Talmud Investment Philosophy: The Wisdom of the Ages

The markets must have given a points victory to Hillary. The Dow was up a bit. Gold shed a few dollars. The Aussie dollar strengthened a little.

Nothing much changed. Anyway, the not-so-great debate was a sideshow. The world has far more serious problems than deciding who the least despicable person to sit in the Oval Office is.

To make sense of the world’s woes, today’s Markets and Money takes on a biblical theme.

Before you switch off, this is not a sermon. More an exercise in drawing on the wisdom of the ages to help regain our bearings.

Religious teachings are replete with examples of excesses being corrected by God or, if you prefer, nature.

The burning of Sodom and Gomorrah.

Noah’s Ark — 40 days and 40 nights of flooding to cleanse Earth of violence.

Balance is the natural order in life.

Soft and hard. Hot and cold. Dark and light.

We need contrasts to provide balance.

We need opposing pressures to provide strength.

Natural order can be disrupted, but eventually the pendulum does swing back.

The risk is that, the longer the period of imbalance, the more it’s seen as the ‘new normal’.

Or, as renowned economist Hyman Minsky said, ‘stability creates instability’.

Without resistance, the system grows weak and vulnerable. But human nature gravitates towards the line of least resistance, which only serves to increase the weakness…preferring cheap loans over savings; gambling over investing; printed money over productivity.

People either forget the ‘old normal’, or dismiss it as a relic of the past. The accepted view becomes one of ‘the world’s changed, so get with the program’.


However, history is littered with tales that started with ‘this time it’s different’ and ended with ‘told you so’.

John Heywood’s proverb, ‘There are none so blind as those who will not see,’ dates back to 1564.

It’s believed Heywood’s inspiration came from the Bible — Jeremiah 5:21 — ‘Hear now this, O foolish people, and without understanding; which have eyes, and see not; which have ears, and hear not.

Let me share with you what I’ve seen in recent days (emphasis mine):

[US companies] in the S&P 500 are now expected to report an earnings decline for the sixth consecutive quarter in the coming weeks, according to analysts polled by FactSet. That slump would be the longest since FactSet began tracking the data in 2008.

The prolonged contraction has raised questions about how far stocks can rise without corresponding strengthening in corporate earnings.

Wall Street Journal, 25 September 2016

Deutsche Bank shares hit their worst levels in more than two decades on Monday, after German press over the weekend said Chancellor Angela Merkel had ruled out state aid for the bank. That sent investors scrambling. Deutsche Bank is trying to work out the details of a proposed $14 billion settlement with the Justice Department over its mortgage-securities business.

Wall Street Journal, 26 September 2016

The former chief economist of the International Monetary Fund [Ken Rogoff] has told the BBC a slowdown in China is the greatest threat to the global economy.

Ken Rogoff said a calamitous “hard landing” for one of the main engines of global growth could not be ruled out.

“And I think the economy is slowing down much more than the official figures show,” Mr Rogoff added: “If you want to look at a part of the world that has a debt problem look at China. They’ve seen credit fuelled growth and these things don’t go on forever.”

— BBC News, 26 September 2016

And finally, this comment about the persistent earnings decline in the US:

Investors don’t care about fundamentals as long as central banks have their back,” said Jack Ablin, chief investment officer at BMO Private Bank, though he added that he finds the lack of earnings growth for such a long period is “certainly problematic.”

Wall Street Journal, 25 September 2016

Got all of that?

US earnings are heading for their sixth straight quarterly decline, yet the US share market is a whisker off its record high.

Deutsche Bank — with a capitalisation of US$18 billion — has a US$14 billion fine to pay to the US Department of Justice. And Merkel has ruled out a bail-out — not because she doesn’t want to, but after taking a hard line (screwing) with Cypriot, Greek and Italian banks, Angela’s painted herself into a corner.

Finally, China — the engine room of the global economy — has been running on the fuel of credit growth for so long that it’s now in danger of stalling.

Yet, in spite of a slowing US economy, a looming banking crisis in Europe, and China finally having to pay its dues to the debt piper, it’s reassuring to know you don’t have to worry about the fundamentals…the almighty Fed has your back.

The accepted wisdom of the ‘new normal’ is that central bankers have a divine power over markets and the economy. Central bankers holding sway over markets has been around since Greenspan was anointed the Fed’s high priest in 1987. 30 years of central banker induced imbalances has created an almost unquestioned belief in the wisdom and power of these false prophets.

If you believe the Wall Street parables, central bankers can raise markets from the dead (albeit with some help from a few squillion newly minted dollars and zero interest rates).

Wall Street and the investment industry are obviously blind to the mounting pressures that are building to correct the massive imbalances in the system — a direct result of policies that overtly encouraged and enabled an over-dependence on excessive credit (ab)use.

In due course, the gamblers who inhabit Wall Street’s casino will watch, with eyes and mouths wide open, the sea of red (or should that be Red Sea?) on their Bloomberg screens.

To appreciate the natural balance in the investing world, we refer back a couple of thousand years to the Talmud investment strategy.

Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve.

The Talmud (c. 1200BC–500AD)

The Talmud contains the teachings and opinions of thousands of rabbis on a variety of subjects, including Halakha (law), Jewish ethics, philosophy, customs, history, lore and many other topics.

— Wikipedia

The rabbis’ opinions on prudent money management have stood the test of time.

In Roger Gibson’s excellent book, Asset Allocation: Balancing Financial Risk, he noted: ‘Whoever wrote the Talmud knew something about risk. He also knew something about return.

The wisdom of one-third shares, one-third property and one-third cash is considered a relic of the past.

These days, your garden variety ‘balanced’ fund is more likely to be two-thirds shares, with the remaining one-third shared between a mix of infrastructure, property, fixed interest and cash.

The Talmud investment philosophy is a timely reminder of how it’s possible (over a period of time) to drift away from the wisdom of the ages.

The looming problem for a lot of Australians is that their superannuation money is invested in the default ‘Balanced’ option.

These unbalanced funds — with an overexposure to shares — are likely to suffer serious losses when the market pendulum swings back into deeply negative territory.

The serious imbalances in the global financial system are staring us in the face. Some choose to see the signs; most remain blind to them.

All indications point to a crash of biblical proportions in our future.

Only foolish people, and those without understanding of how markets function, would close their eyes and ears to the messages being sent.

Ironically, the best defence against the second coming of The Great Depression is to create an equal and opposite imbalance in your portfolio.

An overweight position in cash will be your saviour.


Vern Gowdie,
For Markets and Money

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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