Chapter One
The Plain-Old Normal
Yes Sir, Sir John
"The four most expensive words in the English language are, `This time it's different.'" So saith Sir John Templeton (1912–2008), forever and ever, amen. Of course, he was only talking about investing. Or maybe spirituality—or maybe both.
To say Sir John is legendary is an injustice to the word legendary. He was a mutual fund pioneer—founded and built one of the first big firms. He was a global investing pioneer, too—doing global for clients before anyone did. Sir John had ice water in his veins and really lived the idea: Don't follow the herd. He knew to be greedy when others were fearful and vice versa before Buffett made that his. He never believed in chart voodoo, no matter how trendy it was. He was firmly grounded in fundamentals. He believed in what he called bargains.
I was fortunate to meet Sir John several times, and always paid him a lot of attention (not just because I realized we shared the same birthday almost a half century apart). To me, he was personal. He was also humble, understated, unflappable, soft-spoken, courtly, civil and gentlemanly in all circumstances. He was and is an ideal role model for almost anyone—I don't care who you are.
Sir John was simply an all-around great guy. He gave heavily to charitable foundations (many he established himself), among other things the world's largest financial prize, the Templeton Prize in Religion. He was thrifty—preferred driving junky used cars instead of being chauffeured in a limousine. He flew coach. He was knighted (through no fault of his own) but down-to-earth. He played a mean game of poker—put himself through Yale on his winnings. He, like me, thought the US government was a lousy steward of his, yours and his employees' money, so he bolted for the Bahamas. He also built an ongoing business interest, which itself helped launched many thousands of good careers in a well-paying industry—lots of smart folks learned the business at Sir John's knee—not to mention the countless numbers of investors who got wealthier investing with him. It was his success that first made me envision building a big investment firm.
He was a stunning spiritual thinker. If you can ever get your hands on a copy of his long-out-of-print spiritual book, The Humble Approach, I assure you, whatever your spiritual views, it will impact them somehow. Sir John was a deep, deep thinker.
But to my mind, one of his greatest contributions was that admirably short admonition. That if you think, "This time it's different," you're in all likelihood dead wrong and almost surely about to cost yourself dearly.
This isn't to say history repeats perfectly. It doesn't—not exactly. That's not what Sir John meant. But a recession is a recession. Some are worse than others—but we've lived through them before. Credit crises aren't new, nor are bear markets—or bull markets. Geopolitical tension is as old as mankind, as are war and even terror attacks. Natural disasters aren't new! And this idea that natural disasters are bigger, badder and more frequent now simply isn't true. Only human arrogance allows us to believe we're living in some new, unique age. Sure, we are—just like every previous generation did. And in that sense, Sir John understood the great value of studying and remembering history. Without that history anchor, you have no context to understand the here-and-now or any way to determine what's reasonable to expect in the future. Sir John was a historian in a world in which most market practitioners' sense of history is largely limited to their career span.
Sir John also knew then what every good investor should know now (but they don't because they forget): Humans don't evolve fast. We don't! The same things that freaked us out during the early Mesopotamian market days are the types of things freaking us out in the twenty-first century. And because human nature is a slowly evolving beast, the scenery can change, but we still have the same basic reactions to things.
We have the same reactions because we don't remember very well at all. My line on this subject is that societally, we're like chittering chimpanzees with no memories. We chitter about whatever without any sense of history, data or analysis. Sir John was exquisite with all three and knew we falsely believe every recession that hits is more agonizingly painful than the last. Every credit crisis we live through we think beats all the rest. (Anyone who thinks the 2008 credit crisis was history's worst knows zero about nineteenth-century history. Zippo!) Behaviorally, this is evolution's gift to humanity so we don't give up in despair.
And that's why Sir John's admonition that it's never different this time is so eternally useful. No matter how big and scary something seems, we've almost always been through something similar before. And if you can remember that and find those times and learn the lessons from them, you can know better how to react—or not react. You can know that it's never as bad or as great or as lasting as your Swiss-cheese monkey's memory makes you think.
What's also not different this time is how resilient economies and capital markets are—particularly in more developed countries. People forget that. Sir John never would. There's this nonsense notion about secular bear markets lurking around every corner (Chapter 4). But if that's true and if capital markets aren't remarkably resilient, how can it be the value of all publicly traded stocks globally keeps rising over time—currently $54 trillion? Global economic output is now at $63 trillion! It was $31 trillion in 2000. (For all the 2000s being frequently referred to as a "lost decade," somehow the global economy doubled.) It was $19 trillion in 1990. It will be higher still in 2020 and 2050 and 2083 and 3754. Exactly how much? I don't have a clue. Neither would Sir John, were he still alive. But I only heard him say about 40 times over the decades it would be much higher and at about the same growth rates as we've seen before—maybe a little more or a little less. Almost no one ever believed him on that—particularly not when he said it in the midst of a bear market or recession. Yet he was always right.
Side note: One reason folks fall prey to the notion of long-term stagnancy now, I believe, is the death of journalism. Once upon a time, journalism was a serious pursuit. To be a journalist, you went to school, you interned, you learned your five W's and your H—who, what, when, where, why and how. You put all the pertinent information in the first paragraph: Man bites dog in Tulsa suburb because dog stole his rib-eye steak. Then you elaborate. Editors knew they could "trim from the bottom." Don't need the details about the dog's breed or creed (purple Pekinese with three legs and no tail) in paragraph seven? Trim that. Don't need to know it was the man's birthday party from paragraph five? Trim that.
On magazine and newspapers' mastheads, there used to be a roster of staff writers. Some new, but many older and grizzled. They were the best and the core of the organ. They'd seen things. So when the young pups would say, "Golly gee! This Tech bubble is the biggest thing ever! The world is ending!" the Grizzled Veterans would say, "You don't know anything. The Energy bubble in 1980 was just as bad or worse!" They'd been around the block— lots of times.
Now, traditional journalism is dying. Blame the Internet, blame cable, blame whatever you want. Doesn't much matter! Traditional media is bleeding money. Pick up any newspaper or magazine. The masthead has been obliterated. Maybe there are just a few staff writers. Maybe those staff writers weren't there five years ago. They let all the grizzled guys go a long time ago to hire cheap guys and often kids who write for pennies. Or maybe for free! Online blog sites get tons of free contributors—they'll print any nonsense folks write. Or maybe they print just wire stuff and have a few go-to editorialists for some spice.
But most of the folks writing news today haven't been around the block. Maybe 2007 to 2009 really was the biggest thing they'd ever seen. Maybe they were in college during the last recession and bear market or (eek!) high school. Maybe they weren't even born for the one before that! They have no context. To them, the world really is ending and they can't fathom how we get past this bad time (whenever it is) because they've never seen that happen before— not as an adult.
I'm not saying that's it 100%. And there are still a very few old grizzled journalists around, but precious few. As a whole, we don't remember even very recent events. But it doesn't help when media confirms our worst nonsensical monkey memory fears.
Compounded by no-memory no-context journalism, it's harder to pause, take a deep breath and ask, "What am I forgetting? Has this happened before? Have I seen this or something like this before?" Because, except for the truly young pups reading this, you probably have.
Believing "this time it's different"—when it isn't—is more than just seeing the world wrong. It can lead to serious investing errors. In my world, people make bets—bets with their own or frequently with other people's money—based on their world views. The idea isn't to be perfect. No one is. To do well at money management—whether for yourself or others—means being right more than wrong over long periods. That means you will still be wrong a lot and frequently in clumpy patches of wrongness. But being right more than wrong is easier if you see the world more correctly.
It matters because seeing the world right and remembering it's never truly different this time could have saved people from making huge errors in 2009 and 2010. And it could save you big when the next big panic, super bull market or gotta-have-it investing fad hits.
The good news is that it's easy to spot the "this time it's different" mentality. It often masquerades as:
• The "new normal" or "a new era" or sometimes a "new economy." Just because people think, "This time it's different," doesn't mean they think all is terrible! Sometimes they are overly, dangerously bullish. Sometimes bearish.
• The "jobless recovery." Except every recovery is jobless— until it isn't anymore. No one remembers this.
• Fears about a "double dip"—which is always talked about but rarely seen.
There are other iterations, but these are the ones you likely run into most. So let's examine them.
The Normal Normal
Starting early 2009, the term new normal (a same-but-different way of saying, "This time it's different") started ping-ponging through the media. The new normal was specifically the idea that the bad problems newly emerged or envisioned in the recent recession were insurmountable—resulting in a new era of below-average economic growth, poor market returns, maybe even a double dip.
The basis for the new normal was a litany of ills—some real, some vastly overstated: A housing crash that hadn't recovered, too much US federal debt, too much consumer debt. Many believed greedy bankers had pushed our financial system beyond the brink and it was irrevocably broken. The economy couldn't recover because banks wouldn't lend. And tapped-out consumers couldn't spend!
(Now, a rational person might pause to think you can't simultaneously and logically fear banks not lending while fearing everyone being overindebted. If you fear people are overindebted, then banks not lending would be good! And you can't simultaneously complain consumers are all recklessly and irresponsibly tapped out and also complain they don't spend enough. But never mind—this is all part of the irrational psychosis that accompanies most every recession and bear market.)
Politicians got on the bandwagon, too, claiming the new normal supported whatever it was they wanted to do anyway—hike taxes, cut taxes, socialize medicine, whatever. Pundits and journalists jumped on new normal like they'd never heard it before. Novel! Except there's nothing so new about the new normal. We get some concept like it every cycle. Following are just a few historic examples from the media (with my comments in italics):
• September 2009—"The applicable word in New Normal is, of course, `new.'" This was from the latest round of new-normaling.
• December 13, 2003—"The Industry is starting to settle on a new normal where growth is more muted but sustainable."
• April 30, 2003—A F@stCompany headline said, "Welcome to the New Normal"—calling it a "slightly awkward, slightly odd place" where corporate profitability is more challenging. Except when this was published, a recession had ended about a year and a half earlier, and a massive bull market run-up from the recent bear had started a month before.
• November 2, 1987—A Time magazine cover said, "After a wild week on Wall Street, the world is different." Not the new normal, but a variation of "this time it's different." (And no, it wasn't different. The world recovered from the October 1987 crash and subsequent bear to finish the decade strongly.)
• January 7, 1978—"The `new normal' is here and now." Same new normal, different country—from a Canadian newspaper.
• June 15, 1959—"We could expect the country to return to the New Normal of the depressed Nineteen Thirties." You could expect it, but it didn't happen. Annual GDP growth was 7.2% in 1959, 2.5% in 1960, 2.1% in 1961 and 4.4% in 1963.11 Normal, fine economic growth. A bit volatile, but normal normal, not new normal.
• October 20, 1939—"Present conditions must be regarded as `normal'—a `new normal.'" Sure, if new normal meant GDP annualized 8.1%, 8.8%, 17.1%, 18.5% then 16.4% as it did in 1939, 1940, 1941, 1942 and 1943.
This isn't to say every period following widespread use of new normal had fine (sometimes great) GDP growth. It's just the phrase tends to pop up most around the end of recessions and in the few years of recovery thereafter—when people are bleakest but the actual future is brightest. Regardless, it's never a very novel concept—or very prescient.
2009 and the New Normal
The latest new normal round doesn't appear to be very different at all. The latest cycle kicked into high gear in May 2009 when Bloomberg, Reuters, MarketWatch andBusinessWeek all featured new normal headlines or stories or both. From there, it exploded. Check Google News for search results on new normal for any month in 2009 and 2010—you get thousands of hits.
Suppose in 2009 and 2010, while the media was almost uniformly handwringing a new era of economic lousiness, you decided stocks couldn't rise? First, you'd be wrong about the economic lousiness. The National Bureau of Economic Research (NBER) dated the recession's end as June 2009—but that announcement wasn't released until September 2010, which is normal. NBER always dates recession start- and end-dates at a big lag.
Even without the NBER's official pronouncement, GDP growth signaled the recession was likely over. US GDP was just flattish in Q2 2009—a first sign. Then, Q3 2009 1.7% GDP growth was followed by 3.8% growth in Q4 2009 and 3.9% in Q1 2010 (all annualized figures). Positive GDP isn't the only factor NBER looks at to date a recession's end, but it's a major component. Put another way, I can't find two positive quarters together that NBER has ever called a recession.
More damaging if you'd acted on new normal fears: The stock market bottomed in March 2009, before the economy. Then stocks boomed—world stocks were up 44.1% three months off the bottom, and US stocks 40.2%. Twelve months later, world stocks were up 74.3%, US stocks 72.3%—the biggest initial 3- and 12-month bounce since 1932. From the market bottom through year-end 2010, world stocks surged 93.3% and US stocks 93.1%.18
(Continues...)
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