Is It Different This Time? Part 3

“We are not going to have a depression, and we have survived financial crises before. A century of investing experience, as well as insights from the field of behavioral finance, suggest that investors who bail out of equities during times like these are almost always making the wrong decision.” – Burton G. Malkiel.

Alex Berenson’s October 11th article in The New York Times Those With a Sense of History May Find It’s Time to Invest is well worth reading, especially if you are discouraged enough to be considering selling your equity mutual funds and putting the money in CDs.

The four most dangerous words for investors are: This time is different.

In 1999, technology companies with no earnings or sales were valued at billions of dollars. But this time was different, investors told themselves. The Internet could not be missed at any price.

They were wrong. In 2000 and 2001 technology stocks plunged, erasing trillions of dollars in wealth.

Now investors have again convinced themselves that this time is different, that the credit crisis will push economies worldwide into the deepest recession since the Depression. Fear runs even deeper today than greed did a decade ago.

But in their panic, investors are ignoring 60 years of history. Since the Depression, governments have become far more aggressive about intervening when credit markets seize up or economies struggle. And those interventions have generally succeeded. The recessions since World War II, while hardly easy, have been far less painful than the Depression.

Berenson goes on to quote various investors and economists who believe that the pessimism is overdone and that this is a good time to buy rather than sell stocks.

If there is good and wise policy, and government moves effectively, this need not play itself out in ways like the Great Depression, which is the image that is playing itself out in people’s mind. . Government action typically does not work immediately, and banking crises around the world often require multiple interventions. – Stephen Haber, an economic historian and senior fellow at the Hoover Institution.

“I think in years to come — I wouldn’t say months to come — we will perceive this as being a great value-buying opportunity. Two and three years from now, it will seem very smart.” - David P. Stowell, a finance professor at Northwestern and a former managing director at JPMorgan Chase.

“This is the opportunity of a lifetime. The most important securities are being given away.” – Martin J. Whitman, a professional investor for more than 50 years.

photo credit: Sheffield Tiger