This time it is different

Two weeks ago, I wrote my annual half time report and advised that the best strategy is to stay invested. Some readers questioned this advice with the notion that ‘times are different this time”

Times are different

It’s true; some of the specific events that we are experiencing today are different. September 11th was the worst act of terrorism in history; the threat of nuclear war in the east; the corporate scandals of Enron and Worldcom; a technology meltdown of this magnitude; the lingering effects of Y2K. All of these events have contributed to the negativity in the last couple of years.

It is true these events may not have occurred in the past and every new event has no specific historical base. However, it is important to recognize that markets, countries, economies, industries, and companies have all gone through new incidences of unprecedented history. They have gone through wars, albeit different wars. They have gone through scandals, depressions, recessions, terrorism, politics, bear markets and bull markets.

While I acknowledge that times are tough and times are different, the fact that they are different does not mean that a bull market will never come. It does not mean that the market cannot recover its losses. It does not ensure that stock markets will never reach their highs again.

Not long ago, many pundits and investors were preaching the merits of technology. I remember writing articles of caution and people saying that this time it is different. Technology would never crumble because of how it has changed our lives. Technology makes life more efficient and convenient. It’s different this time because technology has touched our entire lives, from the food we eat to the cars we drive to the manufacturing of homes, to the luxuries that enhance our lifestyle. All these things are true, yet what does not change is that everything goes in cycles.

The story of Nortel

Let me tell you a true story about a friend of mine. Back in February of 2000, one of my friends approached me casually asking about some investment advice. The question was whether or not Nortel was a good buy at roughly $80 per share. Now to put this in context, most people in February of 2002 were overly optimistic about technology and Nortel. Arguably Nortel was in a euphoric state. In retrospect, we know that this was an emotional belief.

I told my friend that I did not own the holding myself in my stock portfolio because I thought it might be overpriced. My logic simply stemmed from the fact that Nortel had gone from $15 per share to $80 per share in just over a year and no investment can sustain that type of momentum. I reiterated one of my favorite principles to investing that everything goes in cycles – what goes up will come down and what goes down will eventually come up.

Technology is here to stay and will change the way we live our lives. At the time, Nortel was the biggest company in Canada. Nortel was on the buy list of almost every brokerage firm. Technology companies and Nortel were different than other companies. This time it was different.

Nortel rises to over $120 per share

My friend bought Nortel and in future conversations; I was reminded of what an idiot I was in not buying Nortel. Every day the stock went up and every day, I continued to be wrong in my assessment. In fact, the stock climbed to over $120 per share within months of his purchase. We all know what has happened to Nortel since its peak share price back in the fall of 2000.

The moral of the story

I will be the last one to say I told you so because I know that this sort of thing happens all the time and to everyone. Far too often our investment behavior is driven by our emotions. Our emotions create the belief that what goes up will keep going up and also what goes down will keep going down. Often our emotions cause us to extrapolate good news and bad news in a linear (straight-line) fashion.

Successful investors need to be rational and disciplined. Warren Buffet said success lies in your ability to create a logical framework to keep emotions from corroding that framework.

Yes, times are different today but remember that everything goes in cycles what goes down will come up. Your discipline to keep emotions from corroding your framework will determine your success. I wish you all the patience and discipline you need to ride through this difficult time.

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