This time it’s different!!!  With almost three decades of investment experience, we have heard this phrase many times throughout the years.  Every market run and collapse is different (i.e., technology boom, mortgage collapse, black Friday, real estate boom, to name a few), but there is one constant among all of them – human emotion.  Human emotion causes market prices to go well above or well below fair value.  Look at 1999 as an example.  We were already talking about the overvaluation of technology stocks in the spring of 1999 to only see prices of these stocks rise to even higher levels.  Not only did we hear “this time it is different,” but we also heard “technology is the wave of the future.”  Yes, some people were correct in that technology has become “the wave of the future”; however, technology stocks were grossly overvalued at the time and those investors who hung on to them lost a significant amount of money.  Technology stocks have improved substantially since 1999, but in the end, it was not different.  Emotions created a bubble that burst.  Once that bubble burst, prices fell back to their true fundamental value.

Most everyone is aware of the “tech boom” and how well the stock market performed in 1999, but many may not realize that investors in Berkshire Hathaway took it on the chin that year.  In 1999, Berkshire Hathaway LOST 23% while the S&P 500 index was up more than 20%.  Many technology stocks were up as much as 50% or more that year.  Warren Buffet’s picture was on the cover of Barron’s magazine that year with the title – “What’s Wrong with Warren.”  Over the next three years, the S&P 500 index proceeded to drop 47% and many technology companies ended up losing more than 80%.  Shareholders of Berkshire saw their value appreciate more than 10% over those turbulent years.  So, investors that dumped Berkshire at the end of 1999 and jumped into technology stocks did not fare so well.   Unfortunately, we know several people that did such a thing.

What does this mean for investors?

There are several lessons to be gleaned from this:

1)    Investments sometimes go to extremes on both the upside and the downside.   Don’t let those extremes make you believe it is a “new paradigm.”

2)    Stick with the fundamentals.  We know that at times it is difficult to be patient, but eventually fundamentals will prevail.

3)    Keep emotions out of investment decisions.   This is the most difficult aspect of investing.   It is hard not to follow the crowd and studies have shown that investors make emotional decisions at the absolute worst times.

4)    When getting excited about the stock market (like many are today), remember how you felt during the bottom of the market in 2002 and 2009.  Conversely, when the market does finally correct, remember the recoveries that occurred at the market bottoms – it is not the end of the world.   Most investors have a short memory, but remembering those feelings will help you avoid making emotional decisions.

We wish you a very Merry Christmas and Happy New Year and look forward to a prosperous and successful 2014!

Sincerely,

Your THOR Team