What did John Templeton mean when he said that the four most dangerous words in investing are: ‘this time it’s different'?
"Essentially, he means ""one ignores history at their own peril"". We often hear people arguing that ""the old rules no longer apply"".  Whether it be to valuations, borrowing, or any of the other common metrics, to ignore the lessons of the past is to invite disaster.   History shows us that major crises in the markets usually occur when the old rules are ignored and people believe that current exceptional market conditions are justified by special circumstances." "This refers to the faulty idea that the stock market will behave differently than it has in the past.  For example, in the late 1990s, internet stocks rose to ridiculous heights in price, to be followed soon after with the Dot-Com Bubble crash. In the future, it's likely that there will be another such bubble with another hot stock - we just don't know what kind.  Saying that ""this time it will be different"" could mean that you expect this bubble not to burst when, historically, that is never the case." "It's a statement that seems to be true about our tendency to believe we won't make the same mistake twice, even though we do, and that somehow what's occurring in the present is completely different, even when the underlying fundamentals of the situation may be nearly identical.  It's a form of self-delusion and, sometimes, mass-delusion, and it has been a major contributing factor to many of our worst financial disasters. If you look at every housing bubble, for instance, we examine the aftermath, put new regulations and procedures into place, theoretically to prevent it from happening again, and then move forward.  When the cycle starts to repeat itself, we ignore the signals, telling ourselves, ""oh, that can't happen again -- this time it's different."" When investors begin to ignore the warning signs because they think the current situation is somehow totally different and therefore there will be a different outcome than the last disaster, that's when things actually do go bad. The 2008 housing crisis was caused by the same essential forces that brought about similar (albeit smaller scale) housing disasters in the 80's and 90's -- greed caused banks and other participants in the housing sector to make loans they knew were no good (an oversimplification to be sure, but apt nonetheless), and eventually the roof caved in on the market.  In 2008, the essential dynamics were the same, but everyone had convinced themselves that the markets were more sophisticated and could never allow things like that to happen again.  So, everyone told themselves this was different, and they dove into the markets headlong, ignoring all of the warning signs along the way that clearly told the story of what was coming had anyone bothered to notice." "There's an elephant in the room that no one is addressing: Suckers. Usually when there's a bubble, many people are fully aware that its a bubble. ""This time its different"" is a sales pitch to the outsiders. It the dotcom boom for example a lot of people knew that the P/E was ridiculous but bought objectively valueless tech stocks with the idea of unloading them later to even bigger fools. People view it like the children's game musical chairs: as long as I'm not standing when the music ends some other sucker gets left holding the bag. But once you get that first hit of easy money, its sooo tempting to keep playing the game. Sometimes, if it lasts long enough, you start to drink your own kool-aid: gee maybe it really is different this time. The best way to win a crooked game is not to play*. *Just in case someone thinks I'm advising against the stock market in general, I'm not: I'm advocating not buying stocks that you know are worthless with the hope of unloading them on some other sucker." "A brief review of the financial collapses in the last 30 years will show that the following events take place in a fairly typical cycle: Overuse of that innovation (resulting in inadequate supply to meet demand, in most cases) Inadequate capacity in regulatory oversight for the new volume of demand, resulting in significant unregulated activity, and non-observance of regulations to a greater extent than normal Confusion regarding shifting standards and regulations, leading to inadequate regulatory reviews and/or lenient sanctions for infractions, in turn resulting in a more aggressive industry ""Gaming"" of investment vehicles, markets and/or buyers to generate additional demand once the market is saturated ""Chickens coming home to roost"" - A breakdown in financial stability, operational accuracy, or legality of the actions of one or more significant players in the market, leading to one or more investigations A reduction in demand due to the tarnished reputation of the instrument and/or market players, leading to an anticipation of a glut of excess product in the market ""Cold feet"" - Existing customers seeking to dump assets, and refusing to buy additional product in the pipeline, resulting in a glut of excess product ""Wasteland"" - Illiquid markets of product at collapsed prices, cratering of associated portfolio values, retirees living below subsistence incomes Such investment bubbles are not limited to the last 30 years, of course; there was a bubble in silver prices (a 700% increase through one year, 1979) when the Hunt brothers attempted to corner the market, followed by a collapse on Silver Thursday in 1980.   The ""poster child"" of investment bubbles is the Tulip Mania that gripped the Netherlands in the early 1600's, in which a single tulip bulb was reported to command a price 16 times the annual salary of a skilled worker. The same cycle of events took place in each of these bubbles as well. Templeton's caution is intended to alert new (especially younger) players in the market that these patterns are doomed to repeat, and that market cycles cannot be prevented or eradicated; they are an intrinsic effect of the cycles of supply and demand that are not in synch, and in which one or both are being influenced by intermediaries. Such influences have beneficial effects on short-term profits for the players, but adverse effects on the long-term viability of the market's profitability for investors who are ill-equipped to shed the investments before the trouble starts." To play devil’s advocate to much of what has been written before, it's also worth noting that this is quite an important quote for a sort of reverse reason to what has been discussed before us, that of that fact that virtually every economic situation is different. As it's such a reflexive problem, each and every set of exact circumstances is always different from before. Technology radically changes, monetary policy and economic thinking shift, social needs and market expectations change and thus change the very fabric of markets as they do. It's only in its most basic miss projections of growth that economics repeats, and much like warfare, has constant shifts that radically change the core assumptions about it and do create completely new circumstances that we have to struggle to deal with predicting. People betting on the endless large scale mechanised warfare between western powers continuing post nuclear weapons would have been very, very wrong for example. That time it actually was different, and this actually happens with surprisingly often in finance in ways people quickly bury in the memories and adopt to the new norm. Remember when public ownership of stock wasn't a thing? When bonds didn't exist? No mortgages? Pre insurance? These are all inventions and changes that did change the world forever and were genuinely different and have been ever since, creating huge structural changes in economies, growth rates and societies interactions.  As the endless aim of the game is predicting growth well, we often see people/groups over extend on one new thing, and/or under extend on another as they struggle to model these shifts and step changes.  Talking as if the fact that people do this consistently as if it is some kind of obvious thing we can easily learn from (or easily take advantage of) in the context of such a vague and complex problem could be argued to be highly naïve and largely useless. This time it is different. Last time it was too.
&gt;At some point you can no longer take on more debt even if you wanted to. If global and domestic investors think you are going to be a risky investment then they cut you off.  The *issuer* of a currency can't be cut off from spending in the currency they issue. This is why I am amazed that people are saying this time the market is different; it will only correct itself; we won't see another crash like '08.  When in reality, all of the data is pointing to a bubble that is about to burst worst than '08. One of the funnier parts of the finance crisis was seeing just how awful Morgenson could be. Every time she wrote something dumb, she'd manage to one-up herself the next time.  It was impressive.   (which made me remember that [Calculated Risk even had a tag](http://www.calculatedriskblog.com/search/label/Picking%20On%20Poor%20Gretchen) for posts about her awful stories.) &gt; The stock market measures individual companies' ups and downs, right?  Not precisely, no. If anything it measures...  1. Information  2. Risk and Riskiness  3. Market Sentiment  &gt; Perhaps it could even gain over my life.  One would assume that this would be a relatively flat graph, with little if any trend, and occasional spikes upwards and downwards. It'd also be subject to caps and floors, unlike the market which is only floored (at 0).  &gt; I don't know if anyone could come up with a kind of standardised measurement we could use to do this.  It'd be impossible. Happiness is subjective *and* relative. Getting a million bucks might make me happy, but Bill Gates bored. Having a child can be conflicting intensely. The death of a loved one could be both sad and a relief. "fennec has a very good answer but i feel it provides too much information. So i'll just try to explain what that sentence says. Put option is the right to sell a stock. ""16 puts on Cisco at 71 cents"", means John comes to Jim and says, i'll give you 71 cent now, if you allow me to sell one share of Cisco to you at $16 at some point in the future ( on expiration date).  NYT quote says 1000 puts that means 1000 contracts - he bought a right to sell 100,000 shares of Cisco on some day at $16/share. Call option - same idea: right to buy a stock." "There may well be several such graphs, I expect googling will turn them up; but the definition of risk is actually quite important here. My definition of risk might not be quite the same as yours, so the relative risk factors would be different. For example: in general, stocks are more risky than bonds.  But owning common shares in a blue-chip company might well be less risky than owning bonds from a company teetering on the edge of bankruptcy, and no single risk number can really capture that. Another example: while I can put all my money in short-term deposits, and it is pretty ""safe"", if it grows at 1% so that my investment portfolio cannot fund my retirement, then I have a risk that I will run out of money before I shuffle off this mortal coil.  How to capture that ""risk"" in a single number? So you will need to better define your parameters before you can prepare a visual aid. Good Luck" "I think that ""memoryless"" in this context of a given stock's performance is not a term of art. IMO, it's an anecdotal concept or cliche used to make a point about holding a stock. Sometimes people get stuck... they buy a stock or fund at 50, it goes down to 30, then hold onto it so they can ""get back to even"". By holding the loser stock for emotional reasons, the person potentially misses out on gains elsewhere." "Can you easily stomach the risk of higher volatility that could come with smaller stocks? How certain are you that the funds wouldn't have any asset bloat that could cause them to become large-cap funds for holding to their winners? If having your 401(k) balance get chopped in half over a year doesn't give you any pause or hesitation, then you have greater risk tolerance than a lot of people but this is one of those things where living through it could be interesting. While I wouldn't be against the advice, I would consider caution on whether or not the next 40 years will be exactly like the averages of the past or not. In response to the comments: You didn't state the funds so I how I do know you meant index funds specifically? Look at ""Fidelity Low-Priced Stock"" for a fund that has bloated up in a sense. Could this happen with small-cap funds? Possibly but this is something to note. If you are just starting to invest now, it is easy to say, ""I'll stay the course,"" and then when things get choppy you may not be as strong as you thought. This is just a warning as I'm not sure you get my meaning here. Imagine that some women may think when having a child, ""I don't need any drugs,"" and then the pain comes and an epidural is demanded because of the different between the hypothetical and the real version. While you may think, ""I'll just turn the cheek if you punch me,"" if I actually just did it out of the blue, how sure are you of not swearing at me for doing it? Really stop and think about this for a moment rather than give an answer that may or may not what you'd really do when the fecal matter hits the oscillator. Couldn't you just look at what stocks did the best in the last 10 years and just buy those companies? Think carefully about what strategy are you using and why or else you could get tossed around as more than a few things were supposed to be the ""sure thing"" that turned out to be incorrect like the Dream Team of Long-term Capital Management, the banks that were too big to fail, the Japanese taking over in the late 1980s, etc. There are more than a few times where things started looking one way and ended up quite differently though I wonder if you are aware of this performance chasing that some will do." I always thought high-risk investing is hit or miss, but this is working out very well with the stocks I've chosen  High risk investing IS hit and miss.  We are in an historic bull market.  Do not pat yourself on the back too hard, the bear can be around any corner and your high risk strategy will then be put to the test. "The calculation and theory are explained in the other answers, but it should be pointed out that the video is the equivalent of watching a magic trick.  The secret is: ""Stock A and B are perfectly negatively correlated.""  The video glasses over that fact that without that fact the risk doesn't drop to zero. The rule is that true diversification does decrease risk. That is why you are advised to spread year investments across small-cap, large-cap, bonds, international, commodities, real estate. Getting two S&P 500 indexes isn't diversification.  Your mix of investments will still have risk, because return and risk are backward calculations, not a guarantee of future performance. Changes that were not anticipated will change future performance. What kind of changes: technology, outsourcing, currency, political, scandal." no offense, but clicking through to that guys blog and fund page he seems like a charlatan and a snake oil salesman. It's not surprising that he doesn't like asset manager software because he himself is an asset manager. the software is trying to replace him.  He doesn't make money by beating the market... he makes money by convincing others that he can... he is exactly the type of person that the original article is warning against investing with. It's a phrase that has no meaning out of context.  When I go to Las Vegas (I don't go, but if I did) I would treat what I took as money I plan to lose.  When I trade stock options and buy puts or calls, I view it as a calculated risk, with a far greater than zero chance of having the trade show zero in time.  A single company has a chance of going bankrupt. A mix of stocks has risk, the S&P was at less than half its high in the 2008 crash. The money I had in the S&P was not money I could afford to lose, but I could afford to wait it out. There's a difference. We're not back at the highs, but we're close.  By the way, there are many people who would not sleep knowing that their statement shows a 50% loss from a prior high point. Those people should be in a mix more suited to their risk tolerance. "Classic investing guru Benjamin Graham defines ""An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return."" He contrasts this with speculation which is anything else (no thorough analysis, no safety of principal, or no adequate return). The word ""adequate"" is important, since it contrasts adequate returns with those that are either lower than needed or higher than necessary to reach your goals." "Translation : Funds managers that use traditionnal methods to select stocks will have less success than those who use artificial intelligence and computer programs to select stocks.  Meaning : The use of computer programs and artificial intelligence is THE way to go for hedge fund managers in the future because they give better results.  ""No man is better than a machine, but no machine is better than a man with a machine."" Alternative article : Hedge-fund firms, Wall Street Journal. A little humour : ""Whatever is well conceived is clearly said, And the words to say it flow with ease."" wrote Nicolas Boileau in 1674." "no way -- he suggests that if you don't have an edge, no one needs to play the game. He doesn't like the idea of a ""lesser bad"" way to invest (MPT).   If you do decide to get involved in investing, then it's about absolute performance, not relative. He believes that the whole relative performance thing -- beating some arbitrary benchmark -- is just an artificial construct."