It's different this time...

Every financial bubble is marked by pundits and financial industry mavens chanting: 'it's different this time." If you believe that, I have a bridge in Alaska (not yet built, admittedly) for sale at a very reasonable price.

Well, it wasn't different this time - and it wasn't the last time. Or the time before. Or the time before that.

The latest housing bubble, the dot.com bubble, the stock market bubble of the 1920s, the South Sea Bubble of 1720 and the Tulip mania of 1637 - just to name a few - were all essentially similar. Every few years, there is a speculative frenzy as a gigantic herd of financiers, in the grasp of near terminal groupthink, rushes in the same direction followed by the naive and the greedy. As they run, they can be heard chanting - over and over: "you can't lose, buy now before it's too late, it's different this time."

The result, if not the exact timing, is predictable: rising prices, followed by ever higher prices as the "buy high, sell higher" crowd piles on. Inevitably, however, once prices have reached unsustainable levels, some piece of negative news, known but previously ignored, panics the herd.

As everyone tries to escape at the same time, prices crash and those who have borrowed to support their speculations are bankrupted. If that was all that happened, the excessively greedy would be punished and life would continue without much disruption.

Unfortunately, most of the punishment is inflicted on the real economy: the bankrupt default on their loans, banks tighten credit standards and reduce lending, businesses can no longer finance raw materials, inventories or receivables, workers are laid off, consumers reduce their buying and the cycle continues. The nightmare only ends when lenders replenish their capital and regain their courage.

A friend of mine is a highly successful money manager. Twenty years ago he told me that you could see the next financial crisis by looking at the fastest growing category of bank assets (loans). He was right, then, but banks are not the only culprits now: add hedge funds, overly large private equity funds, some sovereign wealth funds, and private speculators of all walks.

If you see the so-called smart money rushing to invest in a specific category of assets, don't walk away from the opportunity. Run away.

Missing out on some of the "gains" generated during a bubble is a minor loss, missing out on the crash that follows is a triumph.

And it won't be different next time!