Know When to Hold ‘Em, Know When to Fold ‘Em

Dear Reader,

With COVID-19 and the volatility on global share markets sucking up all the media oxygen, the death of Kenny Rogers on 20 March went largely unnoticed.

Who hasn’t sung along to ‘Islands in the stream’, ‘Don’t fall in love with a dreamer’, ‘She Believes in me’.

Heck, I’m even singing as I write this. But Kenny’s greatest hit — in my humble opinion — is ‘The Gambler’. The lyrics are brilliant.

It’s a great ballad about an old bull passing on his wisdom to the young bull. Wisdom that’s been learnt the hard way, through the school of hard knocks.

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With all the action on markets of late, I thought this piece of wisdom especially relevant to the situation investors find themselves in today…

He said, “If you’re gonna play the game, boy
You gotta learn to play it right”
You’ve got to know when to hold ‘em
Know when to fold ‘em
Know when to walk away
And know when to run
You never count your money
When you’re sittin’ at the table
There’ll be time enough for countin’
When the dealin’s done

If you’re gonna play the investing game, you gotta know how to play it right.

And if you’re listening to the talking heads or industry economists or financial planners or stockbrokers — the ones who are forever bullish and never saw this collapse coming — then you ain’t gonna be playing this game right.

There are times in the market cycle when you hold ‘em. And there are times, like early 1929, when you definitely wanted to fold ‘em.

Personally, I walked away from the market some time ago. Others, are now wondering whether they should be running.

There’s plenty of talk that the Australian share market has wiped out four years of gains. That’s true…but, shock horror, the industry has not told the whole story.

The All Ords is actually back to a level it first breached in April 2006, 14 years ago.

Rum Rebellion

Source: Commsec

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If that sort of information became public knowledge, then it would really blow a hole in the ‘in the long term, shares always go up’ narrative.

Best we keep that to ourselves. So the self-serving commentary from the so-called experts, will NOT tell you when to fold ‘em.

They want you to hold ‘em, because the longer you hold ‘em, the longer they can tap your account for fees.

In recent days I’ve been chained to my desk writing a yet-to-be-titled ‘Survival Guide’ for readers of The Gowdie Letter.

So far, it’s at 70 pages and counting.

Here’s a snippet on the hold ‘em message:

Trying to anticipate in advance the depth and length of this downturn is a process of educated guesswork.

And, plenty of people are airing their “guesses” in public.

The usual suspects — fund managers; economists; stockbrokers — are all urging investors to hang in there…good times will resume.

And for those on the sidelines, the urgency to act is reflected by this headline from Seeking Alpha on 20 March, 2020:

Rum Rebellion

Source: Seeking Alpha

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Generational buying opportunity? Really?

History, again, tells us the best generational buying opportunities present themselves when…no one wants to buy.

At the time of writing, the Dow Jones Index was around the 18,500-point level.

Here’s a little perspective on that “generational buying opportunity”…

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Source: Macro Trends

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The Dow is back to where it was in October 2016…only three and a half years ago.

Do you recall any cries going up back then about a “generational buying opportunity”?

No. Me either.

The claim just doesn’t stand up to the most basic of scrutiny.

However, this sort of nonsense is what passes for informed commentary.

There’s no doubt we’ll see a bounce from the market’s recent rapid descent…there always is.

And, the Fed’s ‘do whatever it takes’ stimulus has delivered the expected and predictable bounce.

The down, up, down market action has plenty of people second guessing do I hold ‘em or fold ‘em?

The hold ‘em camp believes that after a period of temporary volatility, normal trading conditions will resume. I need to get my hands on whatever their smoking to see that vision.

A little recap here. The US share market reached an absurd level due to this simple equation…artificial earnings times historically high multiple.

If anyone thinks that pre-COVID-19 (debt-inflated) earnings are coming back anytime soon, they are certifiably nuts. And, if you think anyone in their right mind is going to pay a 20-, 30- or 40-times multiple for those earnings, you are doubly nuts.

People are already warning that COVID-19 is the precursor to possibly more pandemics. Who is going to pay premium-premium multiples for earnings with that prospect looming?

Investors are now learning the hard way…

In collecting my thoughts on what lies ahead, I’ve gone back through history. There are a number of possible scenarios. I’ll share a couple with you…

The first is…

Dow — 1929 to 1950:

Rum Rebellion

Source: Macro Trends

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The Dow took just under three years to go from peak to trough. During the descent, there were periods when attempts at rallying were made…but to no avail.

You’ll see that each of those ‘ticks up’ gets less intense the longer the bear market grinds on.

Fatigue sets in. By the time it’s all over in June 1932, very few people are interested (or have the means to participate) in the ‘generational buying opportunity’.

Then, there was a meandering recovery — due to the Second World War — for the next decade or so before a sustained recovery in the 1950s.

We may not have the Second World War, but we could have WTWI…(World Trade War 1).

The West — especially if the death toll mounts in the US — could take aim at China. We could well see some form of “economic distancing” result from this.

The Great Depression was a deflationary period.

The second is…

Dow — 1966 to 1982:

Rum Rebellion

Source: Macro Trends

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After the productive “America was Great” period of 1950 to mid-1960s, the Dow proceeded to go nowhere for over 16 years.

From its peak in early 1966, the Dow took almost nine years to reach the fatigue stage in September 1974.

Unlike the early 1930s, the 1970s was a highly inflationary decade.

The sharp whipsaw movements on the Dow where reflective of a market coming to grips with rising costs…oil, wages, interest rates.

All these had a negative impact on corporate profits.

One was deflationary, the other inflationary. What lies ahead? Deflation or inflation or a combination of both?

My educated guess is detailed in the Survival Guide.

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But in both cases — 1929 to 1932 and 1966 to 1982 — it was a clear case of fold ‘em.

If you’re gonna play this game, then you better learn real quick how to play it right.

The cycle has turned (which is why it’s called a ‘cycle’) from up to down. Expansion is now being replaced by contraction. You have to know how to play it right.

How long and how deep will this contraction be? I have some views on this in the Survival Guide.

The time to walk away, was before the panic set in. That’s passed. Now you have to pick up the pace and consider when it’s time to run…before the next big wave of selling comes.

Investors are now learning the hard way…

You never count your money
When you’re sittin’ at the table
There’ll be time enough for countin’
When the dealin’s done

The only time you can count your money is when you convert those paper profits into cold-hard cash.

All those pundits who were saying a few months ago ‘look how much you conservative investors have missed out on’, forgot the wisdom of…

You never count your money
When you’re sittin’ at the table

Those same pundits are now saying ‘don’t sell, the losses are only on paper’. Well, here’s a newsflash…so were the gains.

For those who want to gamble their capital on a near-term sustained recovery, for what it’s worth, my advice is: Hope is not an investment strategy.

If you’re gonna play this game, then you need to understand the rules of the game changed a few weeks ago. The market dynamics are entirely different to the ones that existed in recent years.

How different?

As reported in the Sydney Morning Herald on 23 March, 2020 (emphasis added):

More than 2 million Australians could be out of work, with unemployment expected to soar as businesses begin shutting their doors and standing down or sacking workers because of the coronavirus pandemic.

Queues of laid-off staff snaked around blocks in Melbourne and Sydney on Monday in scenes reminiscent of the Great Depression.

And, CNN Business on 23 March, 2020 (emphasis added):

Goldman Sachs warned second-quarter GDP could collapse by a record 24%. Unemployment claims could spike eightfold to 2.25 million this week. White House economic adviser Kevin Hassett said the United States could face a repeat of the Great Depression.’

Surviving a period, that’s being compared to the Great Depression, requires far more critical thought than blind belief in the banality of ‘in the long term shares go up’.

Yes, they will. But will you live long enough to see that recovery?

After the 1929 crash, the Dow took 25 years to recover its pre-depression high.

As Kenny Rogers sang…

Every gambler knows
That the secret to survivin’
Is knowin’ what to throw away
And knowin’ what to keep

Now more than ever, you need to know what to throw away and what to keep.


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