Investing Lesson: The “Can’t Happen Here Syndrome”

“In the long-term we learn absolutely nothing” – Jeremy Grantham

(Photo: artemuestra’s photostream)

 If you were living in Japan in the late 80’s you were living on top of the world.   Besides seeing your investments grow close to 400% over the last few years on the Tokyo stock market and your real estate prices almost double you were also the envy of the world.  In the late 80’s Japan a country the size of Montana was responsible for close to 40% of world GDP which was truly staggering.  From electronics to economical and reliable cars it would seem that Japan would run the world, and the Japanese stock market showed as much. There seemed to be no price too high to pay for a Japanese company and there was no price too high to pay for land.  To the point where office space was going for $93,000 a square foot in downtown Tokyo in the late 80’s.

But trees don’t grow to the sky and like every good party this one came to an end in 1989.  Cut to almost 30 years later, not only has the Japanese stock market not reached the heights of 1989 again, it recently hit an all time low.  If you invested $10,000 in Japanese stocks in the late 80’s, in 2012 you would have roughly only $2500 left.   A lost decade turned to two lost decades and now going on three.

I vividly remember, after the Internet bubble crash in the late 2000’s, seeing so many talking heads discussing how the lost decade could never happen in America and how this slide in stock prices is only temporary.  After all, the US could never be like Japan.  The Japanese people are used to conformity, Americans are not.  Japanese CEOs are proud and would keep the debt on the books, where American companies would write the dept off taking a loss and moving on. Japan had hyper-inflated real estate prices, America did not, that would happen 5 years later.  America has a much stronger corporate governance and much better political leadership than Japan. What transpired in Japan could never happen here in the US.

Well, financial history might not repeat itself but it certainly rhymes.  As we can see from the chart below, since 2000 the US stock market has followed the path of the Japanese stock market 11 years earlier in a haunting manner.

Here is the performance of SP500 since the Internet bubble compared to the Nikkei 250 since their bubble 11 years earlier.

This is not to say that the US stock market has to follow the Japanese path from here on out, or that we will hit a low in Jan of 2014.  It does mean that the “Can’t Happen Here” scenarios occur in finances a lot more than people want to admit.  When talking about finances, be wary of anyone who says “Can’t happen here” or “This time is different”.  The world is a lot more complex than their simplistic understanding of it.

Michael Page

 

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