This Time It’s Different

As someone who embarked on their investment career shortly after the 2008 global financial crisis and weathered the storm of the 2020 stock market crash, I’ve witnessed first-hand the cyclical nature of financial markets.

These crises, though different in their causes, share a common aftermath: the lasting impact on investor portfolios and psyche. Despite the subsequent recovery of equity markets, remnants of these turbulent times linger, serving as poignant reminders of the cost of getting swept up in market frenzies.

Smart Apes

The financial market, at its core, is a collective of human interactions. It’s people trading with people, and despite advancements in technology and the complexity of investment vehicles, the market’s pulse is still governed by emotional and irrational creatures called humans.

This intrinsic trait underscores why, despite painful experiences, investors find themselves repeating the same mistakes. The allure of new investment trends—be it NFTs, cryptocurrencies, or overvalued tech companies—reveals our enduring naivety and susceptibility to hype.

GMO’s Jeremy Grantham was once asked what lessons investors would learn from the 2008 Global Financial Crisis, he replied: “In the short-term a lot, in the medium-term a little, in the long-term, nothing at all. That would be the historical precedent.” 

Thus, suggesting a historical pattern of short-term learning followed by a gradual return to old habits. This observation points to the heart of the issue: our collective memory and behaviour. Painful investment experiences have a diminishing impact over time, and with each new generation of investors comes a fresh set of minds eager, unburdened by the baggage carried by the previous generation – ready to learn the same lessons anew.   

“What a wicked web we weave” – Sir Walter Scott

Moreover, the cycle of repeating mistakes is not solely a function of fading memories or new entrants to the market. It’s also about the stories we tell ourselves. Every market crash or boom comes with its narrative, convincing us that “this time it’s different”.

This mantra, despite being a known harbinger of investment peril as highlighted by Sir John Templeton, continues to trap investors in cycles of poor decision-making. The changing nature of market stories allows our behaviors—driven by fear, greed, and hope—to persist unchanged.

Self-Reinforcing Loop

This combination of compelling narratives, the pressure of social proof, and the fear of missing out creates a powerful force that often leads to irrational investment decisions. This self-reinforcing loop of stories, performance, and investor behavior is difficult to escape.

It begins with an engaging narrative about a particular investment or market trend. This narrative, often fuelled by media coverage, expert opinions, and social media buzz, captures the imagination of investors, promising unprecedented opportunities.

As more investors buy into the story, their collective actions drive up the performance of the asset or market segment in question, creating tangible results that seem to validate the initial narrative. This performance, in turn, attracts more attention and investment, further reinforcing the belief in the narrative’s validity.

As the cycle continues, social proof amplifies the trend, with investors drawing confidence from the growing number of their peers who are also investing based on the same story. This loop creates a powerful momentum that can detach market valuations from underlying fundamentals, making it difficult for investors to break away from the crowd and evaluate the investment objectively.

“The most important quality for an investor is temperament, not intellect. – Warren Buffett

The fear of missing out (FOMO) and the desire to be part of a winning trend can override rational decision-making, leading even sceptical investors to join in, perpetuating the cycle. It’s not necessary for everyone to buy into a trend for it to dominate the market; a critical mass can sway the broader investor sentiment, leading many to forsake rational decision-making.

The advent of modern technology has amplified this phenomenon. Financial markets have become prolific storytelling machines, with narratives spreading faster and wider than ever before.

The ease of access to trading and the instantaneous nature of information flow have created a potent mix that can exacerbate our behavioral weaknesses. This environment makes it increasingly difficult for investors to maintain discipline, making the task of learning from past mistakes more daunting.

Awareness and Discipline

Recognizing the immutable nature of our behavioral tendencies and the ever-present lure of new market narratives is the first step towards better investment decisions. Although the challenge is formidable, understanding the dynamics at play can empower investors to navigate future market upheavals more prudently.

As we look ahead, the lessons of the past serve as a guide, not just in avoiding previous mistakes but in fostering a more thoughtful and disciplined approach to investing. The market will continue to evolve, presenting new temptations and challenges.

“The investor’s chief problem and even his worst enemy is likely to be himself.” – Benjamin Graham

However, by acknowledging our vulnerabilities and the seductive power of new narratives, we can strive to make more informed choices, keeping in mind the enduring wisdom that, in investing, sometimes the most significant risk lies in forgetting the lessons history has to teach us.

I’ll try and remember that when the next market crash comes.

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