Lessons Learned from 32 Years in Financial Planning — Part Two

Many a true word is said in jest.

It was American comedian, Steven Wright, who said…‘Experience is something you don’t get until just after you need it.’

How very true.

Over the past 32 years, I’ve gained a lot of experience…some the hard way and some from observing the folly of others.

Having looked at the world upside down, inside out, and from all different angles, the conclusion I keep reaching is that we’re headed for a crisis of epic proportions.

Using the same logic as ‘you cannot cure obesity with an increased diet consisting entirely of sugary drinks and fatty food’, then it stands to reason, ‘you cannot cure a debt crisis with the addition of more debt’.

Yet, this is precisely what’s happened since 2008.

The greater the period of delusion, the greater the heartache and humiliation…look at Madoff’s victims.
Here’s the next instalment in this series of lessons learnt.

There are no new ways to go broke — it is always too much debt

‘Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.’

John Mills, ‘On Credit Cycles and the Origin of Commercial Panics,’ 1867

147 years ago, John Mills recognised the folly of man, money and mania.

Nothing has changed. Debt is the common denominator in all financial disasters.

Those who live by the creed ‘you have to bet big to win big’ can be lucky…but they’re in the minority. The majority end up wrecked on the rocks of financial reality.

Hyman Minsky said ‘Stability breeds instability’. The longer a trend is established, the greater the certainty in the investors’ minds that it’ll continue.

The following spreadsheet from the Reserve Bank (RBA) website, shows the volume of Margin Lending from Jun 1999 to Mar 2009.

In June 1999, total margin lending stood at $4.713 billion. Fast-forward to December 2007 (the peak of the Australian share market) and total margin lending had increased to a mammoth $41.589 billion — nearly a nine-fold increase in the decade.

The quarterly data provides a fascinating insight into the greed mentality that gripped investors during the 2003 to 2007 bull market.

Four consecutive years, that delivered returns of 20+% per annum, bred complacency.

Borrowing to invest in an increasingly expensive market…what could possibly wrong?

Margin Lending 16-07-2018

Source: Reserve Bank of Australia
[Click to enlarge]

The Storm Financial debacle should be a warning on how badly this margin lending exercise (debacle) ended.

Be prudent.

Personally, I prefer the creed ‘slow and steady wins the race’.

The best luck is bad luck

Success without bad luck is a disaster waiting to happen.

Bad luck and misfortune teach you to appreciate the good times.

Success without setbacks is conditioning you for a Minsky moment — your continual success will inevitably breed a much bigger failure. 

Remember, you cannot consider yourself to be an investor unless you’ve lost money — the trick is to not lose too much.

These ‘ouch’ moments (should) teach you the respect I mentioned above — sometimes we (mainly males) need more than one lesson.

Don’t beat yourself up over your loses — look at them as ‘school fees’.

If I look back at my ‘bad luck’ experiences, they usually resulted from not really understanding the investment, acting on impulse and/or greed.

Thanks to the lessons learnt, these days my approach to investing is much more disciplined and very simple.


Patience truly is a virtue. In this fast-paced world, instant gratification has become embedded in our society. The thought of taking twenty years to pay off a home, or forty years to build retirement capital, is completely at odds with the ‘want it now’ attitude.

‘Buy in haste and repent in leisure’ is so true. Exercise patience when considering investing — rarely are ‘once in a lifetime’ opportunities the shortcut to riches you thought they would be. Whenever I hear ‘once in a lifetime opportunity’ my retort is ‘so never again in my life will there be another opportunity to profit?’

You also need patience after you have invested. Markets do not always behave the way you want them to or in the timeframe you desire.

For example, Europe, Japan and the US have been gripped by the lowest interest rates in history (going back at least 200 years). This is lousy timing for a retiree seeking a return with security. Will interest rates turn? Yes. But it could be years before rates return to ‘normal’…if ever. Patience is required.

My strategy at present — based on seeking safety — is to be 100% invested in cash and term deposits.

Waiting patiently in cash is not easy when the share market has been posting good gains.

When markets are falling, it’s far easier to exercise patience.

Naturally, I would like to see markets fall further and more quickly to mobilise the cash holding. However, you have to recognise markets will do what they have to do, in their own sweet time — irrespective of your personal agenda.

The problem confronting the majority of self-funded retirees, who want to adopt a similar cautious investment approach, is ‘how to fund their living expenses’.

The investment industry’s solution is to recommend high yielding shares, REITs and/or hybrids.

My question is ‘what’s the potential cost for that extra few percent?’

Telstra shareholders have already been given the answer to this question.

For those yet to be given an answer, you should consider this question…’if share markets fall 50+% in value, was the reach for extra yield worth it?’

Waiting patiently in cash may mean using some of your capital to subsidise living expenses. So be it.

However, when markets do correct (and they will) you’ll be in a position to deploy your cash to buy assets at significantly discounted levels.

Do not chase returns

This lesson follows on from patience. If interest rates are low, the temptation is to leave the safety of the bank and chase an extra few percent. Invariably (unless you sell early) the cost for chasing the higher return comes with loss of capital — this loss is usually far greater than the few percent you earned.

Investments can be like icebergs — it’s what you don’t see that usually causes the most damage.

This is what I mean about understanding investments.

The simple rule of thumb is, if the return you are offered is above bank term deposit rate, then you are potentially placing some or all of your capital at risk. If you cannot quantify what this risk is or where the risk could come from, then DO NOT invest.

During the boom times, the industry brings so many opaque investment products — offering various rates of return — to market.

Investor demand for ‘too good to be true’ offerings puts the industry product development teams into overdrive.

While different in some ways, they all have a common denominator — the underlying investments are ‘geared up’ to enhance yield AND due to the complex investment structure, higher management fees are charged.

Simple and transparent investments may not set the adrenalin racing during your waking hours, but you will sleep a whole lot better.

Successful investors assess risk — what can go wrong, and what can be lost.

If risk assessment is done properly, the returns will come.

Do not chase returns. Past returns are just that…in the past.

What you need to assess is what the future may hold.

More lessons to come.


Vern Gowdie,
Editor, The Gowdie Letter

Vern Gowdie 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 recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

To read more insights by Vern check out the articles below.

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