This Time It’s Different, But Key Lessons Endure
In today’s dynamic world, adapting to change while upholding our investing principles is key.
Legendary investor Sir John Templeton famously cautioned years ago that, “The four most dangerous words in investing are, ‘This time it’s different.’” His point was clear: Investors ignore investment history at their own peril. It can be dangerous to get caught up in new investment trends and believe that the traditional rules of investing no longer apply. Yet markets are constantly evolving, and some aspects of today’s investment environment truly differ from the past. Our task is to recognize which rules remain foundational and which must adapt.
Reversion-to-the-Mean Investing
We believe the modern investment era should be divided into two distinct periods: pre-internet and post-internet. During the pre-internet era, many successful investors (including Templeton) practiced a strategy we call reversion-to-the-mean investing. They bought companies when valuations were near the bottom of their historical ranges and sold when valuations approached the high end in a repeatable cycle. In an economy constrained by geography and limited communications, this disciplined approach worked well. A common refrain was that, “Trees don’t grow to the sky.” Given the economic realities of this period, this refrain was accurate.
The Internet Era Brings Change
The arrival of the internet introduced a new economic reality, shatt ering geographic boundaries and expanding total addressable markets for some companies to a global scale. This new reality was hard to comprehend at first – companies able to fully take advantage of this global reach could now grow faster and for longer than even the best businesses of the past. We believe the most successful investment strategy in the internet era is to identify durable, advantaged, highgrowth business franchises and then hold them for many years in order to harness the powerful effects of long-term compounding. Trees still don’t grow to the sky, but they grow much taller and much faster than before.
Put simply, this time is actually different. Investors must recognize the difference and use it to their advantage. Companies that can sustainably grow faster for longer should have higher valuations than their slower growing peers of the past. Investors today need to avoid being too dogmatic about only investing in stocks that are statistically “cheap.”
Renowned economist John Maynard Keynes captured the challenge well, saying, “The difficulty lies not so much in developing new ideas as in escaping from old ones.” Successful investors today must remain intellectually flexible and open minded, recognizing how technology reshapes competitive dynamics without discarding core disciplines.
Timeless Principles Still Apply
We believe building these new realities into our investment process is essential for success. However, even as circumstances change, certain bedrock investing lessons from the past endure:
- Price discipline and margin of safety. The price you pay still matters; valuation should embed a buffer against unforeseen risk.
- Long-term ownership mindset. Short-term thinking should be avoided – investors should focus on years, not quarters. It’s important to think like a business owner rather than a stock trader.
- Fundamental financial analysis. Things like earnings quality, cash-flow durability, profitability and balance sheet strength remain central.
- Shareholder-oriented management. The decisions the CEO makes with the firm’s capital, along with the culture he or she perpetuates, are critical.
- Rational temperament. Emotion should be separate from decision-making when making any investment decisions.
Looking Ahead: Opportunity and Uncertainty
Today is an incredibly interesting and challenging time to be an investor. We are in the early innings of another transformative platform evolution – artificial intelligence. If adoption proceeds as predicted, AI could unleash an enduring productivity boom across nearly every sector of the economy. Productivity growth is a significant tailwind for economic growth.
At the same time, investors face heightened geopolitical tensions, historically high sovereign debt loads, substantial budget deficits in the U.S. and deep political polarization. Investors today must weigh the extraordinary promise of AI against the genuine risks that are present. This is not an easy task.
Our Approach
Guided by our time-tested investment philosophy and process, our approach to this conundrum is simple. We strongly believe predicting macroeconomic paths accurately and consistently is futile; building resilient portfolios is not. We therefore:
- Identify durable, high-quality businesses with clear competitive advantages, long runways for growth and management teams we view as partners.
- Purchase these businesses at valuations that compensate for risk, preserving a margin of safety.
- Hold for the long term, allowing the power of compounding to work on our clients’ behalf.
This has been our approach for decades. It builds on the underlying timeless principles of investing that do not change, yet allows us the flexibility to remain open-minded and adaptable to the things that do change over time.
Thank you for choosing Baird Trust to help you achieve your investment goals and objectives. We appreciate our relationships with you and pledge our very best efforts on your behalf.
Baird Trust Company (“Baird Trust”), a Kentucky state chartered trust company, is owned by Baird Financial Corporation (“BFC”). It is affiliated with Robert W. Baird & Co. Incorporated (“Baird”), (an SEC-registered broker-dealer and investment advisor), and other operating businesses owned by BFC. The information offered is provided to you for informational purposes only. Neither Baird nor Baird Trust is a legal or tax services provider and you are strongly encouraged to seek the advice of the appropriate professional advisors before taking any action. The information reflected on this page is subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor. Investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor or a member of your Baird Trust team before taking action.
