Smart People Making Dumb Decisions

And the crowd goes wild.

A hush has descended over the crowd.

The anguish of the crowd was evident for all to see.

If you’ve ever watched or been to a sporting contest, you’ll recognise this all-too-familiar range of emotions.

The more invested you are in your team, the greater the agony and ecstasy.

But when you analyse it on a rational level, it makes no sense.

Why do we get so involved in grown men kicking a piece of leather around a paddock or in the battle between a little red ball and a piece of wood or a half-dozen tall people trying to put a round ball through a hoop?

It defies logic. In the scheme of life, none of these activities are all that important.

Yet to some — especially Brazilian and English soccer fans — it’s life and death.


Emotions are primal. Rational thought is, at best, a secondary consideration.

When it comes to markets, those primal instincts are never too far from the action.

Fear and greed are recognised drivers of asset prices.

For the novice investor, here’s an easy-to-understand emotional ready reckoner:

Record high = Greed
Record low = Fear

The only exception to this rule is when it comes to interest rates. Then the reverse applies:

Record low = Greed

Record high = Fear

A quick check of markets:

Dow Jones hits record high.

Bitcoin hits record high.

Art work sells for record high.

High-end real estate hits record high.

Interest rates at record low.

The crowd has gone wild…in fact, the crowd has gone mad.

Central banks have blown THE BIGGEST (written in capitals and underlined for emphasis) bubble in history.

History shows us that ALL bubbles eventually find a pin.

Due to the breadth and height of this bubble — spanning the global economy and across all asset classes — containing the fallout will be nigh on impossible.

Central bank efforts will be powerless because of the emotional response from the crowd…the horror of having lost a lifetime’s worth of savings and the shattering of retirement dreams.

The anguish will be evident for all to see.

The secret to investment success is to see what others don’t see…before it’s too late. 

To help you understand what awaits the greedy, the following is an edited extract from my recent book, How Much Bull Can Investors Bear?


Instinct or Intellect — Which Do You Use?

It is our intellect and ability to reason that sets us apart from animals.

Renae Richardson

The human race has made enormous progress over the centuries due to our power to think and reason.

Yet, in the world of investing, our primal instincts are never too far below the surface.

The herd mentality is why the average investor ends up being, well, an average investor.

Successful investors continually question assumptions. They assess the risk more than the reward.

They know that, if you fully understand what you could lose, you will have a better appreciation of what you stand to gain. The herd tends to operate on a ‘buy in haste and repent in leisure’ mentality.

Do not confuse intelligence with investing intellect. There are some very smart people who have done some very dumb things with money. A quick look at who invested with Bernie Madoff (the greatest con artist of the century) confirms this. Along with the “mum and dad” investors, billionaires and bankers were victims of Madoff’s pyramid scheme, too.

Madoff understood the power of investor conditioning. Year after year, his Ponzi scheme delivered investors a consistent 10% per annum return. He conditioned his investors to expect a certain outcome.

We know there are only a few genuine certainties in life — death, taxes and night following day. All other “certainties” should be subjected to robust questioning, and the more “certain” a certainty, the more it should be questioned.

But why don’t people do this when it comes to investing their hard-earned money?

Over a century ago, Russian physiologist Ivan Pavlov conducted conditional reflex experiments with animals. The result of those experiments gave us the term “Pavlov’s dog”. This saying has become synonymous with the actions of people who simply react to a situation instead of applying critical thinking.

Hyman Minsky, the Economics Nobel Laureate, noted that stability breeds instability. This was Minsky’s ironic way of describing complacency breeding contempt.

The longer the good times last, the more convinced investors become things will stay that way — or improve even. The fact that nothing good lasts forever never seems to dawn on them.

Minsky found there was a direct correlation between the duration of the good times and rising levels of risk taking. The unquestioned belief in the trend continuing without disruption inevitably causes its demise. At the mature stage of the trend, it’s common to hear phrases such as: “This time it is different” and “you can’t go wrong buying…” “There is no alternative” — complacency-bred contempt.

To further highlight the risks of conditioning and complacency, there’s a brilliant turkey analogy in Nassim Taleb’s book, The Black Swan.

Leading up to Thanksgiving, the unsuspecting turkey is well fed day after day. The turkey is being conditioned to think life is pretty good. The turkey’s confidence and belief system grows with each successive day of feeding. The turkey is certain it’ll be fed tomorrow. Then, one day, the turkey meets its true fate.

This graphic, from The Black Swan, is a great example of how you go from feasting…to being the feast in one foul (pun intended) chop.

It bears a strong resemblance to any number of market graphs, doesn’t it?

1000 and 1 days in the life of a thanksgiving turkey 8-12-17

Source: Business Insider
[Click to enlarge]

You can see how conditioning has led us to the situation we have today.

An obvious example is the US housing market. Prior to the implosion of sub-prime lending, the US housing market had never sustained a coordinated nationwide fall in value.

From time to time, individual States experienced property market downturns, but not the nation as a whole. This unquestioned belief in the resilience of the US property sector unleashed the greatest lending frenzy in history. The more money that poured into the sector, the more the belief of rising prices was reinforced. Which in turn attracted more money. It became a self-feeding loop of confidence, borrowing and rising prices.

However, like all Ponzi schemes, eventually you run out of mug punters to provide a new base.

The pyramid starts to crumble under the weight of over-commitment and overconfidence.

The sheer weight of this debt crushed the entire property market. The reason the US property market (as a whole) had not collapsed previously is because this lending madness was without precedent. Decades of stability gave rise to a level of instability not seen since the Great Depression.

The looming collapse of the financial system will come as a huge surprise to many people.

They’ve been conditioned to believe central banks can solve all problems.

Nothing could be further from the truth. They are the creators of problems.

That will only become apparent AFTER the crash.

When it comes to health and wealth, it’s far better to gain wisdom BEFORE the event.


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:

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