The Value of Reading and Thinking

When asked ‘what did you do today?’ my standard response is usually ‘nothing much.’

In reality, my days are filled with mostly reading and some writing.

But I ceased saying that a long time ago.

Because the follow up question was usually ‘what did you read and write about?’

And, a response like ‘the increasing deterioration in credit worthiness of corporate bond issues’ tended to make the questioner’s eyes glaze over and think ‘why did I bother asking?’

It’s better to say ‘nothing much’.

The reason we have herd mentality is due to people’s failure to ‘read and think’.

Instead, their decisions are based on ‘impulse and emotions’.

It was Warren Buffett who said…

I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business.

My investment approach is based on identifying trends and positioning our capital to participate in or avoid the trend.

To quote Buffett again…

You only have to do a very few things right in your life so long as you don’t do too many things wrong.

Hopefully, reading and thinking assists in getting those few things right…like avoiding a 1929-style market meltdown.

A history making crash is in our future…there is nothing surer, other than the outcome of a Russian election.

Sidestepping that capital destroying event means you need to take evasive action. Often times that means acting early and waiting. And that’s the problem with trends…they can take much longer to play out then you think. Most people do not have the patience to wait and wait and wait a little longer.

Another trend that’s playing out in tandem with the over-bought, over-valued and over-hyped share market is the changing dynamics of society.

Bain & Company recently released a paper titled…

‘Labour 2030: The Collision of Demographics, Automation and Inequality’.

This is an edited extract from The Executive Summary:

Demographics, automation and inequality have the potential to dramatically reshape our world in the 2020s and beyond. Our analysis shows that the collision of these forces could trigger economic disruption far greater than we have experienced over the past 60 years.

 These gathering forces already pose challenges for businesses and investors. In the next decade, they will combine to create an economic climate of increasing extremes but may also trigger a decade-plus investment boom.

The following chart from the Bain & Co report highlights the challenges we face in the coming decades.

Collision of demographics, automation and inequality 19-03-2018

Source: Bain & Company
[Click to enlarge]

This was a trend I wrote about in the Daily Reckoning in 2015.

This is an edited extract of that article titled…

‘Ignore this trend at your peril’

Do you ever give much thought to the trends shaping our lives?

Or do you just go along with the flow?

Most of us are far too busy to notice and just go along with the flow.

Can you remember what communications were like before mobile phone or internet access?

Where did we go to meet up with friends in a world without a coffee shop on every corner?

These changes crept into our lives without consciously registering them and now we can’t imagine life without them.

What if you could have seen a trend coming?

For example, our Prime Minster Malcolm Turnbull made a fortune from being an early investor in Ozemail…turning $500,000 into $60 million.

The world is constantly evolving — there are trends within trends.

If we look back we can identify four big trends in economic development — agricultural, manufacturing, services and technology.

Each trend overlaps the other, but eventually the earlier more dominant trend gives way to the new economy.

If we go back 100 years rural Australia was booming — the sheep (mutton, lamb and wool), wheat, cattle and sugar cane industries all provided an abundance of employment opportunities. Towns thrived. In those days there were pubs on every corner.

These industries still exist today, but due to the advent of machinery and imports the rural towns are no longer the bustling centres of commerce they once were.

If a small business in a rural town had identified the impact machinery would have on the agricultural industries supporting their town, they could have sold before being forced to close their doors.

The industrial age ushered in machinery. With machinery, manufacturing — cars, white goods, clothing, electrical goods — could be churned out with a mechanical production line. Employment drifted away from rural and regional Australia and into the cities.

The western world prospered. America was the manufacturing hub of the world in the 1950s and 60s. The big ‘yank tanks’ couldn’t come out of the factory quick enough. Television sets. Washing machines. Fridges. Stereos. All the mod cons were being bought by eager western consumers — it is no coincidence this heightened level of manufacturing activity also saw the beginnings of the personal finance industry.

The tractor, mobile irrigator, cane harvester and wheat combiner were also part of the manufacturing age — all these innovations made the agricultural industry less labour intensive.

The success of the manufacturing trend in the West sowed the seeds for its failure. Prosperity led to higher wages. Higher wages increased the cost of goods to the extent that cheaper competitors (Asia) could supply lower cost alternatives.

The long overdue closure of Holden and Ford in Australia is high profile recognition of this fact.

The prosperity created during this manufacturing trend boosted all sectors in the service industry. Including finance (banking, stockbroking, fund management, consumer credit), medical, legal, accounting, restaurants, retail and household chores (cleaners, lawn mowing, pool cleaning, dog groomers).

Working in the paddocks and manning machines has gradually been replaced with working behind desks, counters and in kitchens. 

Another service is the public service. Government — with all its attendant rules and regulations to oversee these industries — has been a major employer. There are nearly 2 million people (nearly one in every 10 Australians (men, women and children) who are employed by local, state or federal government.

A staggering level of regulatory overlay and cost to the economy.

Employment in the services sector is even more heavily concentrated in major cities. This in turn creates cost of living pressures. Higher costs of living translate into demands for higher wages.

As we have seen with the agricultural and manufacturing trends, when costs become uncompetitive cheaper alternatives are found.

We are just starting to see the next trend emerging — technology. And I don’t mean the internet, latest mobile phone or Apple gizmo.

Cognitive computing power is going to transform the global economy

Apple and Google are looking to make inroads into banking.

Blockchain technology (currently used in bitcoin transactions) is going make transferring shares an instantaneous transaction.

US based Forrester Research recently published a report that estimates 1 million B2B (business to business) salespeople will lose their jobs by 2020.

According to Social Intelligence:

Triggering this sobering prediction is the rapidly growing B2B e-commerce sector, which allows customers to buy goods and services with less help from salespeople.

B2B compensation could be rising more slowly than the overall economy. Why? Quite simply, the meteoric rise of e-commerce. Gross e-commerce revenue is projected to grow nearly four times faster than B2B sales at large. Organizations have been quick to move their operations online to further their reach and cut costs.

That last sentence sums it up — companies are moving quickly to embrace e-commerce to cut costs and improve their reach into other markets.

The next stage in our economic evolution is starting — the Jetsons are no longer the fantasy of some out-there cartoonist (for those who are too young to know who the Jetsons were, please Google it).

The timeframe of the trends is another factor to note.

Agricultural based economies were around for centuries. The manufacturing economy was with us for 60 or more years. The service economy has been in play since the 1980s.

The speed of transitioning from one to the other is gathering pace.

The technology trend is going to be upon us much faster than we realise. Within a decade you are going to wonder how we ever managed to get by without robotics, e-commerce facilities and other automated services.

The difference with this trend is the employment opportunities — if a farm hand lost a job they could be employed in a factory. When the factory hand lost a job they could wait tables, mow lawns, work in retail or hit the jackpot with a government job (and all its perks).

Where do those who lose their jobs in the services sector go to? The technology trend is all about cutting out human (high labour cost) involvement.

Perhaps we’ll see a complete 180-degree reversal and people will move out of the cities and re-populate regional towns. Looking for a lower cost and better quality of life — growing veggies, collecting their own water and harnessing solar power.

The technology trend is going to be a global deflationary force. This deflationary pressure could be compounded if there is a collective re-evaluation of ‘what’s really important in life’.

Consumerism may not be as important.

Opportunities on the horizon

The two big trends — over-valued markets and the shifting tectonic plates in the economy — are on a collision course.

Fortunes are going to be lost and made in the coming years.

Being in a position to capitalise on the opportunities that are coming, is going to be one of those ‘getting it right’ moments in life…the ones that people think happen by luck.

But, it wasn’t luck…it was due to taking the time to read and think.


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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