The price to be paid for instant gratification

Wednesday, 24 November 2021 — Gold Coast, Australia

[7 min read]

Dear Reader,

When you’re young, you tend to want things to happen quickly.

Patience is a virtue that’s in short supply.

I can remember being a young man in a hurry. In today’s world of instant everything, my youthful ‘haste’ now looks decidedly pedestrian.

There are 20- and 30-year-olds making fortunes from technology-related businesses (I should add that many of these are loss-making enterprises).

The disconnect between profitability and price for these enterprises is irrelevant. What the younger generation sees is the speed in which fortunes can be made.

Here’s a timeline of some of the high-profile successes:

In a little over a decade, multibillion-dollar fortunes have been created by their peers.

Wealth of this magnitude once took decades and generations to accumulate, think Pratt family, Packer family, Murdoch family, et al.

The upside of these newly-minted fortunes is that it shows what can happen if you pursue your dream with passion and commitment. The downside is it risks setting an unrealistic expectation of how quickly wealth can be created…psst, we’re yet to see how it can be destroyed even quicker.

Recent experiences create your present reality. If something has been good or bad, then this sentiment is projected into the future.

We’re all guilty — to varying degrees — of extrapolating today into tomorrow.

This human trait is why we experience booms and busts. The easy-money times are going to last forever OR things are never going to get better.

The following chart provides some insight into how the various generations view the world of investing:

The younger generations are more enthusiastic about shares compared to baby boomers.

Whereas, baby boomers are far more comfortable with tangible assets (property and gold).

According to an article published by TD Ameritrade titled ‘Millennials Are Affecting Investing’:

‘Use of technology among younger folks is an example of how a generational trait can lead to trading and investing opportunities for everyone.

‘With more of the economy driven by technology-related firms now than in past years, tech companies may be the leaders in helping the economy recover from the coronavirus downturn. They have already been leading the stock market recovery.

‘Younger generations have not only been quick to embrace technology, but as investors, they have also been buyers of tech shares.’

Our experiences frame our thinking.

My 35 years in this business has taught me (courtesy of some very hard lessons) to proceed with caution.

The old adage of ‘if it’s too good to be true, then it usually is’ constantly keeps me grounded.

Do I regret not having been in the market in recent years?

Not really.

Why?

Because — unless this time is completely different — it’s my belief a far better risk versus reward proposition will present itself in the future. Just be patient and wait for a genuine low-risk/high-reward investment proposition.

What do I mean by that?

In the rotation of a market cycle, there are times when there are better or worse future returns on offer.

The following chart (dating back to 1919) illustrates the accuracy of the Margin Adjusted P/E (MAPE) model in forecasting the ANNUAL return from the S&P 500 Index a DECADE in advance.

The blue line is the FORECAST return. The red line is the ANNUAL return.

Where the blue line goes, the red line eventually follows.

There are times of disconnect — during periods of extreme BOOM or GLOOM — but overall, the blue and red lines have an intertwining relationship.

In the early 1940s after the Great Depression and in the midst of the Second World War, the MAPE forecasted return for the S&P 500 Index over the next 10 years was over 20% PER ANNUM.

The ACTUAL return ended up being just under 20% PER ANNUM.

The prevailing gloom of that time offered up a low-risk versus high-return opportunity.

Compare that to the euphoria surrounding the Roaring Twenties, the dotcom bubble, and current bubbles…

On each occasion, the MAPE model has forecast NEGATIVE PER ANNUM returns over the next 10 years.

With regards to the Roaring Twenties and dotcom bubble, the ACTUAL return ended being almost identical to what was forecast.

The current mood of speculation and greed has created the most extreme reading in HIGH RISK with ABSOLUTELY NO REWARD MINUS 7% PER ANNUM over the next decade.

Do you dismiss over 100 years of market history — created by the ebb and flow of human emotions — OR do you take heed of the message and retreat to a position of safety with your capital intact?

The decision you make could have serious consequences (good or bad) for your future financial well-being.

My approach is all about ‘permanent capital’. Money that lasts for generations.

Millennials, I fear, are chasing the quick buck from the latest hot stock. This market will be their rite of passage…just like the dotcom boom and bust was mine.

It’s experience that’s taught me that if I need to wait (for longer than you would like to) for low-risk, high-reward circumstances to present themselves, then so be it.

As Howard Marks (founder of Oaktree Capital) said:

‘Being a high-risk, high return investor is in my opinion like operating on the high wire without a net. You can do it spectacularly…for a little while.’

This ‘hasten slowly’ approach is one we’re hoping will demonstrate the value of patience to our (millennial) daughters. My investment philosophy is not based solely on our financial well-being, but to also provide leadership and guidance to the next generation of investors.

While they understand the principle of ‘softly, softly, catchee monkey’, I appreciate the lesson won’t be fully learnt until this market goes through a complete cycle…from up to down.

Permanent capital

Rather than listen to the noise of those trying to steer the herd in a certain direction (broking analysts, institutional economists, central bankers, et al.) we need to make our decisions based on informed data.

There are two quotes that remind me of what it is we’re trying to achieve with our permanent (as opposed to fleeting) capital:

‘Of the two ways to perform as an investor — racking up exceptional gains and avoiding losses — I believe the latter is more dependable.’

Howard Marks, The Most Important Thing

‘The stock market is a no-called-strike game. You don’t have to swing at everything —you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, “Swing, you bum!”’

Warren Buffett

Avoiding losses and waiting for the right investment are guiding principles for long-term wealth creation.

This approach requires less haste and more patience.

You must be prepared to sacrifice the adrenalin buzz of instant gratification for the contentment that comes from delayed gratification.

In the midst of an ever-rising market, trying to convince inexperienced investors of the merits of this philosophy is not easy.

This is why we have market cycles…to teach people about the need for balance.

When this market rotates from euphoria to despair, a lot of people — the young and not so young — are going to pay a very hefty price for chasing instant gratification.

This is what MINUS 7% per annum over the next decade would do to a $100,000 investment:

This cumulative loss of almost 52% is just from an index-based investment. Individual holdings could fare better or worse.

Losing half your wealth over the next decade is NOT what investors are expecting in today’s environment of buoyant share markets…which is precisely why there’s a very high probability of it happening.

Regards,

Vern Gowdie,
Editor, The Rum Rebellion

Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.

Sit down. Remain calm. Let’s try to figure this out…

The big news last Friday was that the House got together and passed Joe Biden’s social spending program. Nancy Pelosi congratulated herself:

‘[The package] is a spectacular agenda for the future, with transformational action on health care, family care and climate that will make a significant difference in the lives of millions of Americans.’

Here at the Diary, we don’t care much for numbers. We don’t trust them.

We’re talking about numbers used in public policy discussions — which tend to be connected on multiple levels of legerdemain and statistical fuzz.

But the numbers connected to the Build Back Better boondoggle are especially shifty. How much in tax increases? What’s the final tab?

Darned if we know.

Fuzzy numbers

The numbers are all over the place, depending on which lies you believe. The Hill elaborates:

‘That Congressional Budget Office (CBO) assessment, released Thursday evening, flew in the face of Biden’s promise that the legislation would be fully paid for. It has sparked some debate — and plenty of confusion — over how much the bill will cost overall.

‘The CBO found that, in total, the package allocates $1.64 trillion in new federal spending over ten years. But unlike the White House, the budget office does not include the tax credits as part of that top-line number. If those credits are added to the CBO’s spending tally, the figure would jump into the $2.4 trillion range — well above Biden’s initial $1.75 trillion framework.’

The Wall Street Journal tries to explain further:

‘The current $10,000 limit on the state-and-local tax (SALT) deduction increases to $80,000 through 2030. In 2031 it would return to $10,000. Penn Wharton says this gimmick would lead to $65 billion in additional tax revenue through 2031 though it would cost about $300 billion through 2025.’

Well…we’re glad that’s been cleared up!

High-cost boondoggle

The Penn Wharton Budget Model ‘scored’ Biden’s new Build Back Better boondoggle at US$4.6 trillion over 10 years.

The Committee for a Responsible Federal Budget (which sounds oxymoronic to us) says the cost will go to US$4.9 trillion when the feds finally admit that the sun will never actually set on their ‘temporary’ provisions.

But for today’s purpose, let us assume that the great cause — whatever it is — will end up taking US$5 trillion out of the public purse.

Are you sitting down?

Are you aware that this proposal comes on top of the US$1.2 trillion ‘infrastructure’ boondoggle…which came on top of the US$2.77 trillion deficit for fiscal year 2021…which is 12% of GDP, considerably more than Argentina’s 8.5% deficit/GDP ratio?

And are you aware that every penny in the public purse must come from the public, in one form or another? And that the purse now holds nearly US$29 trillion worth of IOUs that the public will eventually have to pay — most likely, in the form of higher consumer prices?

Are you also aware that inflation is on the move…rising at the fastest pace in 31 years? And that the average working stiff is getting poorer (his wages are going up, but about 2% more slowly than prices)?

Elizabeth reported yesterday that her trip to the grocery store cost US$100 more than it usually does. She thought the clerk had made a mistake. But it was no mistake, prices are rising.

‘Think of those poor families living pay cheque to pay cheque,’ she said.

‘It must be awfully depressing.’

Almost every penny of the federal deficit is now covered by ‘printing press’ money. So isn’t adding another US$5 trillion to federal spending likely to make the situation worse?

And won’t this put voters in a foul mood, in which they will most likely throw out the Democrats in the next election?

So why on Earth would the feds do such a thing?

Obvious cause

We turn to a Democratic senator for a dumb answer.

Senator Mazie Hirono believes that additional spending is good for the economy. Newsweek reports:

‘I disagree…that Build Back Better is going to add to inflation. In fact, economists rarely agree about anything, but 12 Nobel science economists say that Build Back Better is actually going to not add to inflation and will be anti-inflationary over the long term.

‘So we need to get on and pass the Build Back Better to lower costs for families and to address climate change and all of the other parts of the bill that will actually strengthen our families and our economy.’

So let’s see if we have this straight…

Inflation is rising in almost all sectors. The rather obvious cause is that the Federal Reserve added nearly US$5 trillion to the nation’s monetary base since August 2019.

As we elaborated Friday, fish gotta swim…and money gotta buy something. Buying things caused ships to back up, shelves to empty out, and prices to rise.

And now, there are those among us — including 12 Nobel Prize-winning economists! — who believe that another US$5 trillion down the drain will ‘strengthen our economy’.

How so? It might be worth looking at these 12 Nobel Prize winners — or at least one of them — more closely.

Regards,

Bill Bonner,
For The Rum Rebellion