Winning By Not Losing , wouldn't that be nice except for the most of us, is about losing less and recovering. But yes, that's what I suggested to stay on the sidelines even with no/less skin in the game in January this year.
Vern's view is not your average mainstream financial person, but he was able to see the forest from the trees.
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How Do You See Me?
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Thursday, 2 April 2020Gold Coast, AustraliaBy Vern Gowdie
The vase? The two faces? Life is rarely one-dimensional. There are always different aspects to consider. For example, popular thinking has it that ALL this stimulus will be inflationary. Trillions here. 16% of GDP there. But what’s been lost in the argument/discussion is this detail. The ‘newly minted’ dollars will not be enough to replace the lost earnings AND borrowing power of all those previously employed. And (this is another big AND), if people — in sufficient numbers — somewhat rebuff the whole ‘debt-financed live beyond my means’ economic model, then global GDP numbers will shrink. Yes, there’s more money being created than ever before. However, there’s a whole lot more being destroyed. Central banks are always going to be behind the curve. They won’t know the extent of the damage until AFTER the (lagging) data is released. Then they’ll go (even more) ballistic. But will it be enough? After a sustained period of deflation, will they try to get in front of this and do way too much? Do we then get inflation? Questions to which, as yet, we have no definitive answers. However, anyone who thinks things are going back to normal when self-isolation ends, may want to think again. This is whole new world stuff. The damage to (government, corporate and personal) earnings, resulting from this new normal, is what markets are currently grappling with. How much? How long? How deep? How painful? In due course, the altered economic model will be fully priced into asset markets. That won’t happen overnight. Which is why investors should brace for further heart-in-mouth plunges. If you have skin in this game — be it in superannuation, shares, property, money in the bank — you need to be conscious of the various aspects at play. The good times are over, we have now moved into the make or break phase…and it requires you to see things differently. And now to the topic of today…how do you see me? The popular view — from the reams of feedback I’ve received over the years — is bearish, permabear or chicken little…and they’re the polite ones.Life is simpler if we label someone and place them in a pigeon hole. However, that labelling came from a one-dimensional view, my investment approach during the ‘up phase’ of the cycle. My investment philosophy is winning by not losing. And by losing, I mean those capital-destroying losses that can take years or decades to recover from or worse, you never recover. I am neither bullish nor bearish…just cautious. Right about now I can hear the protests going up… ‘Surely, advocating putting all your money in cash is bearish?’ Those holding that view are looking through the wrong end of the telescope. In bullish (and getting more bullish) markets, your level of ‘bearish’ should rise. Sell into a rising market. And conversely, in bearish (and getting more bearish) markets, your level of ‘bullish’ should rise. Buy into a falling market. I struggle with why that’s so difficult for people to comprehend? It’s the time-honoured way to create lasting wealth. Unfortunately, most people get it the wrong way round. The reason for my cash position was pretty straightforward…markets were feverishly bullish. That whole TINA narrative was reflective of that. The ‘everything bubble’ — the biggest asset bubble in history — was ALWAYS destined to meet a pin. And when it did, the sheer size of the bubble, meant it had/has the potential to be Great Depression-like ugly. Why on Earth would you want your capital exposed to that? Makes no sense to me. Timing the arrival of ‘the pin’ is a mug’s game. So you wait, safe in the knowledge your capital is intact and government guaranteed. Those who looked through the big end of the telescope now have absolutely no idea just how much capital they have at risk. Will it be 30% or 50% or 65% or nearly 90% like the Great Depression? The more this market falls, the more bearish those once bullish investors will get. The only guarantee you get with that approach, is the guaranteeing of losses. By comparison, that government guarantee looks pretty good. So far, the All Ordinaries is down about 30%. Is that the end of it or is it just the first round? What do you think? This initial blow the froth off the top correction has taken the All Ords back to a level first breached in 2006, 14 years ago.‘Shares for the long term’?
But let’s bring the focus in a little tighter. The All Ords most recent move above the 5000-point level was in 2014. It took less than six weeks to wipe out six years of gains. That’s how quickly paper profits can be shredded and what if this market hasn’t finished yet? How far back might the Aussie market go?4,000 points…a level first breached in 2005?3,000 points…a level first breached in 2000?2,000 points…a level first breached in 1994? These unknowns are why I opted for the known…100% of my capital not being exposed to capital-destroying losses that could take decades to recover from. Is this a bearish stance or at 60 years of age, was this just me being prudent? When markets are in the bearish zone — where I consider they offer far more reward than risk, then it’ll be time to turn bullish. But not yet. We’re a long way from the bearish zone. Why? Various valuation metrics I follow have us nowhere near the bottom. And, social mood is still too high. There are far too many people who remain bullish. Reports of people rushing to establish online trading accounts is, to me, an indication of where the mob’s thinking is at present. When it comes to markets, you really do need to practice self-isolation. Stay as far away from the mob as possible. The mob — those looking at a one-dimensional world — invariably gets it wrong. The time to buy will be when no one wants to buy. When online brokers are reporting a high level of inactive or closed accounts. The sound of market silence is what you want to hear. Until then, I’ll wait and, as a bonus, banks have increased the term deposit rates. For now, 100% of my money is earning almost 2%. That ‘known’ is far more appealing than the unknown level of capital loss AND dividend cuts that awaits share investors. When looking at the various dimensions of investing, the one thing that’s most overlooked and the most difficult to value is peace of mind. Unfortunately, it’s not until you lose it that you discover its real worth. Winning by not losing is much more than a one-dimensional view of the world. How do you see your situation now?Regards
Vern Gowdie,
