This Time It's Different

Whenever you hear the words, “This time it’s different,” be afraid or at least extremely suspicious. I have heard those words at several different times in my life. The best example occurred during the dotcom boom of the late 1990s. Amazon.com was capitalized at a value that exceeded the combined worth of several of the largest most profitable companies in the world. At the time, it was nothing more than a mail order book store that had never turned a profit. I concluded that the entire boom was completely insane. I was abused for this opinion by some of my coworkers. They told me, “This time it’s different. The economy of the entire world is going to the Internet. These stocks can not go down.” Well, most of them went belly up. A few survived and even prospered but their stock prices remain depressed until this very day.

The second example is a little more complicated. While I was horrified by all the interest only mortgages, 50 year mortgages, reverse amortization loans, and other follies of recent years, like most Americans I believed that affordable single family housing could never go down in value, at least not in the significant long term. I knew there was a cap on the value of any individual property that was approximately 3 times the annual salary of the family that lived in the house, but I believed inflation would make residential real estate a relatively bullet proof investment. I started getting a little worried when the value of my house exceeded my ability to buy it, if I did not already own in it, but I never expected the sudden and dramatic crash we have seen over the last 18 months. I heard the condo flippers and real estate infomercials touting their no money down schemes, telling the world, “This time it’s different. Real Estate never goes down.” I should have known what was just over the horizon.

Thankfully, I am old school. In fact I am so old school that it is slightly ridiculous, but more about that later. I bought all the house I could possibly afford 22 years ago. It cost so much to walk through the front door that I needed a short term loan from my father in law to have enough cash on hand to stay fully operational. Like my father before me, I have been programmed to fear debt. My grandmother was so terrified of debt that she bedeviled my grandfather into paying off the mortgage on their farm as quickly as possible. Only two families in that little corner of South Dakota managed to hold on to their family farms throughout the depression. My father’s family was one of the two. I managed to pay off my mortgage in less than ten years. Although I thought about moving up to a more expensive home, one that I actually could afford, I didn’t because I am so frightened by debt.

I confess, I am old school in the extreme. When my wife’s cell phone needed a new battery, I went to several stores but could not find a battery that fit the thing. Finally, I called up the manufacturer. I was told that the life of a cell phone was six months. After that period of time passes, the company considers the instrument obsolete and no longer stocks replacement batteries. I finally located a replacement battery on the internet. It cost about $30 including shipping and handling. When I related this story to a more knowledgeable coworker he asked me, “Why did you do that? You could have got yourself a new cell phone with a new battery included for free.” The idea of replacing a perfectly good cell phone because it needed a new battery would have no more entered my mind than replacing my car because the ash tray was full, but my friend was right. I could have obtained a new cell phone for my wife and it would have been free. Old school is not fool proof.

Today I am hearing, “This time it’s different. Buy and hold and dollar cost averaging no longer make any sense.” First of all can you tell me a better way to pay for a primary residence, still my largest single investment, than “buy and hold?” Dollar cost averaging is nothing more than saving a little bit every month. You don’t have to buy stocks with that money. What you sock away in an insured savings account or the gold doubloons you hide in your basement are nothing more than a variation on dollar cost averaging. The price of stocks, gold, and even the value of the dollar itself rises and falls over time. Please, tell me how one can avoid dollar cost averaging on some level. I would also like to point out that the sage of Omaha, Warren Buffett, does nothing but buy and hold. I admit he took a nasty hit last year. Now he is only the second wealthiest man in world.

While not a get rich quick scheme, old school will generally keep you out of trouble. I know I can not control the world for even a ridiculously short period of time like a thousand years. Some catastrophe could overtaken me in a heartbeat. Ultimately we are all in the hands of God, but the systematic and conscientious management of money using well proven methods is probably the best course for most of us both in boom times and times of great distress.

Just a reminder

Luke 12

[16] And he spake a parable unto them, saying, The ground of a certain rich man brought forth plentifully:
[17] And he thought within himself, saying, What shall I do, because I have no room where to bestow my fruits?
[18] And he said, This will I do: I will pull down my barns, and build greater; and there will I bestow all my fruits and my goods.
[19] And I will say to my soul, Soul, thou hast much goods laid up for many years; take thine ease, eat, drink, and be merry.
[20] But God said unto him, Thou fool, this night thy soul shall be required of thee: then whose shall those things be, which thou hast provided?