The year was 1986.
Share markets were on the rise.
The brash and showy entrepreneurs were never far from the social or business pages.
New business acquisitions. Grandiose homes. Luxury yachts. Lifestyles of the rich and famous…or as we would later discover, infamous.
It was a complete contrast to the more austere 1970s.
The excessive displays of wealth and opulence were the inspiration for the movie Wall Street…Gordon Gekko and ‘greed is good’.
This was the period when my financial planning career commenced.
Investing in shares was still a foreign concept to most people.
Property, term deposits, and insurance policies were the preferred investment vehicles.
However, there’s nothing like a few years of strong returns to rouse the level of public interest.
Managed funds (marketing past returns) were the primary beneficiaries of people’s desire to participate in the ‘greed is good’ era.
Then along came 19 October 1987…the day forever etched in market history as ‘Black Monday’.
The days of easy money were over.
Unlisted property trusts stepped into the breach…offering the higher returns that investors find appealing and advisers find easy to sell.
These investment products collapsed in the early 1990s.
Funds were frozen. Investors received cents on the dollar.
It took nearly a decade for the All Ordinaries to surpass its 1987 peak.
Then, from 1996 to 2000, we witnessed a renewed interest in share investing…the dot-com boom was infectious.
That era of unrealistic returns also ended badly. The NASDAQ index fell over 80% in value.
People were introduced to the term ‘subprime lending’.
And, as they say, the rest is history. Wall Street institutions, laden with toxic debt, faltered.
The Fed, once again, stepped into the breach with lower interest rates and quantitative easing. The term QE was largely unknown until the events of 2008.
When I started in this business, if someone had asked me what QE stood for, my reply would have been, ‘Queen Elizabeth’.
Over the past 32 years there have been numerous lessons…most learned from failures.
Sadly, none of them appear to have been learnt by central bankers.
They keep repeating (and amplifying) the same policy, somehow expecting a different outcome. Their actions meet Einstein’s definition of insanity.
Their insanity has placed us smack bang in the middle of the greatest (and most dangerous) credit bubble in history.
There are no good outcomes from where we are today.
The options are bad, really bad, or catastrophic.
Bubbles of lesser magnitude have never deflated gradually…they always burst.
Expecting this one to end any differently, also qualifies for Einstein’s definition of insanity.
My next four contributions to Markets & Money will be about the lessons I’ve learned from 32 years in this business.
However young or old you are, the savings you’ve accumulated are the sum total of your life’s endeavours. This is your total wealth. Losing some or all of it could set back your plans by years or even decades.
The lessons are designed to make you think more deeply about your personal situation and to decide whether you need to take protective action before this Mother-Of-All credit bubble bursts.
The real driver behind the investment industry’s growth
The past three decades have been an exciting time to be involved in investment markets.
From its humble beginnings in the early 1980s, the investment industry has evolved into a multi-multi-billion-dollar industry.
This phenomenal growth has not been without its fair share of heartache and setbacks. Each market downturn and product failure provided valuable learning experiences.
There have been many drivers contributing to industry growth — compulsory superannuation, massive credit expansion, baby boomers moving towards retirement.
However, in my mind, the industry’s success has largely been underwritten by the share market’s extraordinary performance…a 1600% increase in value since 1982.
A return of this magnitude, in this space of time, is without peer.
The history-making performance is what gives credence to the industry’s narrative of: ‘in the long run shares always go up’.
Investors and industry players rarely question the legitimacy of this statement.
While the market went from high to high, interest rates were on the descent.
Falling from 18% to 1.5%…encouraging borrowers and discouraging savers.
It’s highly unlikely the investment industry would have prospered to the extent it has, had the risk-free rate of return remained competitive.
Investors have been forced into higher yielding investments…increasing demand for the industry’s products.
The bursting of the credit bubble in 2008 should have been a sobering reminder of the perils in a system dependent upon leverage.
Everything (and I mean everything) — corporate profitability, political stability, welfare sustainability, retirement viability — all hinged on a system whose growth had become entirely conditional upon the continued accumulation of debt.
Policy makers had made a rod for their own back.
In 2008, instead of acting responsibly and heeding the warning (when global debt was only US$140 trillion) to gradually reduce debt dependency, central bankers went ‘full throttle’.
Global debt now stands at US$240 trillion…US$100 trillion more than when the world stared into the financial abyss in 2008.
The central banks have actively engaged in policies deliberately designed to reflate asset prices…rewarding borrowers, speculators, investors and punishing savers.
The investment industry has been a major beneficiary of the central bankers irresponsible, reckless and delusional policies.
The industry — out of self-interest — has no real motivation to point out the obvious folly in the central bankers’ actions.
We are literally living on borrowed time.
When the bell tolls on this period of insanity, the real propellant behind the market’s stellar returns will be revealed for all to see. Unfortunately, the gaining of wisdom will be a case of ‘too little, too late’ for a lot of people.
And therein lies the first lesson…you have to look at the ‘how and why’ behind the market.
What’s driving it?
Is it sustainable?
When this bubble bursts, the second lesson will be…
Aussie economic expert outlines the five ASX stocks posing the biggest threat to your family wealth. Get the names here.
Humility is key when investing in the share market
Being respectful is an important quality in life. Pride and arrogance often lead to spectacular falls — as demonstrated by the long list of failed entrepreneurs.
The world’s central bankers would do well to exercise a little humility. The hubris on display from the world’s central bankers has been particularly galling.
Consider this extract from the CBS 60 Minutes interview with Ben Bernanke — conducted 5 December 2010:
‘60 MINUTES: “Can you act quickly enough to prevent inflation from getting out of control?”
BERNANKE: “We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.”
60 MINUTES: “You have what degree of confidence in your ability to control this?”
BERNANKE: “One hundred percent.”’
100% confidence in his ability to control the economy…what conceit.
This is the same Ben Bernanke who told us in March 2007:
‘The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.’
And two months before Fannie Mae and Freddie Mac collapsed and were nationalised — Bernanke said: ‘They will make it through the storm’.
There’s no question Bernanke’s academic pedigree is far superior to mine.
But the school of hard knocks has taught me to respect markets…they can (and, do) unleash forces far more powerful than any central banker.
My cautious outlook and simple approach to portfolio construction is borne from being taught very painful lessons from markets.
Doubts and questions are my constant companions.
Nothing is ever taken for granted.
Whenever you enjoy investment success, be thankful for your good fortune.
Don’t fall into the trap of believing you have the ‘gift’ for making money.
Markets are constantly changing. What worked yesterday may no longer be appropriate tomorrow.
Take profits. Respect markets. Remain humble.
More lessons to come.
Editor, Markets & Money
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