Old habits die hard as Time Lords teach us a lesson

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Truth is always revealed to the righteous – so the saying goes – and yet most people only recognise that truth when it’s too late. Put another way: hindsight is 20/20, but wouldn’t it be nice if people also had a little foresight?


While historians warn each generation not to ignore history, people continue to repeat their mistakes time and time again. In no area is this more true than investments, where the average person’s foray into the financial world seems to be plagued by emotion and myopia.

But even a cursory glance at the collective history of human decision making turns up clues left for us by prior generations – clues as to when we might anticipate a “rerun” of an event from a bygone era. And watching a new mania unfold is like watching a “re-boot” of an old series with new characters, aimed at a younger generation who will think they’re seeing something new.

Consider Doctor Who – a familiar old series, with a constantly evolving cast of new characters. When the actor portraying The Doctor leaves the show, a new actor takes his place, which is explained to the audience as the Time Lord’s unique ability to “regenerate”. So why is it that people can follow a television programme for 50 years and recognise when 30-year old plot devices are repeated, but when real-world financial plots are repeated, people are unable to acknowledge that they have seen it all before?

Bubbles and busts have a few things in common with Time Lords: they have been around for centuries, they pop up in every country in the world, and they “regenerate”; that is to say, they take on a superficially different appearance, but deep down they are exactly the same creature. Humanity, however, is nothing like a Time Lord because it never learns from history, and instead carries on repeating the same old mistakes.

It is frustrating to hear the same four-word mantra repeated every time stock markets hit dizzying new heights: “This time it’s different.” No! It’s never different. Same story, new cast. The fundamental reason why most investors lose money is they bought an overpriced asset class at the top an investment cycle, then rode it almost to the bottom before selling. They are probably aware on an intellectual level that it is the wrong time to sell, and that the bottom of the market actually represents an incredible buying opportunity, but emotionally they ignore it because of the pain of their loss.

Sometimes mistakes are caused by good old-fashioned forgetfulness. People forget about the last banking crisis, unless it directly affected them. They forget that house prices do crash, as well as rise, even though the cycle is repeated on average four or five times in each lifetime.

And even the most discerning investor forgets that the stock markets move from expensive to cheap to expensive again continually over hundreds of years. They also forget that the stock market crashes frequently, even though they get reminded of this, on average, every four and a half years.

At the time of writing, the S&P 500 has gone 99 months without a correction (defined as a 20% drop in the market). Barring what would be a shock summer correction, it will be 100 months as you read this. This is already the second-longest uninterrupted upward surge in history, and nearly four years longer than the historical average, and people are still optimistic about equities.

Bull markets inexplicably make people complacent. Any cricket supporter knows to be anxious when their batsman is on 111 (a “Nelson” in cricketing parlance), and any football fan gets a knot their stomach when a rival’s player receives a pass and the commentator says, “He’s not scored a goal in 56 matches.” Why do these events make us nervous? Because fate is being tempted.

As the old saying goes, investors climb a wall of worry, then slide down a slope of hope. In other words, they are tempting fate as the market gets higher, but hope that history won’t repeat itself as it turns downward. But history is cruel that way. Sideburns come and go; neckties get wide then thin; wire rims give way to tortoise shells; bull markets crash.

The current corporate-debt-to-GDP ratio at is over 45%, which is almost the same record amount of leverage seen before the three previous recessions. The S&P 500 index has a Price/Earnings ratio of 24.15 – it was 30 when the dot com bubble burst.

Those two numbers are worthy enough of attention on their own, but combined with the Federal Reserve relaxing the very stimulus which has driven the markets so high in the first place, well, let’s just say our batsman is currently on a “Nelson”. It doesn’t mean he’ll be out next ball, but it is reason enough to make you sweat.


US stock markets are at all-time highs. Global interest rates are at historic lows. And the threat of higher rates will put pressure on both of these markets. You need stable alternatives, and we can help you find them. Email us today: chatwithus@phuketexpatfinance

Courtesy: Published at The Phuket News on July 16, 2017 by Phuket Expat Finance

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