The Price to Be Paid for Instant Gratification

When you’re young, you tend to want things to happen quickly.

Patience is a virtue that’s in short supply.

I can remember being a young man in a hurry. In today’s world of instant everything, my youthful ‘haste’ now looks decidedly pedestrian.

There are 20- and 30-year-olds making fortunes from technology-related businesses (I should add that many of these are loss-making enterprises).

The disconnect between profitability and price for these enterprises is irrelevant. What the younger generation sees is the speed in which fortunes can be made.

Here’s a timeline of some of the high-profile successes:


Fat Tail Investment Research

In a little over a decade, multibillion-dollar fortunes have been created by their peers.

Wealth of this magnitude once took decades and generations to accumulate, think Pratt family, Packer family, Murdoch family, et al.

The upside of these newly-minted fortunes is that it shows what can happen if you pursue your dream with passion and commitment. The downside is it risks setting an unrealistic expectation of how quickly wealth can be created…psst, we’re yet to see how it can be destroyed even quicker.

Recent experiences create your present reality. If something has been good or bad, then this sentiment is projected into the future.

We’re all guilty — to varying degrees — of extrapolating today into tomorrow.

This human trait is why we experience booms and busts. The easy-money times are going to last forever OR things are never going to get better.

The following chart provides some insight into how the various generations view the world of investing:


The Young are most optimistic about returns

Source: Financialplanning.com

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The younger generations are more enthusiastic about shares compared to baby boomers.

Whereas, baby boomers are far more comfortable with tangible assets (property and gold).

According to an article published by TD Ameritrade titled ‘Millennials Are Affecting Investing’:

Use of technology among younger folks is an example of how a generational trait can lead to trading and investing opportunities for everyone.

With more of the economy driven by technology-related firms now than in past years, tech companies may be the leaders in helping the economy recover from the coronavirus downturn. They have already been leading the stock market recovery.

Younger generations have not only been quick to embrace technology, but as investors, they have also been buyers of tech shares.

Our experiences frame our thinking.

My 35 years in this business has taught me (courtesy of some very hard lessons) to proceed with caution.

The old adage of ‘if it’s too good to be true, then it usually is’ constantly keeps me grounded.

Do I regret not having been in the market in recent years?

Not really.

Why?

Because — unless this time is completely different — it’s my belief a far better risk versus reward proposition will present itself in the future. Just be patient and wait for a genuine low-risk/high-reward investment proposition.

What do I mean by that?

In the rotation of a market cycle, there are times when there are better or worse future returns on offer.

The following chart (dating back to 1919) illustrates the accuracy of the Margin Adjusted P/E (MAPE) model in forecasting the ANNUAL return from the S&P 500 Index a DECADE in advance.

The blue line is the FORECAST return. The red line is the ANNUAL return.

Where the blue line goes, the red line eventually follows.

There are times of disconnect — during periods of extreme BOOM or GLOOM — but overall, the blue and red lines have an intertwining relationship.

In the early 1940s after the Great Depression and in the midst of the Second World War, the MAPE forecasted return for the S&P 500 Index over the next 10 years was over 20% PER ANNUM.

The ACTUAL return ended up being just under 20% PER ANNUM.

The prevailing gloom of that time offered up a low-risk versus high-return opportunity.

Compare that to the euphoria surrounding the Roaring Twenties, the dotcom bubble, and current bubbles…

On each occasion, the MAPE model has forecast NEGATIVE PER ANNUM returns over the next 10 years.

With regards to the Roaring Twenties and dotcom bubble, the ACTUAL return ended being almost identical to what was forecast.

The current mood of speculation and greed has created the most extreme reading in HIGH RISK with ABSOLUTELY NO REWARD MINUS 7% PER ANNUM over the next decade.


Hussman Strategic Advisors

Source: Hussman Strategic Advisors

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Do you dismiss over 100 years of market history — created by the ebb and flow of human emotions — OR do you take heed of the message and retreat to a position of safety with your capital intact?

The decision you make could have serious consequences (good or bad) for your future financial well-being.

My approach is all about ‘permanent capital’. Money that lasts for generations.

Millennials, I fear, are chasing the quick buck from the latest hot stock. This market will be their rite of passage…just like the dotcom boom and bust was mine.

It’s experience that’s taught me that if I need to wait (for longer than you would like to) for low-risk, high-reward circumstances to present themselves, then so be it.

As Howard Marks (founder of Oaktree Capital) said:

Being a high-risk, high return investor is in my opinion like operating on the high wire without a net. You can do it spectacularly…for a little while.

This ‘hasten slowly’ approach is one we’re hoping will demonstrate the value of patience to our (millennial) daughters. My investment philosophy is not based solely on our financial well-being, but to also provide leadership and guidance to the next generation of investors.

While they understand the principle of ‘softly, softly, catchee monkey’, I appreciate the lesson won’t be fully learnt until this market goes through a complete cycle…from up to down.

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Permanent capital

Rather than listen to the noise of those trying to steer the herd in a certain direction (broking analysts, institutional economists, central bankers, et al.) we need to make our decisions based on informed data.

There are two quotes that remind me of what it is we’re trying to achieve with our permanent (as opposed to fleeting) capital:

Of the two ways to perform as an investor — racking up exceptional gains and avoiding losses — I believe the latter is more dependable.

Howard Marks, The Most Important Thing

The stock market is a no-called-strike game. You don’t have to swing at everything —you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, “Swing, you bum!”’

Warren Buffett

Avoiding losses and waiting for the right investment are guiding principles for long-term wealth creation.

This approach requires less haste and more patience.

You must be prepared to sacrifice the adrenalin buzz of instant gratification for the contentment that comes from delayed gratification.

In the midst of an ever-rising market, trying to convince inexperienced investors of the merits of this philosophy is not easy.

This is why we have market cycles…to teach people about the need for balance.

When this market rotates from euphoria to despair, a lot of people — the young and not so young — are going to pay a very hefty price for chasing instant gratification.

This is what MINUS 7% per annum over the next decade would do to a $100,000 investment:


Fat Tail Investment Research

Source:The Calculator Site

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This cumulative loss of almost 52% is just from an index-based investment. Individual holdings could fare better or worse.

Losing half your wealth over the next decade is NOT what investors are expecting in today’s environment of buoyant share markets…which is precisely why there’s a very high probability of it happening.

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