The Best Time to Panic About Markets is Before Everyone Else

Dear Reader,

Judging by recent emails, now is most definitely NOT the time to panic.

With emotions running in tandem with the markets, who wants to be told ‘your capital is living on borrowed time’?


Are you kidding?

This party is just getting started.

The responsible parents out there know that being the voice of reason is a thankless task.

Party pooper. You just don’t want us to have any fun. Why do you have to be always so boring?

And that’s just some of the responses I can recall from the days when our girls needed ‘tough love’.

With the passing of time, they have grown to appreciate the wisdom in our caution.

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Sound decision-making relies on logic

As a parent, the time to panic is BEFORE an event, rather than after it.

By conducting a risk assessment — will there be alcohol? Is the P plate driver reckless or responsible? Are there likely to be drugs at the party? Will it just be your school friends or are older fellows going to be there? You are trying to anticipate and prevent an adverse outcome…one that you may have to live with for a lifetime.

Sound decision-making relies on logic prevailing over emotion.

Unfortunately, when it comes to investing, emotions always trump logic…at least in the short term.

In 1934, Benjamin Graham (Warren Buffett’s mentor) together with David Dodd published the first edition of Security Analysis.

With the experience of having lived through the ‘Roaring Twenties’, the 1929 crash and the Great Depression, they made this observation…

In the short run, the market is a voting machine but in the long run, it is a weighing machine.

In the short term, the market is a ’popularity’ contest.

The most ‘attractive’ investment wins investor attention…think of Tesla’s current popularity compared to those other old, stodgy, boring car makers…GM and Ford.

Logic dictates the two companies — that combined, sell almost 30 times more vehicles than Tesla — should (combined) be worth more NOT less than Tesla.

In due course, the market will weigh up the facts of the matter and respond accordingly…Tesla share price will fall like a stone.

The triumph of emotion over logic was clearly on display during the 2017 crypto-mania.

For a lesson in how extrapolating past returns into the future is a mug’s game, please click on this link…to spare you from too much pain, just watch enough to get the gist of how silly it is to…

a) Lament missing out


b) Use past performance as the rationale for getting in on what you missed out on.

The YouTube video is the voting machine in action.

As we know, the weighing machine (logic) on cryptos eventually tipped the scales heavily to the downside.

The future most definitely was NOT a repeat of the past.

When is the best time to Panic?

The simple answer is…‘before everyone else does.’

In support of that view, here’s the wisdom of some seasoned market veterans…people who have been there and done that (emphasis added)…

The biggest mistake investors make is to believe that what happened in the recent past is likely to persist.They assume that something that was a good investment in the recent past is still a good investment.Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment.

Ray Dalio, founder of Bridgewater Associates, LP

You don’t get rewarded for taking risk; you get rewarded for buying cheap assets. And if the assets you bought got pushed up in price simply because they were risky, then you are not going to be rewarded for taking a risk; you are going to be punished for it.

Jeremy Grantham, GMO

There is a simple, although not easy, alternative [to forecasting]. … Buy when an asset is cheap, and sell when an asset gets expensive. … Valuation is the primary determinant of long-term returns, and the closest thing we have to a law of gravity in finance.

James Montier, GMO

Rule No. 1: Most things will prove to be cyclical.  Rule No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.

Howard Marks, Oaktree Capital Management

In a nutshell, you need to panic when markets are brimming with over-confidence (high valuation metrics) and remain calm when markets are wallowing in a depressive state (low valuation metrics).

Unfortunately, that’s not how it works.

The vast majority do the opposite of what’s required to build and (more importantly) retain long-term wealth.

The market constantly telegraphs its emotional state…but few ever bother to heed the call.

The Margin Adjusted PE (MAPE) — developed by John Hussman — has an impressive 93% accuracy in predicting the future 12-year return from the US share market.

When it talks, people should listen.

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Based on the latest reading, the US share market’s current state of euphoria surpasses all others…even 1929 and 2000.

The Rum Rebellion

Source: Hussman Strategic Advisors

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As you can see, emotional highs are invariably followed by emotional lows (or, quite literally, depression).

Letting go of preconceived ideas doesn’t happen easily…or overnight.

The grind to lower lows and the push to higher highs takes time.

After the Roaring Twenties, the Dow Jones took almost three years — August 1929 to June 1932 — to lose nearly 90% of its value.

The Rum Rebellion

Source: Macro Trends

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And the ride to a lower low was far from smooth.

The jagged downward pattern is an indication of investors holding out hope for a return to the ‘good old days’ of the 1920s…a ‘buy the dip’ mentality.

From mid-1931 onwards, the rallies were weak and short-lived…capitulation to the trend was all but complete. The exuberance of a few years earlier had reached a point of exhaustion.

Getting out (panicking) early would have saved, not only a lot of money, but also a lot of grief.

The time to panic is before the mob wakes up to the fact the market is living on borrowed time.

As James Montier says…‘sell when an asset gets expensive’ and the US market — which dictates terms to global markets — has never been more expensive.

Paradigm shifts

Understanding the market’s bi-polar nature is crucial to your financial well-being.

Ray Dalio’s research paper, ‘Paradigm Shifts’, shares what he’s observed during his time as an investment professional (emphasis added)…

Over my roughly 50 years of being a global macro investor, I have observed there to be relatively long of periods (about 10 years) in which the markets and market relationships operate in a certain way (which I call “paradigms”) that most people adapt to and eventually extrapolate so they become overdone, which leads to shifts to new paradigms in which the markets operate more opposite than similar to how they operated during the prior paradigm.

No two decades are ever alike. The paradigms change.

As Ray Dalio states (emphasis added)…

There are always big unsustainable forces that drive the paradigm. They go on long enough for people to believe that they will never end even though they obviously must end.

Understanding (or at least, appreciating) what’s driven past returns — good or bad — enables you to assess whether those factors are at or close to the point of exhaustion.

A reading of the 4 January 1929 edition of The New York Times provides a sobering reminder of the dangers in projecting the past into the future (emphasis added)

Moody Forecasts Market: Says 1929 Promises To Be Largely A Duplication of 1928 “The prosperity which has characterized this country with only moderate setbacks since 1923 is likely to continue without great variation well into the future, according to John Moody, president of Moody’s Investors Service.

How wrong he was about that.

If 1928 was Arnold Schwarzenegger, then 1929 was Danny DeVito.

And the 1930s were the polar opposite of the Roaring Twenties.

The MAPE graph is not just telegraphing us, it is SCREAMING at us…this market is the most emotionally charged in history.

Sooner or later, logic prevails and when it does, the journey from seventh heaven to hell can happen very quickly.

The time to panic is…now.


Vern Gowdie,
Editor, The Rum Rebellion

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion