Money Matters - Simplified

The 4 Most Dangerous Words for Your Portfolio

Are you worried yet?

Does the fact that we've come roaring off the market bottom bother you?

Does the really severe recession we've been in with its banking
crisis, government takeover of companies, and near-double-digit
unemployment make you think that this time, it really is different?

John Mauldin believes it is. In a column written last June, he
outlined several reasons why he believes that, why he thinks we are
going to reset to a "new normal," one that involves lower consumer
spending and a longer-than-usual recovery.

He could be right. Japan's economy, held up by many as an example of
what we might be headed toward, has gone essentially nowhere for many
years. The Nikkei index is actually down, a lot, over the past 10 and
20 years. More than 40% and 70%, respectively, in case you're
interested.

However.

I have a fundamental problem with arguments pinned upon the phrase: "This time it's different."

How it's been "different"

When I first
started investing nearly 10 years ago, people were using that phrase to
justify investing in Internet companies without earnings. Luckily I
stayed away from those, but I did buy shares of Cisco and Intel (Nasdaq: INTC), believing their hypergrowth stories would hold true. "This time it's different." That worked out well.

The last few years, we watched housing prices go up and up and up. Models used by companies like Bank of America (NYSE: BAC) and Fannie Mae (NYSE: FNM) assumed those prices wouldn't decline. Television shows were based on this belief. "This time it's different." Not the banks' best idea.

One more. Prior to the crash in commodity prices in mid-2008, we
were told the place to invest was in commodity companies such as
fertilizer makers Agrium or Mosaic (NYSE: MOS), or miners like Vale (NYSE: VALE) or Rio Tinto.
The emerging markets in Brazil, Russia, India, and China -- the BRIC
nations -- would need everything they could produce and prices would
continue to rise. "This time it's different." Well, you get the idea.

Do you notice a pattern here? Each time investors believed that
phrase, they got burned. And there's no reason to believe that the same
won't hold true on the downside.

According to Robert Arnott, chairman of the asset management firm
Research Affiliates, "The words 'This time it's different' are always a
little alarming because they are used to justify poor investment
choices." The late Sir John Templeton called them, "The four most
expensive words in the English language." And he should know: He lived
through, and invested during, a lot of periods that could be called
"different."


Plus ca change, plus c'est le meme chose


Sure, the Japanese market has been a basket case over a long period. But does that mean every company was terrible? Honda Motor,
for instance, is up nearly 500% over the past 20 years, with an early
2007 peak performance of just more than 700%. And that's neither an
obscure company, nor the only example.

My colleague Ilan Moscovitz pointed out that since the last recession, an investment in Apple (Nasdaq: AAPL) returned more than 1,000% to investors, while one in priceline.com, one of those "different" dot-com companies that managed to survive, gave back more than 800%.

Mauldin could be right. Maybe this time it really is different. But
as those examples show you, if you stop investing, you miss out on
chances like these. Our job as investors is to try to find companies
that perform well and that we can feel comfortable investing in.

One such, a recommendation of Motley Fool Stock Advisor, is Amazon.com (Nasdaq: AMZN).
It started out as an online bookseller, but has since branched out into
music, movies, even kid's clothing. Its solid balance sheet, ability to
generate tons of free cash flow, and money-saving offers for
cash-strapped consumers make it an investment worth considering
regardless of whether it's different this time.

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