A Lobotomy for Your Portfolio

A Lobotomy for Your Portfolio

In 1936, Portuguese neurologist Egas Moniz devised an ingenious method to treat schizophrenia. The newly developed surgical procedure went by the fancy name of ‘prefrontal leukotomy’.

We know it as a ‘lobotomy’. If you don’t know what a lobotomy does, I suggest you watch the movie One Flew Over the Cuckoo’s Nest and see what happens to Jack Nicholson’s character.

The procedure’s aim was to destroy the connections between the prefrontal region and other parts of the brain. In crude non-medical terms, the operation involved ‘putting an icepick through the eyes’.

A very permanent way of short-circuiting one’s grey matter.

Turning some poor bastard into a vegetable certainly gathered a crowd.

Lobotomy 19-02-2018

Source: Cracked.com
[Click to enlarge]

You have to ask: Were they there for medical reasons or to see what sort of idiot would drive an icepick into another human’s brain…or what sort of nutter would let him?

With hindsight, we look back on this medical procedure as absurd and barbaric.

But, at the time, Moniz’s procedure was considered the ‘remedy’ for all sorts of mental issues.

According to cracked.com…

By 1960, parents were getting them [lobotomies] for their moody teenage children…some 70,000 people were lobotomized before somebody figured out that driving a spike into the brain probably was not the answer to all of life’s problems.

The widespread acceptance of Moniz’s ground- (no, make that, ice-) breaking ‘operation’ earned him the Nobel Prize in 1949.


Yet this is what happens in the world.

Myths, beliefs, and procedures go unchallenged and become accepted by officialdom and academia.

Questioning conventional ‘wisdom’ risks ridicule. Go along to get along.

Powerful interests do not want any disruption to the status quo. Egos and money are at stake.

But what about public interest?

Well, we are told it is all in the public interest, but mostly it is in self-interest.

In April 2017, the government established the Financial Adviser Standards and Ethics Authority Limited (FASEA).

The purpose of the FASEA is to ‘…set the education, training and ethical standards of financial advisers, licensed under Australian law.’

Admirable intent.

What about ‘ethical standards’?

Unless an adviser is truly independent (no ties whatsoever to an institution), how can they serve two masters?

Does their interest lie with the institution or the client?

In theory, we know it should be the client. But in practice we know — from the recent ASIC report — that isn’t the case.

The only way to rectify this situation is for the government to drive an icepick through the eyes of the industry and destroy the connection between the front end (advisers) and the rest of the industry. Gone. Permanently remove any association between the advice provider and the product supplier. 

What do the education and training standards consist of?

Is the formal education and training going to be the equivalent of attending medical school and learning about the benefits of performing a prefrontal leukotomy?

If what’s being taught is based on misguided content, then all you’re doing is institutionalising a process of ‘garbage in, garbage out’.

Here’s a case in point.

Since the early 1980s, the fortunes of the share market and the investment industry have operated in tandem.

The share market has been an outstanding performer — albeit with some fairly wild swings — for over 30 years. The investment industry has evolved into big business thanks to the public’s willingness to invest in an asset class that has done well…extra emphasis on ‘has’.

In simple terms, the reasons for this stellar performance are twofold:

  • $200 trillion of debt has boosted corporate earnings; and
  • The multiple applied to those earnings (price-to-earnings ratio) has expanded fivefold from 6.7-times to 33-times.

Share Market performance over 30 years 19-02-2018

Source: gurufocus.com
[Click to enlarge]

In addition to an expansion of multiples, earnings have been artificially inflated by share buyback schemes — companies borrowing money cheaply to boost earnings per share (EPS).

According to the Associated Press…

Companies have been spending big on buybacks since the 1990s. What’s new is the way buybacks have exaggerated the health of many companies, suggesting through earnings per share that they are much better at generating profits than they actually are.

The distortion is ironic. Critics say the obsessive focus on buybacks has led companies to put off replacing plant and equipment, funding research and development, and generally doing the kind of spending needed to produce rising earnings per share for the long run.

“It’s boosted the stock market and flattered earnings, but it’s very short term,” says David Rosenberg, former chief economist at Merrill Lynch, now at money manager Gluskin Sheff. He calls buybacks a “sugar high.”

Will the investment industry’s formal education and training standards question whether these two dynamics — artificially inflated earnings and an expanding multiple — can be maintained?

I doubt it.

Will they even look at how the myth of ‘shares for the long run’ was even created?

I doubt it.

Do you think they might analyse long-term market trends and note — like the Shiller PE 10 graph shows — that PE multiples can shrink as well as expand?

And, in the unlikely event that they do, will they show how devastating a contracting multiple and declining earnings can be on share values?

I doubt it.

Instead, we’ll get the same old, same old…shares for the long term.

History categorically shows that shares can be the worst performing asset for periods lasting up to two decades.

That’s OK if you’re 20, 30 or even 40 years of age.

But for anyone older than that, who was told by their suitably qualified planner to expect the future to be a repeat of the past, well, they’ll have to do some serious rethinking of their retirement plans.

Planners, in over-weighting client portfolios with shares (due to a blind obsession for theory over logic), are in effect lobotomising those portfolios.

When, not if, this market collapses, the disconnect between theory and reality will become all too evident…and, as is always the case, all too late.

To learn how you could avoid having the industry’s ice pick being applied to your portfolio, please go here.


Vern Gowdie,
Editor, The Gowdie Letter

Vern Gowdie

Vern Gowdie

Editor at Markets & Money

Vern Gowdie has been involved in financial planning in Australia 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 recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

He is a feature editor to Markets and Money and is Founder and Chairman of the Gowdie Family Wealth and the Gowdie Letter advisory services.

Vern Gowdie

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Jack El-Hai

I defer to you on investments, but a Hollywood movie and Cracked magazine are a poor foundation for a discussion of medical history. The background and context of lobotomy are more complex (and interesting) than you suggest. May I recommend my book “The Lobotomist: A Maverick Medical Genius and His Tragic Quest to Rid the World of Mental Illness”?

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