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AS WE CELEBRATE 250 years since the Declaration of Independence, I’m reminded of an expression that’s popular in the investment world: “This time is different.”
The phrase dates to a 1993 publication titled “16 Rules for Investment Success,” authored by the veteran investment manager Sir John Templeton. Rule number 11 included the following admonition: “The investor who says, ‘This time is different,’ when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.”
Templeton’s message, in other words: Human nature doesn’t change. Though the facts change with each new market cycle, the outcome will ultimately be driven by the same human tendencies and emotions as we’ve seen many times before.
The phrase “this time is different” was further popularized by a book by that name published during the worst of the financial crisis in 2009. Economists Carmen Reinhart and Kenneth Rogoff studied dozens of market cycles going back centuries and concluded that Templeton’s somewhat informal hypothesis turned out to be more accurate than even he might have guessed. Things always seem different but rarely are.
As a result, “this time is different” is an expression that’s usually invoked with irony, as if to suggest that whatever investors are excited about today is likely—with the benefit of hindsight down the road—to look no different from similar events in the past.
What makes this notion tricky, though, is that sometimes things do change in ways that are fundamentally new and discontinuous. In other words, we can’t dismiss every new development we see in investment markets with the glib assertion that the future will be no different from the past. Even if human nature is a constant, in other words, a more critical analysis of current events is always warranted.
Here are four such areas where change is underway but the ultimate result is still an open question.
Question 1 – The impact of the internet on investing. Years ago, the assumption was that the internet would democratize investing because it would make more information accessible to more people at lower costs. This hypothesis was logical, and to some degree, it was accurate. Information that was previously only available through a pricey Bloomberg terminal is now available through any number of free or low-cost online services.
But there have been unintended consequences. As much as the internet enables the spread of information, it also accelerates the spread of less-than-useful information that can drive events like the meme stock craze in 2021.
The internet has also given rise to various forms of gambling. It’s enabled inventions like non-fungible tokens, which seem to be of dubious value. And the internet has enabled cryptocurrencies, of which there are apparently millions. Many have lost all or virtually all of their value.
Which way will this go? On the positive side, the internet has lowered costs dramatically. Where brokerage commissions were more than $100 not too long ago, most brokers now charge little or nothing to trade stocks and exchange-traded funds. At the same time, recent trends suggest that the internet has been of mixed value, especially with the recent rise in so-called prediction markets. But reversion to the mean is a powerful force, and ultimately the internet may be a net positive for investors.
Question 2 – The impact of artificial intelligence on the workforce. Not long ago, there was the belief that AI would displace large numbers of workers. This view was supported most notably by OpenAI co-founder Sam Altman, who commented more than once that AI was likely to “replace most of the jobs people do today.” But he’s since changed his mind. “I’m delighted to be wrong about this,” Altman said this spring. “I thought there would have been more impact on entry-level white-collar jobs being eliminated by now than has actually happened.”
What did Altman overlook in his earlier prediction? Investor Bob Haber offers an analog. When railroad networks became widespread in the 1800s, there was the assumption that demand for horses would fall significantly. But the opposite happened.
As Haber explains, “rail displaced horses in one narrow function, long-haul transport, but it increased demand for them almost everywhere else. Rail depots needed drayage. Growing railroad towns needed more cartage. Farms connected to wider markets needed more local hauling. Rail automated one visible task while enlarging the surrounding economic system in ways that created more complementary work for horses and for the humans who depended on them.”
We may see something similar with AI. The jury is still out, but it’s clear that the most pessimistic predictions overlooked potential second-order effects.
Question 3 – Whether the stock market is overvalued. For a decade, and maybe more, there’s been hand-wringing over stock market valuations. Using the popular cyclically-adjusted price-to-earnings (CAPE) ratio as a yardstick, the market’s valuation has been rising almost continuously since 2009 and is now just a few percent below the peak reached in 2000. Through that lens, there’s a lot to worry about, and those who argue that this time is different seem like they’re straining to justify numbers that shouldn’t be dismissed.
There’s another side to this argument, though, driven by the fact that the composition of the market has changed over time. Today’s largest companies are almost all in technology and are faster growing than the largest firms were in past generations. As a result, the argument goes, today’s technology companies deserve higher valuations. And that, in their view, makes the CAPE ratio an outdated metric.
Who’s right? Of course, time will tell. That’s why investors’ best defense, in my view, is a defensive asset allocation.
Question 4 – The value of international diversification. Twenty years ago, the accepted wisdom was to diversify a stock portfolio internationally. One reason was because many economies outside the U.S. were growing quickly. Another argument was that exchange rate fluctuations were a potential source of added returns. Those who limited their investments to the U.S. were accused of “home bias.”
But this view came under pressure when, for most of the past 20 years, domestic markets outpaced their global peers, and that’s reversed only recently.
How should we think about this question? One point of view is that we shouldn’t abandon diversification simply because it delivered a string of losing years, and indeed, the recent resurgence of international stocks might represent the beginning of a new trend.
The opposing view cites the relative anemia of many international markets, especially in Europe. Over the 15-year period between 2008 and 2023, GDP per capita in the European Union fell from 76.5% of the level in the U.S. to just 50%.
Which side is correct? It is, of course, anyone’s guess, which is why I continue to believe in international diversification.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
