Do you want to be a successful long term investor?
What a stupid question. Of course you do. Otherwise you wouldn’t be reading these newsletters, right?
If we assume everyone wants to be a successful investor, then why do most fail to achieve this objective?
Being a successful investor requires a lifelong commitment to improving your understanding of market psychology, valuation techniques, the economy, tax law, asset protection strategies and debunking investment industry myths.
Most people do not have the patience, discipline or desire to make this level of long term commitment.
To be a truly successful investor, you must think and act differently to the crowd.
‘We attempt to be fearful when others are greedy and greedy when others are fearful.’
Sage and simple advice, but rarely practiced.
Buffett has been so successful because he thinks and acts differently to the crowd. He knows how to sort the ‘wheat from the chaff’. Do you think Buffett listens to the local bank financial planner for insight on where to invest?
Only if he wanted to turn a large fortune into a small one.
Below is an extract from the May 21 2015 edition of Gowdie Family Wealth.
At that time, the All Ordinaries Index was around 5800 points and the financial press was pondering when the magical threshold of 6000 points would be breached.
Ignorance is an asset
With cash rates falling there’s a growing chorus that the market is going to float higher on a flood of sidelined (and frustrated) cash heading its way.
The theory is that income starved investors will relinquish the safety of cash for higher yielding shares. The sheer volume of cash is going to drive the market up.
This old chestnut doesn’t stand up to scrutiny.
For every buyer there’s a seller.
For example, Bill has $100,000 in cash. Ben has $100,000 in CBA shares. Bill withdraws his cash to buy Ben’s shares. Bill now has $100,000 in CBA shares and Ben deposits the $100,000 cash into his account.
The money has circulated. It wasn’t a one-way trade.
What can drive markets up is the cash investor bidding share prices higher…leading to higher price/earnings multiples.
The ‘flood of cash’ furphy is an investment industry con that doesn’t even pass the most basic of common sense tests.
Over the years I’ve had more people than I care to remember quote the ‘flood of cash’ reasoning for markets going higher.
When given the Bill and Ben example, you can watch the quizzical expression appear on their face. Processing the simplicity of the explanation — and the realisation of why they never considered it — tends to elicit an openness that questions their other accepted market ‘wisdoms’. That’s a good thing.
Being aware of your own ignorance is more valuable than most people realise.
Thinking you know it all is the greatest danger in the investing business. Pride comes before a fall.
Better to accept being humbled by someone correcting a misconception than the market delivering the cold hard truth.
When the market decides to mete out its lessons, these can be the most expensive tuition fees you’ll ever pay.
Seriously successful investors continually question their assumptions. Doubt is their constant companion.
‘Don’t confuse brains with a bull market.’
Legendary investor, Humphrey B. Neill
Making money in a rising market is easy…ask Alan Bond and Christopher Skase. Holding onto it in a brutal bear market is when those who possess genuine investment ability and respect for the market come to the fore.
The following chart on the spectrum of markets is why seasoned investment professionals continually question their assumptions.
Source: Robert Prechter Elliot Wave Theory
Every day we make buying and selling decisions on a variety of markets — goods, services and investments.
In the top left hand corner are the markets we’re familiar with. Most of us have a pretty good idea of price in these markets.
Tools: hammer, saw, screwdrivers etc. The equipment we need to make or fix productive ‘things’. There is never a bull or bear market in tools.
Producer goods: furniture, cars etc. Again we have a reasonably good idea of the price of producer goods — new and used.
Fuel, electricity and water — the price of these consumer commodities are also well known.
Move a little further along to entertainment and price can be a little more subjective. You can have a ‘bull’ market in entertainment — for example, female mania over the latest boy band. One year a band can sell out a concert and the next, they’re playing at the local RSL.
The further we move along the spectrum, the less likely we are to understand the ‘value for money’ equation.
Which explains why there can be such huge price swings in artworks, real estate, commodities and shares. Price discovery is not easy and depends upon a number of variables…some of which are not even evident at the time of purchase.
The professional investors who I know and respect, appreciate that there’s only so much information available to validate a buy, sell or hold position. They monitor these positions and continue to question their assumptions.
The variable they’re all too familiar with is social mood; the greed and fear factor from investors who act or react on price without any real understanding of value. They love this variable because it provides them with the opportunity to buy low and sell high.
Recently I spoke with a couple of very successful professionals. The biggest challenge they face at present is the artificial world the Fed has created. They’re genuinely nervous.
Markets are being driven by factors that cannot be easily measured or known — the possibility of more QE, whether US cash rates rise or fall, the slowdown in China and the prospect of systemic high yield defaults.
Price discovery at the far right end of the market spectrum is extremely difficult even for the savviest seasoned professional.
In a full market cycle, the majority of average investors are grist for the investment mill. In general they buy high and sell low.
When you hear cashed up investors are going to push the markets higher, this is probably correct, but not because of the ‘weight of money’ furphy.
If it happens it’s because seasoned investors, who harbour doubts over the market’s value, sell out to those who are unaware of their own price ignorance.
Understanding market psychology, price compared to value and debunking the industry myths are the aims of The Gowdie Letter.
We are entering an inflection point in the global economy. The old world of debt infused economic growth and generous entitlement payments will collide headlong with a future where technology will enable us to live longer and deliver a greater level of automation into the workplace.
When these two powerful forces collide it will create the economic equivalent of the Big Bang.
The past will be blown away. Massive debt writedowns and governments reneging on welfare promises are in our future.
The future is going to be highly disruptive.
You can either capitalise or be cannibalised by this inevitability.
Your long term investment success will hinge on whether you take the time and effort to understand the situation we face, and then understand how to protect your wealth from the economic fallout.
I know from the very smart people I have regular contact with, that successful investors are already taking steps to protect themselves.
Editor, The Gowdie Letter