Published January 9, 2009

This time, it's different? Yup, it goes both ways

By R SIVANITHY

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DURING the dotcom boom at the turn of the millennium, the now-infamous investment mantra that everyone bought into was 'this time, it's different'.

The source was, of course, an investment community that needed to get its clientele to buy into companies with no earnings, assets and, in many cases, no viable business models and so had to devise a slogan that sounded fresh and exciting.

It worked - because it sounded good at the time and people believed that the more cash an Internet company burned, the better its shares would perform because of a perverse logic that a high burn rate probably meant extensive research and development efforts, which in turn suggested the possible invention of some new-fangled techno- model that would tap into limitless cyberspace and reap untold riches for its inventors.

(You'd have to wonder: whatever happened to those 'b-to-b' and 'b-to-c' portals that were supposed to revolutionise the way business was done?)

'This time, it's different' was again the chant throughout the bull market of 2004-2007, at least as far as getting investors to buy Asia was concerned.

This time the brave 'new' investment paradigm rested on an emergent but nevertheless vigorous China and India which supposedly would buttress global growth if the US and Western economies were to falter.

There was an added dimension as a sweetener: because Asia had just undergone the 1998 regional crisis, its companies were supposedly stronger and better governed, thus making them great investments.

Again, it all sounded well and good - but guess what? When it came to the crunch in 2008, Asian markets fared much worse than Wall Street despite the latter being the primary source of global woes. Truth is - and it's one which Asian investors have found out repeatedly and painfully over the past decade - that things are only different when it applies to the upside; that is, when the investment community wants its customers to buy.

At the first sign of trouble, things are very quickly no longer different. In fact, things will be and have always been the same; Asian stocks will get sold off first - and the quicker a larger number of local investors and analysts recognise this, the better the interests of the local market will be served.

Now, let's assume for argument's sake that the US sub-prime crisis really does morph into the worst slowdown since the Great Depression of the 1930s as some observers have predicted.

If so, should investors rely on urgings to buy now based on historical benchmark valuations, or would it not be better to throw out those comparisons as invalid because the current crisis is without meaningful historical precedent?

For example, does it make sense to say that a sector must be cheap because its book value or price-earnings valuations are at regional crisis levels (10 years ago) when conditions are wholly different today, perhaps even a lot worse?

In other words, if the only time the world witnessed an economic blowout as violent as 2008's was almost 80 years ago - and that period was too long ago to provide relevant guidance - things surely are different now, aren't they? Wouldn't it then be wrong to use numbers from only a decade or so ago to formulate an investment strategy?

In fact, we would take this further and assert that, this time being different, investors should not place too much faith in the assumption that markets can efficiently discount all the worst that the future holds - even after as long a period as an entire year has passed.

Instead, as 2008 has graphically proven with its innumerable and vicious bear rallies, there is a strong bias to always hope the worst is over when it isn't and to speak of 'V-shaped' recoveries when a very fat 'U' is much more likely.

(Of course, a big reason for bias are the bailout actions of the US government, which, if one thinks about it, amount to a repeated rewarding of failure - surely an unprecedented example of things being really different in a supposedly capitalist system.)

Probably the only investment house to have broached this subject, albeit peripherally, is JPMorgan, which in its Jan 2 Global Asset Allocation report said that one of the lessons to be learned from the disaster that was 2008 is 'to degrade expectations of mean reversion to normal and to think in terms of structural change instead'.

It highlighted the present situation where many asset prices are at historic means, thus presenting never-before-seen investment opportunities which would surely be tempting. 'We are wary of simple mean reversion, as the crisis is forcing changes in behaviour that are altering the structure of markets and prices,' said JPM.

Although it focused on leverage and what its absence means for markets, JPM nevertheless raised a very valid issue - namely, that investors should be wary of basing their investment decisions on historical norms, because those norms may not apply.

This idea, if rephrased, would be: as an investment rationale, 'this time, it's different' has some appeal, especially in its main use to depict potential upside - but savvy investors should recognise that the knife can cut both ways.