the motions that any spending is stimulus and cater to the special interests - they favor.

    No, none of that spells a promising future. And yes, that is why things are different now.

  • Report this Comment On October 11, 2009, at 12:49 PM, Gorm wrote:

    Yes, I believe things are different!

    Our economy is no longer robust. We have exported industries and jobs, ie the MEANS to grow wealth. We import more than export and the greatest risk is ENERGY, the lifeblood of our economy.

    As our middle class eroded we employed equity in housing and debt as a means to S T R E T C H our standard of living by using our homes as ATMs. SO with consumers scared, leveraged, feeling poor an vulnerable, our exports incapable of sustaining us, how can we RELY on 2/3 of our GDP from consumers?

    And Congress is so misguided, we can't count on them. They see spending the same as investment. They see effort the same as success. All they will do is go through the motions that any spending is stimulus and cater to the special interests - they favor.

    No, none of that spells a promising future. And yes, that is why things are different now.

  • Report this Comment On October 12, 2009, at 12:37 PM, MAXwolf wrote:

    Things are always "different" and they always will be, how could they be the "same."?

    Resisting change and wanting "same" are basic tenets of human nature. Many, many years ago there was the wise old saying "if god had wanted man to fly, he would have given him wings".

    Nick

  • Report this Comment On October 13, 2009, at 5:07 PM, Manu12 wrote:

    sorrY your analysis is poor, how can you compare internet companies with no earnings with Fertilizer companies who had earnings growth over many years? I do not know what was different back in the internet bubble days, different from what? May be people said not to invest in companies with no earnings for 100 years or so, and they started saying this time is different for the internet thing, but Fertilizer companies are pretty solid, 2008 fertilizer demand did not crash because fertilizer was an illusion, but because the whole finacial system collapsed, so please be specific, may be the market is overvalued now, but nothing is different in commodity and fertilizers, the World still needs commodities as it always did, a recession hits everybody, and you know what? I think that before you go to amazon to buy something nice you make sure you get something to eat......, than if you got money left you spend it somwhere else.

    So in fertilizers nothing is different, everything is the same, we just had a worldwide recession, that is it......

  • Report this Comment On October 13, 2009, at 5:18 PM, Manu12 wrote:

    and back in the internet days you had supply of internet sites every day for a few dollars anyone could set up a .com, for fertilizers you need billions and it takes years to get capacity expantions, so nothing is different, the World needs fertilizers more than it needs amazon, may be they cut back spending in 2008, but if you want to eat a burger while you order a Good book on investing on amazon, you got to hope that nothing is different and the World will use fertilizers again......

  • Report this Comment On October 13, 2009, at 5:29 PM, Manu12 wrote:

    sorry i have read your article again and I do not get it, you mean people were saying this time is different in 2007 when they were buying fertilizers? Different from what, if they were saying it back than? Or youmean they are saying it now?

  • Report this Comment On October 13, 2009, at 5:38 PM, Manu12 wrote:

    may be some could say that commodities bull markets end because at a certain point prices are so high that there is oversupply because everybody wants to get into the market, so this time could may not be different than any other time, exept that is was not oversupply but recession, so "underdemand" and we are at the beginning of the cycle, but in fertilizers it is unlikly the case, it takes huge amounts of investment(billions, many Billions) to add brownfield capacity and even more for greenflield, and all this expansions take from 4 to 8 years to get the product to the market, so for the next 6 years it seems very unlikely that there could be oversupply in fertilizers, expecially Potash, so commodity bull markets do not last forever, but fertilizers bull markets seem to last more......

  • Report this Comment On October 13, 2009, at 5:48 PM, Manu12 wrote:

    and one last thing:

    recessions always ended and the World got back on track, why should this time be different??????

  • Report this Comment On October 14, 2009, at 10:24 AM, 2humble2fool wrote:

    No two situations are exactly the same, but few, if any, are exactly unique. There are always similarities and there are always differences. However, there has always been a reversion to the mean. Does this mean things return to exactly the way they were? No, but most likely this is not the end of the world either. I think if you had a good long-term investing strategy, then it is probably worth sticking with it. The key is remaining patient and not to panic.

  • Report this Comment On October 16, 2009, at 2:23 PM, johnm08 wrote:

    I'll agree with Gustav above... the ten year comment doesn't do anything for your personal brand as finance expert/journalist. I wouldn't hide your relative youthfulness, just don't flaunt it as experience.

    Best wishes,

    john

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1003924, ~/Articles/ArticleHandler.aspx, 11/24/2014 11:35:29 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement