Lessons from 35 Years in the Investment Industry Markets

The past three and a half decades have been fascinating to be involved in investment markets.

From its humble beginnings in the early 1980s, the investment industry has evolved into a multitrillion-dollar industry.

It’s not been all smooth sailing. This phenomenal growth has come with its fair share of heartache and setbacks. Each market downturn and product failure provided valuable learning experiences…for those willing to learn.

Many drivers have contributed to the industry’s growth — compulsory superannuation, massive credit expansion, baby boomers moving towards retirement — but, in my mind, the industry’s success has largely been underwritten by the US share market’s 35-fold increase in value.

This history-making performance supported the industry’s narrative of: ‘In the long run shares always go up’. Investors and industry players had little reason to doubt the legitimacy of this storyline.

While the market went from record high to record high, interest rates were falling from 18% to zero. Absent these dynamics; it’s my contention the investment industry would not have prospered to the extent it has.

The TINA (there is no alternative) mindset is music to the ears of the industry. What a difference to the caution investors exercised during the 1980s.

That music TINA is playing could actually be a bell tolling. When almost everyone thinks they should be ‘all in’, that’s usually when surprises happen…a reversal in the trend.

Last year provided us with a glimpse of how quickly markets can change course. They fall much faster than they rise. Yes, the Fed managed to turn things around that time. But, can they do it again and again and again? Unlikely…no, on second thought, it’s actually impossible.

To assist you in preparing for a future that could be a complete contrast to what we’ve been conditioned to believe, here are a few lessons from my 35 years in this business.

Humility

Being respectful is an important quality in life. Pride and arrogance often lead to spectacular falls — as demonstrated by the long list of failed entrepreneurs.

The world’s central bankers would do well to exercise a little humility. The hubris on display from the world’s central bankers have been particularly galling.

They have taken us to a very dangerous place (emphasis added)…

Years of ultra-loose fiscal and monetary policies have put the global economy on track for a slow-motion train wreck in the coming years. When the crash comes, the stagflation of the 1970s will be combined with the spiralling debt crises of the post-2008 era, leaving major central banks in an impossible position.

Nouriel Roubini, 30 June 2021

Their overblown egos and arrogance have blinded them to what they’ve created…the greatest bubble in history.

There are no new ways to go broke — it is always too much debt

Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.

John Mills, On Credit Cycles and the Origin of Commercial Panics, 1867

More than 150 years ago, John Mills recognised the folly of man, money and mania. Nothing has changed.

Hyman Minsky said, ‘Stability breeds instability’. The longer a trend is established, the greater the certainty in the investors’ minds of its permanence. What has gone up or down will continue to go up or down.

The failure to recognise that all trends are transient was on display during the last boom.

This edited version of the RBA’s spreadsheet on margin lending shows how debt levels continued increasing throughout 2007…even though there were serious concerns over subprime loans.


D10 Margin Lending - RBA’s Spreadsheet

Source: RBA

[Click to open in a new window]

15 months after the Dec 2007 peak debt, margin debt fell in half as indebted portfolios were liquidated.

Too much debt cost investors dearly when markets changed trend…abruptly.

EXPOSED: The truth behind Australia’s ‘miracle’ economy

Patience

Patience truly is a virtue. In this fast-paced world, instant gratification has become embedded in our society. The thought of taking 20 years to pay off a home or 40 years to build retirement capital is completely at odds with the ‘want it now’ attitude.

‘Buy in haste and repent in leisure’ is so true. Exercise patience when considering investing — rarely are ‘once in a lifetime’ opportunities the shortcut to riches you thought they would be.

Patience is needed after you’ve invested. Markets do not always behave the way you want them to. They can take their own sweet time…irrespective of your desires.

Do not chase returns

The TINA (there is no alternative) mindset reflects a need to chase returns.

Give me anything…something, but not zero on my money.

But what downside risk comes with that anything or something?

Investments can be like icebergs — it’s what you don’t see that usually causes the most damage.

Opaque product offerings — with promises of higher returns — breed like rabbits during a boom. Be careful.

Simple and transparent investments may not set the adrenalin racing during your waking hours, but you will sleep a whole lot better.

Always take profits

You never go broke taking a profit. The greed in our DNA often blinds our objectivity. The desire to squeeze the last drop out of a winning investment can be very overpowering. Ignore the voice of greed in your head and be happy to leave some for the next person.

Besides greed, the other reason people don’t take profits is ‘I’ll pay too much tax!’. This is just plain dumb, dumb, dumb. Got the picture. Paying tax — at a pre-determined rate — is a cost of successful investing. Live with it.

On the other hand, the market does not give you a formula on what it will extract — it can take away all your profits and some or all of your capital. The market can be far more brutal than the taxman.

Taking profits locks in your gains and adds to your capital base. Even if you take out your original capital and leave the profits to ‘ride’, at least this way you’ve protected your downside.

Busts always, always follow booms

Since Tulip Mania became folklore, we know booms always bust. Yet, when the animal spirits capture society’s emotions, this logic is abandoned in the chase for the almighty dollar. Night follows day, and booms always bust. When the heat is on in the market — get out and stay out. The market may get even hotter, and you may experience seller’s remorse — get over it. The hotter the market becomes, the more violent the snap back to reality will be.

Never in the course of history has there been a boom without a bust. Human nature dictates that these two go ‘hand in glove’.

Transparency of investments

Only invest in something you understand. There are so many ‘iceberg’ investments out there. You think you see the risk, but most investors have no idea what lurks beneath the surface.

The rule of thumb is ‘if you don’t understand it, don’t do it’.

Simple, easy to understand investments — cash, term deposits, an index fund tracking the ASX 200, gold bullion etc — may be boring, but what you see is what you get. There are no exorbitant management fees, no fancy promises and more importantly, no nasty surprises.

Sure, an ASX 200 Index fund can fall heavily in a bear market — but you know that is a risk. Whereas an individual share could fall much further due to internal gearing levels, poor management or other corporate shenanigans. Unless you are on the inside, you are not fully apprised of these matters.

KISS is the overarching style in my model portfolio. If you feel tempted to pursue a ‘once in a lifetime’ opportunity, invest only what you can afford to lose.

If it sounds too good to be true

Listen to your inner voice — if it’s saying ‘this is too good to be true’ — take the advice. You may genuinely miss out on the once in a lifetime opportunity, but from my experience, you have more than likely dodged a bullet.

The prospect of a quick road to riches or instant wealth is tempting. The harsh reality is ‘the too good to be true’ is a salivating wolf in sheep’s clothing.

The magic of math

There is an old saying, ‘The market goes down by the elevator and up by the stairs’. If a market loses 50%, it has to recover 100% for you to breakeven.

The 50% loss can happen in a blink of an eye, whereas the recovery process can take years. Calculating your downside is far more critical than focusing on your potential gains.

Summary

In a boom, investors (inexperienced and experienced alike) ‘hang on tight and enjoy the ride’. Everyone is happy. Rarely is the sustainability of the boom questioned. Don’t jinx the market. Enjoy it. But we know from history, the party always ends.

In my experience, investors are not mentally prepared for the bust…especially one that wipes 60%-plus off market values. There is rarely a Plan B. No one told you this could happen, which explains why the mob’s default position is panic followed by fear…and plenty of it.

A sound strategy is firmly focused on understanding the downside…what can go wrong, and if it does, what is the likely cost? Is this an acceptable or unacceptable cost? If these factors have been accurately assessed, you can make a reasoned decision on where to allocate your capital, and the upside can take care of itself.

Knowing your tolerance for loss is far more important than dreaming about the riches that await you.

Also, experience tells us it’s better (and a lot less costly) to learn the lessons BEFORE rather than AFTER the event.

Regards,

Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

PS: Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.


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