For new and even experienced investors, there’s a lot to learn from what has happened in the stock market throughout history. Similar patterns have emerged over centuries, with investor euphoria often fueling bubbles and then resulting in crashes later on.
Sir John Templeton was one of the best stock pickers of the 20th century, and he wasn’t afraid of buying at a time when the market was pessimistic. He managed a growth fund that would, for decades, average an annual return of more than 14% — that’s better than the 10% long-run average of the S&P 500 (^GSPC 0.55%).
Templeton was, however, cautious when it came to potential bubbles. And there are four words that he believed were the most dangerous for investors: “this time it’s different.”
Image source: Getty Images.
Why those words can be dangerous
Nowadays, with advancements and technology, artificial intelligence (AI) has been the hottest investment theme to get on board. It’s a big reason why Nvidia, the leading AI chipmaker, is also the most valuable company in the world, with a market cap of $4.3 trillion. Investors are bullish on AI, believing that it will not only transform jobs but also eliminate many of them.
Many investors continue to load up on AI stocks in the belief that this time really is different. But as Templeton warned, that can be a dangerous mindset to have, because it can potentially lead to oversized valuations, inevitably resulting in significant losses later on. Palantir Technologies, which trades at around 240 times its trailing earnings, is a great example of that. Its exciting growth prospects center around AI, and investors have been willing to pay a massive premium in exchange for that potential — a decision that could prove costly in the future.
S&P 500 Index
Today’s Change
(-0.55%) $-36.64
Current Price
$6575.19
Key Data Points
Day’s Range
$6534.55 – $6601.93
52wk Range
$4910.42 – $7002.28
Volume
1B
How can investors stay grounded?
It can be tempting to invest in hot growth stocks that are surging in value, but doing so can be risky. For investors, a way to reduce risk is to consider valuation metrics, such as earnings multiples, when investing in stocks. Avoiding ones that trade at incredibly high premiums (like Palantir) can potentially save you a lot of stress and financial loss later on.
If you’re not comfortable picking individual stocks, another option is to track the S&P 500 through an index fund to give you a broad market position, making you less susceptible to how any one stock performs. Even if the market as a whole struggles, bringing the index down in the process, you can still remain confident that, given its diversification and focus on leading companies, the S&P 500 will bounce back, as it has always done, and likely end up soaring far higher in the future.