The 52-Week Low Formula: A Contrarian Strategy that Lowers Risk, Beats the Market, and Overcomes Human Emotion

Chapter 8This Time Is Never Different

Jacobian Inverse: I want to believe that the risks and returns embedded in today’s markets look nothing like anything in the past. There is always something new under the sun, and it is hopeless to study the past to help me make informed present-time decisions.

Maybe this seems absurd, but, unfortunately, many investors behave as if what is happening within the markets is completely new and unprecedented when, in fact, if you study financial history, you will find many common threads between the past bubbles and bursts.

In a March 2011 GMO white paper, James Montier presented his “Seven Immutable Laws of Investing.” These seven principles, when taken as a whole, provide a nice basis for investing behavior that should lead to long-term gains and include:

1. Always insist on a margin of safety.
2. This time is never different.
3. Be patient and wait for the fat pitch.
4. Be contrarian.
5. Risk is the permanent loss of capital, never a number.
6. Be leery of leverage.
7. Never invest in something you don’t understand.

Pretty good advice, but the one that stood out was the second one: this time is never different. Montier quotes Sir John Templeton, who says “this time is different” are the four most dangerous words in investment. I believe he’s right. You don’t have to look too far back in history to know that it repeats itself, that markets become inflated and bubbles swell until they burst. The idea that a new bubble is somehow different than the old ones because ...