Home   Free eBooks   Articles   Contact

Expect the Unexpected

It's a mistake to expect history to repeat itself exactly. Yet many people do.

They expect yesterday's stock market darling turned ugly duckling to become a darling again any day now. Why? Because they expect history to repeat itself exactly. This is unrealistic thinking!

Never expect an exact repeat of yesterday. Investment themes and best-sector investments are constantly changing. Expect the unexpected when it comes to the stock market.

Here are some examples from the past that illustrate the error of this kind of thinking:

Investors of the 1940s and 1950s expected the great depression of the 1930s to rear its ugly head again. They were very cautious and did not fully overcome that caution until the 1960s.

Investors of the 1980s and early 1990s were obsessed with the return of inflation. They expected the inflation of the 1970s to come back any time. The stock market crash of October 1987 reflected that fear. Instead, inflation became less and less.

Now, in the early 2000s, investors are ever hopeful that the technology boom of the 1990s will re-emerge. The expectation that a better return on technology investments will occur in the second half of the year is such a common refrain now that it makes a good party joke. The problem? The second half, as envisioned, never seems to happen.

However, this does not seem to stop the build-up and sell-off of technology stocks every year. The build-up and sell-off has little or no underlying economic data to support it. It is mostly hype and hope.

Remember this: Never expect the recent past to repeat itself exactly. After a stock market bubble occurs in a specific sector and then crashes, move on to something else. It will be years before that sector rebuilds itself.

How long? It can take as long as 20 years for a sector to reach reasonable valuations again. Be willing to wait.

Yes, history does repeat itself. But not exactly. And certainly not until sufficient time has gone by.

If your favorite stock is a recently fallen angel then let your favorite stock lie and wait. Spectacular rises in the same stock are so rare as to be mostly unrepeatable. Better to try elsewhere.

If you can learn to expect what few other people are expecting--that history will not be repeating itself exactly--you are far more likely to be successful.

©Edward Abbott 2004