By Alexander Green
Investment legend John Templeton famously said that the biggest mistake an investor can make is to say “this time it’s different.”
In some ways, this statement may seem a little strange. On the surface, every market correction is different. For example, when the stock market imploded on October 19, 1987, falling over 22 percent in a single session, that was unexpected. After all, no government failed that morning. No currency collapsed. No President was shot. To this day, pundits still argue about why the stock market crashed.
Or how about the bear market of 1990? No one foresaw Saddam Hussein rolling into Kuwait that August, taking over the country and its oil fields. Investors worldwide speculated that the Middle East would go up in flames. (And, indeed, many Kuwaiti oil fields did.) That was certainly different.
Then there was the collapse of hedge fund giant Long-Term Capital in 1998. Fed Chairman Alan Greenspan feared that unwinding the fund’s highly leveraged positions would turn the bond market upside down. He worked behind the scenes to get major Wall Street firms to help bail out the fund. That was something new.
Or how about the March 2000 to October 2002 bear market that started with the collapse of technology and Internet stocks? It was the end of an era, the deflating of a bubble. We hadn’t seen anything like that in modern history.
Or how about 9/11? Who woke up that day suspecting that a group of zealots would fly planes full of people into buildings? Not me.
The mania for residential real estate six years ago was something curious, too. And so was the collapse of sub-prime mortgages. That led to an unprecedented financial crisis and a harrowing drop in the Dow. You don’t see something like that every day.
So was Templeton out of his mind when he declared it foolish to say “this time it’s different?” Of course not. Templeton well understood that the particular events that cause a market decline will always vary. What shouldn’t vary is the way you respond to it as an investor.
If you bought into the market crash of 1987, you did very well over the next few years. After the bear market of 1990, stocks went on a remarkable 10-year run. If you bought into the secular bear market of 2000 to 2002, you also made out handily over the next five years. And, of course, the market almost doubled from the lows of the financial crisis in 2009.
Here we are today and the stock market has swooned again, this time due to sovereign debt problems here and in Europe. Nothing like this has happened in recent history.
So the question you face now is whether to take advantage of the sell-off and buy great companies at bargain prices or… to insist “this time’s it’s different.”
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