Timing is everything in life.
Muhammed Ali should have called it quits after the ‘Rumble in the Jungle’ with George Foreman in 1975.
Instead, he stayed on for another five years. The opponent he battled in the later years of his life was Parkinson’s Disease.
Kerry Packer sold Channel Nine to Alan Bond in 1987 for $1 billion…just before the stock market crash.
Packer said later ‘you only get one Alan Bond in your lifetime’.
The decisions we make — stay or go — can have a huge impact on our lives.
The investment industry would have you believe that ‘time’, rather than ‘timing’, is the secret to investment success. The industry message is one of ‘stay and never go’.
That’s a narrative that suits their agenda…keeping your money in fee paying products for as long as possible.
There are times when you do not want to be in the market…October 1929 comes to mind.
Those 1929 investors who ignored the importance of timing — being out before the downturn — never really recovered.
It took the passing of almost a quarter of a century before the US share market permanently breached the 1929 high. Who can afford to wait that long?
And here we are today, faced with a ‘stay or go’ moment. The US market has developed a serious case of the wobbles. The industry spokespersons all sing from the same hymn sheet…‘hold on, don’t sell, this too shall pass’.
Maybe. Maybe not.
What you have to realise is the industry mouthpieces are NEVER, NEVER, EVER going to tell you to sell…even if we’re on the cusp of an October 1929-like event.
It’s simply not in their interest to recommend you exit the fee-paying products that fund their generous salaries. To do so would be commercial suicide.
Self-interest compels them to convince you to stay onboard the Titanic.
What you have to realise is that losses come at a far faster rate than gains.
We’ve seen this lately.
In the space of a few weeks, the All Ords has surrendered all the gains made since March 2015.
When (and it is only a matter of time before it happens) this market goes into freefall, it’ll be too late…the damage will have been done.
Those who believed the ‘time in the market’ bulls**t will then be caught in a ‘devil and the deep blue sea’ quandary.
Do I sell and avoid even more losses OR do I hang in there and wait?
But what happens if it goes down further?
Compounding the problem is if — in the case of jointly held money — one partner wants to hold and the other wants to sell.
Can the resolute partner withstand the growing nervousness and tension — that comes with a cascading market — from the panicking partner?
Finally, the persistence of anxious pleas beats the resistance of ‘time in the market’.
Capitulation is complete…right when the market purge is all but over.
In my book, How Much Bull Can Investors Bear? — published in early 2017 — I forewarned about the industry’s conflict of interest when it comes to the decision to ‘stay or go?’…
‘The main thrust of the industry’s marketing message is best summarised as: Shares are good value, cash is trash, and when it comes to shares, it is either a bad time to sell or a good time to buy.
‘No stone is left unturned in the efforts to convince investors to stay the investment course.
‘Industry super funds buy airtime to promote, in bold print, their superior past performance (with the small print caveat of ‘past performance is not a reliable guide of future performance’) as a means to attract more dollars to manage.
‘We are constantly told ‘it’s time in the market, not timing the market’ that delivers the best long-term results. At best this is a half-truth…one we will explore later in the book.
‘As stated earlier, the industry players, whether they realise it or not, are fighting for their survival. A loss of investor faith in the market’s ability to deliver superior performance will see their industry suffer the same fate as the Thanksgiving turkey.
‘There are two points worth considering with the current situation the industry finds itself in:
- ‘It’s obvious the fortune of the share market plays an integral role in the investment industry’s prospects. A prolonged downturn in the Australian share market would expose the industry as an expensive one-trick pony. If the share market goes lame, then the easy-fee circus is largely over. Without the performance of the share market to sell, the industry will find it difficult to maintain its relevance.
- ‘Can you ever recall hearing the analysts, industry commentators and economists, who are now telling us the market is ‘good buying at these levels’, making any pronouncements in 2007 about the market being overvalued and telling investors they should sell? No. The hypocrisy is galling.
‘The next serious — and I suspect more severe — market downturn is certain to test investors’ belief in the market’s resilience and powers of recovery. Unfortunately, when this happens, it’ll be another case of being wise after the event. Repenting in leisure is no way to spend your retirement.’
1929 recession all over again
The next serious — and more severe — downturn is upon us. The ructions we’re seeing on Wall Street are, in my opinion, the start of a 1929-like decline…far, far worse than 2008/09.
The Banking Royal Commission has started what the next credit crisis will finish…a mass exodus of planners from the industry.
The easy-fee circus is over.
As reported in the Australian Financial Review on 30 September 2018…
Kenneth Hayne’s findings of ‘dishonesty and greed’ within financial planning will exacerbate a mass exodus already under way and send the value of advice businesses plummeting further, an expert says.
Predictions are for 8000 planners, or about one third of the industry, to exit in coming years.
And while financial advice businesses were previously valued at about four times the fees due from customers on the books, that figure had dropped to 2.7 times and would fall even further.
Planners who’ve opted to stay in the advice/product selling business, have seen the value of their businesses seriously eroded.
In addition to the Price to Fee multiple on the cusp of halving, the easy-fees (trailing commissions) are gone or going.
The changes the industry is now facing were evident to me many years ago…that’s why we opted to go — sell our financial planning business — in 2008.
There’s a lesson in this for investors.
Let me show you how the capital loss on a financial planning business can occur…
A reduction in fees and multiple combine to create a 50% loss in capital value.
The same maths applies to Price to Earnings multiples.
The US market is trading on historically multiples being applied to earnings that have been boosted by creative accounting.
When both the multiple and earnings suffer the same fate as that of financial planning businesses, the US market could easily fall by 70% in value.
That’s not a misprint…I’ll go on record — again — as stating that by the time this is over, from peak to trough the S&P 500 and Dow Jones Index will have lost 70% or more in value.
Stay or go?
I can’t tell you how much time you have left to make a rational decision.
But I can tell you that when the market decides it’s time to correct past excesses, events can spiral out of control quite quickly.
This is when you risk being forced into making irrational conditions…and that’s far from an ideal time.
Editor, The Gowdie Letter