Are you willing to risk 60% of your wealth to make 6% in the stock market?
Because that’s the risk/return ratio you are looking at right now, Vern Gowdie told the audience in the afternoon of day two at World War D.
He’s not willing to expose his family wealth to those kinds of odds…not for him, but mostly, not for his kids.
His reason for such a stark view of the markets for the foreseeable future is down to the fact that we’re at the beginning of secular bear cycle. But more on that in moment.
He began his presentation with a stark warning for the boomers in the room:
‘We’ve created a world of excessive debt…and we’re leaving it all to our children. The highest debt-to-GDP ratio in history, overpriced housing and tax system skewed to benefit us…this is the legacy we’re leaving our kids.’
Vern’s been thinking about this ever since he sold his financial planning business back in 2008 to manage his own family wealth full time.
He recalled a gathering he attended in Nicaragua for the Bonner Family Office, where he had the chance to meet with a network of ultra-wealthy people.
Some had more wealth to manage than others, said Vern, but just like every one of us, they were all looking for answers to the same questions.
What will happen to our families when we’re no longer around? Have we built the kind of wealth we want for our children and grandchildren?
And how can we make sure that wealth is still there for them so that it can appreciate and grow?
One way to do this is to realise we are in unchartered waters. Think critically. Don’t just accept what those in the financial industry tell you as fact.
Vern recalled a conference for financial professionals he spoke at in 2006. His warning that they were in the midst of a long term secular bear market didn’t go down well.
That’s because the fund managers and brokers you deal with make their money from commissions, not their performance. So their view will always be that you should be in the market.
But what if you shouldn’t be in the market? What if it’s wholly dangerous to be in the market?
Few people take into account the downside. As Donald Trump famously said, ‘some of best investments I’ve made are the ones I didn’t make.’
And Vern isn’t making any investments right now.
You see, like seasons, the markets move in cycles. They never replicate identically…but fundamentally, you know summer is hotter and winter is colder. It’s the same in the financial markets.
Secular bull markets can feature many crashes in the midst of stock market prices rising over time. Secular bear markets tend to be long term sideways movements with periodic rallies and crashes.
Right now, the US is making all time highs. Many other countries lag behind.
Question: is this a new secular bull market…or are investors all over Australia and the world investing into a market on the precipice of an almighty leg down?
We know where Vern stands. Based on past secular bull and bear markets, he’s convinced we’ll see one more major crash before a new secular bull market will begin.
In order for that to happen, the US market will need to reach a P/E ratio of below 10.
That implies a 60% fall for stock prices in the near future.
That brings me back to the question Vern asked at the start…
‘Are you prepared for a 60% crash in stocks?’
Vern isn’t.
He likened the situation to a ship captain who can see a cyclone coming. If you know a category five storm is on its way do you risk it out to sea, or wait in the harbour for it to blow over?
‘You wouldn’t risk your life, so don’t do it in the market.’
Vern’s putting his money firmly where his mouth is: 100% in cash.
Although he has diversified his currencies, and recommends you do too…
He moved some of his own cash into US dollars back when the Aussie was buying US$1.05. His reasoning is simple: the Aussie dollar isn’t likely to rally far if it does rally. But if it falls, the drop could deep.
So when Vern does jump into the stock market, what will he decide to do?
As he explained, he’s a ‘beta’ investor, not an ‘alpha’ investor.
Beta refers to the wider market going up as a whole.
Alpha is your ability to outperform the market by picking individual stocks. Of course, that means you have to find the ones that go up, and avoid the ones that go down. The risk is obvious. Pick a dud, and you’re in trouble.
You probably gathered by now Vern doesn’t like risk.
So he prefers beta. And besides, if you pick your bull and bear markets well, it can be immensely profitable anyway. What’s more, it’s less stressful and much easier to get cycles right than individual company prospects.
That way he’ll be ready and waiting to take advantage of the next cyclical move up, once the opportunity presents itself.
James Woodburn,
Contributing Editor, Money Morning