Vern Gowdie – Markets and Money (Australia) –
Be careful. Don’t drink too much. Call us when you arrive safely. Don’t talk to strangers.
Better to be five minutes late than ‘dead on time’.
Most parents, at some stage, have offered these sage pieces of advice to their children.
Your motive is to protect those who are precious to you. You don’t want or mean to be, the ‘fun police’.
Life has taught you what can go wrong when there’s too much focus on the revelry and not the risk.
Our cautionary advice is designed to put an ‘older on much younger shoulders’.
Anyone offering cautionary advice is a ‘party pooper’.
A few years ago I warned about chasing yield. There are no free lunches. The extra return comes with a potential sting in the tale.
At that time, Mum & Dad investors were piling into Telstra shares. In the space of a few years Telstra share price rose from under $4 to around $6.85. In addition to this 70% capital gain, Telstra was paying a fully franked dividend of 30 cents (grossed up to 43 cents).
Depending on your buy-in price, this was an income return ranging between 6–10%.
Since mid-2015, Telstra shares have fallen nearly 50% in value, and now the dividend is being cut to 22 cents fully franked (grossed up to 31 cents).
An investor who chased yield in 2015 has paid dearly for their ‘free lunch’.
In my recent book, How Much Bull Can Investors Bear? I dedicated a chapter to the ‘Guiding Principles to Keeping it Simple’.
This is boring advice.
Advice that’s designed to keep people grounded during the times when they get carried away with the excitement of the moment.
In the context of investing, it was my attempt at putting my older on inexperienced shoulders.
Here’s an edited extract:
Guiding Investment Principles to Keeping It Simple
‘Life is really simple, but we insist on making it complicated.’
‘Having money is a life changer. Depending on how you handle it, those changes can be either good or bad.
‘What you find out when you accumulate capital is that the world of money is vastly different to the world of no money.
‘There are plenty of traps for the unwary.
‘For instance, a market fall of 50% doesn’t matter so much if you have $10,000 invested. A loss of $5,000 is not life-altering.
‘Whereas, if you have $5 million invested, losing $2.5 million could significantly alter a lot of plans.
‘Many a dream life has been shattered by a significant loss of capital.
‘There are so many traps out there that it’s impossible to give you a definitive list of things to be wary of.
‘To keep it simple, here’s a checklist to guide you:
- If it sounds too good to be true…it usually is. Promises of higher returns always come with hidden risks. These risks can destroy your capital. Whenever you are tempted to reach for that extra return, remember you are placing at risk maybe half or more of the amount you are investing. Any offer outside the security of a bank deposit comes with risk…the trick is identifying what that risk is. If you can’t, then do not invest.
- Are you looking to invest in the latest hot thing — property, shares, gold, mortgage fund, or whatever? If what you are considering investing in has captured the public’s imagination, then don’t do it. You will be following the herd over a cliff. Invest in unloved, out of fashion assets — the ones your trend-following friends would label you crazy for even considering. Buy shares after a massive crash. Buy property when interest rates are high and ‘doom and gloom’ is in the air. Investing against the trend is not easy but, in due course, it invariably turns out to be an astute decision.
- Keep an eye on fees. How many fingers are in your investment pie? The more people that are taking a slice here and there, the less of the pie you receive. Learn how to minimise tax legitimately. Be very mindful that managed funds, investment administration services and financial planners all eat from your pie. As already stated, the preferred option is to invest in low cost Index Exchange Traded Funds (ETFs) and, where possible, do your own administration — track performance and collect tax statements (it’s not that hard).
- Listen to your gut. If someone cannot explain to you (within a few minutes and in plain English) the investment concept and the fees, risks, and management , or if they use jargon to impress or confuse you — run away.
- High risk does not equal high return. So often people are told the trade-off is low risk/low return and high risk/high return. Rubbish. High risk can mean no return and loss of capital. Just because you elect to take a high risk does not mean you will be rewarded for it.
- If ever you hear that something is ‘a once-in-a-lifetime opportunity’, put those running shoes on again. My standard reply is: ‘You are saying that me, my children and their children will never ever again be presented with an opportunity to make money ever again?’ This slogan is a marketing gimmick. The real once-in-a-lifetime opportunity never announces itself. For instance, buying shares in 1933 after the Great Depression had wiped nearly 90% off the market, was a genuine once-in-a-lifetime opportunity to buy quality assets at a huge discount. But no one was spruiking this news. The real opportunities are not the ones some incentive based salesperson tells you about.
- Never bet the family home on an investment. I’ve seen retired people advised to borrow against their home and then lose the lot in a market downturn. If someone tells you to use your home as collateral for a loan, do not do it. The investment may work for a while, but losing your home in your seventies is soul destroying. I’ve seen it first hand — people crying in my office asking me what they can do. The short answer is: It’s too late.
- Who is advising you and what is their motive? I’ll repeat again: When it comes to the horse race of life, self-interest will always win by a nose. What is their self-interest and does it align with yours…or is there a conflict? If you cannot satisfactorily reconcile that they’re working in your best interest, do not proceed.
- Control your emotions. Do not react out of fear or greed. This is impulsive and primal decision making. Go away and think about what you are considering doing. Apply rational thought to the process. If you have gotten yourself into a situation where fear or greed is driving you, you have ignored the previous eight points on this checklist.
- Maintain an interest in what the global economy and markets are doing. You do not have to become an investment guru, just be informed so you can make considered decisions. As a rule of thumb, you should also invest more in the areas you understand.
- Never be afraid to take a profit. No one ever went broke selling at a profit. Yes, you will pay capital gains tax, but that is only a percentage of the gain. Markets can take back not only all your gains, but your capital as well. Do not be greedy.
- Every single investment has risk. Find out what it is and see if you can accept the risk. If you cannot identify the risk, then this is the riskiest investment of all, and you should definitely not do it.
- Make sure your estate planning is current. Your will should reflect your intentions; these intentions should be conveyed to your family in advance so as to avoid a family dispute after you have gone. You should also have an Enduring Power of Attorney to ensure your affairs can be managed in the event you are unable to act on your own behalf. Failure to have adequate estate planning in place means the government is forced to intervene in the management of your financial affairs.
‘Creating, retaining and advancing wealth is a process that involves discipline, patience, a commitment to continuing education, and an application of sound risk management techniques.
‘I’ve seen plenty of people create, inherit or win wealth, but then lose it all because they fail to follow one or more of the retention checklist rules.
‘You need to avoid becoming one of them.
‘If you are fortunate enough to accumulate wealth, people may call you a lucky bastard. But management and judgement, not luck, will determine what happens to your capital.
‘When it comes to investing, the motto of ‘think a lot and act a little’ is well worth remembering.’
Telstra serves as a high-profile warning of what’s to come for those who believed that extra few percent came without risk.
The collapse in the Telstra share price and reduction in dividend payouts is not an isolated case. There has been, and will be, many more tales of woe from investors who chased yield.
Contrary to popular belief, being the ‘fun police’ is no fun.
Life would be so much easier if excessive reward was risk free…but that’s not how life works.
Overbought, overhyped and overvalued markets represent a serious threat to your wealth. Be careful out there. Now is not the time to be cavalier.
Editor, The Gowdie Letter