The most common mistake.

What is the most common investment mistake that people make?





"This time it's different"





That's it. Ask any investor, either amateur or professional, if they have said this before and then ask them how it worked out for them.


My guess is that, if they were being honest, they would tell you, overwhelmingly, that it was a failure as a strategy.

It is what people do when the markets are going up and they should be selling into strength and taking profits because they believe that the bad times are behind them never to return, because "this time is different".

It is also what people do when markets are falling and they should be buying quality stocks when they are dirt cheap. They are selling on the way down because things are awful and they will never recover because, "this time is different".

Things do repeat themselves in the markets. That's because capitalism is predictable, with known outcomes. And while history doesn't repeat itself precisely, the frame work remains constant. It is mostly the timing and intensity that varies.


The LAW of supply and demand.

This really is a law. You can't screw around with one and not effect the other. This is one of many things that Capitalism teaches us. And it is born out time and again.
But don't confuse capitalism with democracy. That is also a common mistake. Capitalists have existed in every form of man made government since the beginning of time. Some systems of government tend to promote capitalism, like democracies and some try to crush it, such as socialistic systems. Both systems of government will, however, ultimately fail in their efforts to manipulate markets either up or down, because market forces will always prevail in the long run and overthrow the forces of governments, whether well intentioned toward capitalism or not.

Our government has forgotten that market down turns are corrections, necessary corrections for a healthy economy. They balance out supply and demand.
After the Internet crash in 2000 the Fed came in and re inflated the economy by lowering rates and pumping up the housing markets sky high all the while congress was pushing banks to make as many high risk, low reward, loans as possible. They should have let the markets correct.


Why the attempted lecture on Social Sciences? And what does this have to do with investment mistakes?


The answer is that we are in the middle of major market forces at work and, unfortunately, the collective wisdom of our government is to move toward socialism in an attempt to prevent natural market forces from reaching their inevitable goals. By nationalizing some banks, insurance companies, even mortgage rates and apparently to some degree the auto makers, they are trying to stop those forces from doing what they have to do. Which in this case is a long overdue and massive correction of those market places. Will they succeed?


Not in the long term. We have the ability to look into the past at 4000 years of monetary history. But much to my dismay no one in the halls of power has the desire. Or maybe I should say the intelligence or the integrity.


That history, were it heeded, would tell the tale that NO country, state or empire has ever successfully devalued their currency without destroying it. We began devaluing our currency under FDR around 80 years ago with the complete conversion to fiat currency occurring in 1971 when Nixon closed the gold window. Fiat money is money that is backed only by our faith in government, or more accurately money created by government decree. Since 1971 we have steadily been creating money out of thin air.


The framers of our constitution and overall government, were students of history and they knew the dangers of fiat currency. In fact they specified what a dollar was, and that was Silver. A very specific weight and purity of silver. Furthermore they imposed a penalty against anyone who devalued that currency and as penalties go, it was a little severe. Death.


I am not saying we should ship off our elected officials to the gas chamber, although I'm sure there are those who would disagree, but we should look at how serious they felt about this and why, instead of doing what our politicians have been doing. Which is saying "This time it's different".



People tend to look at the time in which they are running around in this world as the most important time in history. In doing so, they over emphasize their importance in the world and forget that in the context of all of human history, their time on this earth amounts to little more than flea flatulence in Yankee Stadium. Thinking that we are larger than this, is delusional and it leads one to believe that, "this time it's different" because "now I'm here".



Socialism has never worked in the past but it's sounds so compassionate and noble that it has to succeed now because "this time is different".

Printing money will stave off deflation and save the economy but it won't cause inflation because "this time is different".

I know I should buy Silver and Gold to protect my wealth, but I don't believe that inflation is a problem and I don't believe that Gold and Silver are valuable as money anymore because "this time is different".



As historians look back on this time, with the clarity of hindsight, I believe that they will scratch their heads and say, "How could they ignore 4000 years of monetary history? All the clues were so obvious, how come they couldn't see it coming?".

And I will answer for them one more time.



Because they thought that "this time was different".



Good Luck and Godspeed



JT

Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor, which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.