How to Build Wealth With Long Term Investments

— In today’s Weekend Markets and Money we’re going to sit down with the Chairman of Gowdie Family Wealth, Vern Gowdie. He’s been on the Australian financial scene for over a quarter of a century, and he’s not afraid to call things as he sees them. Perhaps that’s why his presentation was the surprise hit of the World War D conference. So we’re going to talk a little bit about that today, plus some insight into his latest report, which went out yesterday.

Callum Newman: You generated a huge level of interest after your speech at World War D. Attendees literally surrounded you afterwards wanting to know more. Why do you think your talk resonated so much with them?

Vern Gowdie: My presentation was a summary of what I’ve learned from nearly three decades in the investment industry. The philosophy underpinning my family wealth strategy is simple —identify at what point in the value cycle (under, fair or over) you are considering buying or selling into; understand the downside risk in any investment you are considering, and if in doubt err on the side of caution and remain in cash.

My guess is the presentation struck a chord with attendees because they have also had their fair share of ‘hit and miss’ investments. These ‘school fees’ are an expensive education on how treacherous the investing world can be.

The ‘baby boomer’ and retiree attendees appreciate they can ill-afford to make a costly mistake at this stage of their lives. Recouping a significant capital loss becomes so much harder when you are in retirement or with retirement looming.

The simple model portfolio I’ve constructed also showed how it’s possible to outperform the majority of investment managers, at a fraction of the cost. In a low growth, low return investment environment minimising expenses is imperative.

The majority of people who approached me after the presentation wanted to share their investment horror stories and express their appreciation for being shown a straightforward solution to their wealth creation endeavours.

The Chairman in Action at World War D

CN: In your speech you mentioned how Australians are generally over-exposed to shares, especially in their superannuation. Is this the biggest risk you see right now for investors?

VG: Absolutely. Recentism is a term I used in my presentation and also in my weekly newsletters. What it means is our decisions are influenced by our recent experiences. Over the past thirty years Australian investors, in the main, have benefitted from a positive share market. This ‘warm glow’ is reflected in the overweight position shares have in the average ‘balanced’ superannuation fund.

Conversely, share market investors in Japan and the Netherlands have been battered from pillar to post for more years than you care to imagine. This rather negative experience is reflected in the pension funds of those countries having a half to two-thirds less exposure to shares than our Australian funds.

With the average Aussie super fund having a 60% exposure to Australian and international shares, investors are very susceptible to a GFC type market downturn. Losses of the magnitude of 50% or more will see super fund member accounts suffer a fall of at least 30%.

CN: The Self-Managed Super sector is growing and bound to get bigger. How can people protect themselves from the relentless marketing and skewed advice of the finance industry?

VG: Members with larger balances have in recent years migrated in their thousands to Self Managed Superannuation. The desire to take control of their retirement capital and reduce annual costs has been the primary motivators for the establishment of an SMSF.

In my opinion this is a step in the right direction, however the next step is to seek independent, unbiased advice in the management and administration of the SMSF.

From memory, somewhere in the order of 80% of financial planners are owned directly or indirectly by an institution. Institutional ownership does not necessarily mean the advice lacks independence, but it should make you question the basis behind any product recommendations — especially if the institutional owner manages those recommended products.

Another point to be mindful of is whether the planner is remunerated by way of an hourly fee or with a percentage fee based on the amount of capital you invest. In my opinion the hourly fee rate indicates the advice is more likely to be unbiased.

Obviously, subscribing to newsletters like Gowdie Family Wealth is another option for accessing independent views on the global economy and investment markets.

CN: You are a ‘beta investor’. Can you explain what that means and why you follow that approach?

Beta investing is basically investing in the index and accepting the average market return; it’s passive investment. Whereas, alpha investing involves active stock selection in an attempt to outperform the average return of the index.

Countless research reports have shown that less than 20% of alpha managers outperform the index over the long term. With such slim odds of outperformance you have to ask, ‘why bother trying to beat index?’

This question takes on even greater consideration when you realise the management fees of an index fund are a fraction of professionally managed alpha funds. So another way to frame the question is ‘why bother paying excessive management fees to underperform the index?’

Warren Buffett recently endorsed the merits of index investing when he revealed the instructions he gave to the Trustee of his Will. Buffett told the Trustee to invest 90% of the bequest he has made to his wife into a share index fund.

Obviously Buffett doesn’t have much faith in active managers either.

CN: In your latest report you talk about a former client who made and then lost a lot of money. Was that a common story for you over your 25 years in financial planning?

The report concerned a client who was very successful in business but unfortunately not quite as successful in managing his family’s expectations and their financial demands. This was not a common story, but I did encounter it on more than one occasion.

The story is one I am sure most people have either witnessed or heard of. The wealth creator is so absorbed in their business endeavours little time is devoted to family. Money and gifts become the substitute for time, communication and love. As the children progress into adulthood the demands become more expensive — cars, homes, holidays, payment for therapy, you name it.

The song Cats in the Cradle captures the cycle of father/child and then child/father disconnect that my client experienced. It was sad to witness and far too much water had gone under the bridge to repair the family relationships.

This firsthand account taught me the importance of investing in my family — building strong relationships and respect. Like anything worthwhile in life, there are no shortcuts in this process.

The way I see it you can spend the first 20 years of your children’s lives developing the bonds of love and respect, OR you can ignore the first 20 years of their lives BUT spend the next 30 or 40 years trying to repair the damage created by this neglect. Give me the former option anytime.

CN: You talk about ‘family wealth’ in your report. How is that approach different from what we normally hear about?

VG: The term SKI is a refrain used by many retirees. For those who don’t know, SKI stands for — Spend Kids’ Inheritance. Family Wealth is the antithesis of SKI. It is about taking an ultra-long term view on investing to ensure your family wealth is passed from generation to generation.

Most investors are trying to achieve a certain rate of return from their capital to fund their living expenses. Family Wealth investing is focussed more on the preservation of capital and only looking to advance the capital when market values make it prudent to do so. It really is a mindset of hasten slowly.

I discussed this in my April 2014 newsletter. It goes to the heart of the Family Wealth investment mindset.

The recipe for successful generational wealth is so, so simple. It is TIME. You don’t have to be an expert in options, derivatives or any fancy trading strategies.

The simpler the investment strategy the more easily the investment culture is transferred from one generation to the next.

Given enough time, the power of compound interest will turn a small fortune into a large one.

The Rule of 72 tells us how long it will take to double your money at a given rate of return. A return of 6% per annum takes 12 years to double your money and an 8% return would take nine years.

The concept is simple; the application is difficult. This is why you need a documented and dynamic operating manual to guide and remind each generation of your fundamental investment and risk management philosophies.

The time and effort spent on creating the right platform to support the generations to come should pay handsome dividends.

The structure for the Family Investment Committee operating manual I refer to was detailed in the April 2014, Gowdie Family Wealth Newsletter.

CN: You spoke on a panel with Bill Bonner’s son Will at World War D. What are some of the things people took away from that?

The Bonner Family Office was established in 2009. I was fortunate enough to be a founding member of the Bonner Family Office.

On a personal level, I can state the knowledge gained from my involvement in the Bonner Family Office has greatly assisted in shaping my philosophy on Family Wealth management.

In the Bonner family Bill has been the wealth creator, however he has entrusted Will, the eldest of his six children, with the responsibility of managing the Family Office. 

Will was able to share the important lessons he has learned over the past five years.

The responsibility of being accountable to both his father and his siblings has been character building.

All family members have different personalities, levels of financial interest, risk profiles and external influences they bring to the family council. Managing this diversity can be a challenge.

I’ve learned some important lessons about Family Wealth from my association with Bill and Will.

First, structure is essential. This includes coming up with an operating manual on how the investment committee will function; an agenda for family meetings; minutes taken for each family meeting; and a list of responsibilities and duties for each family member. These structures are designed to ensure everyone is ‘reading from the same page’ and minimises the risk of misunderstanding.

Second, open and honest communication, from the youngest to the oldest, is encouraged and is critical to the cohesive management of family wealth.

Third, the Family Wealth model needs to be somewhat flexible as the family changes. Different life phases have different challenges. This includes marriage and divorce, children, and retirement. These changes can alter the dynamics within a family.

And fourth, the culture of family wealth is very much about patient investment. This is counter-intuitive to how the majority approach their investment decisions. Which is precisely why the term ‘old family money’ applies. For instance the real ‘old money’ in Europe is invested in land, art and gold. These investments can and do take decades to improve in value, but they can also be transferred to the next generation to act as custodians.

Not every investor has the luxury of being able to leave their capital untouched. However, the lesson of patient, long term value investing as a genuine wealth creation strategy can and should be applied by all investors.

As we have seen recently, high speed algorithmic trading provides a distinct edge to those rich, powerful and astute enough to employ this strategy. The average day trader is playing a mug’s game if they think they can beat these odds.

Taking strategic investments in undervalued asset classes is the most assured, low risk way of creating long term wealth. For many this approach is too boring or too slow. Sadly those looking for the hot tip or following the herd on the road to promised riches generally end up worse off than those who took the slow, but steady approach — the tortoise and hare analogy.

CN: OK. Thanks for your time today Vern. It’s been great.

VG: My pleasure.



Callum Newman+

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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