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May 19, 2020

My Say – No. 62 Investors Unite by Peter Thornhill

Investors Unite - My Say 62 by Peter Thornhill

This content is not the views and opinions of Modoras. The content belongs to Peter Thornhill on behalf of Motivated Money Pty. Ltd. ABN 83 089 708 092.

With ‘breaking news’ shattering our peace at present, I am rather reluctant to add any more to the tumult attempting to address the health aspect of the current ‘crisis’.

However, I would like to add some comfort for committed investors. Whilst this current situation is the result of a pandemic over which we, as individuals, have no control, I would like to address the financial aspects over which each one of us has total control.

The last time we faced a financial meltdown was the GFC and I was browsing through an article I had written at the time and relating it to earlier events.
I have decided to reproduce it here in an edited and amended form as my view of the financial implications hasn’t changed. I therefore ask for your indulgence and, as you read, remember that it was written in October 2008.

“WHAT A DIFFERENCE A DAY MAKES” – My Say No 38

What a difference a day makes!

London Evening Standard, Thursday 25th September 2008; “BAILOUT HOPE BOOSTS SHARES”

London Evening Standard, Friday 26th September 2008; “BAILOUT CHAOS HITS THE CITY”

Since no one knows what is going to happen in the short term it would be stupid of me to claim any foresight. The heroic claims to having foretold this current setback will be ex-post.

It is difficult to know where to start or even what to say as the market movements have been reported minute by minute, ad nauseum. However, let’s give it a go with my personal slant on events.

Fear is based on ignorance. Fear is one of the most contagious and destructive diseases known to man. Even if you are not an investor, fear of current events will still strike at you or your family. Every second article has the word ‘panic’ and the ‘D’ word (depression) is appearing with greater regularity as indices are daily hitting new lows. Markets are now being suspended with increasing frequency as selling pressure overwhelms them.

Don’t look for ‘cause and effect’ reasons for what is happening; fear is a far stronger force than greed. Useless comparisons with the very recent past abound and attempts to give some credibility to the commentary is laughable: “On Wall Street, the key Dow Jones index fell below the key psychological level of 10,000 for the first time since 2004” – “the FTSE 100 index was falling through the psychological 5000 barrier”!

What the hell is psychologically important about some big numbers? I maintain my stance that all the economic theory accounts for diddly squat when the herd is spooked; behavioural finance is the new order. After losing a staggering 20,000 pounds in the South Sea bubble Sir Isaac Newton was moved to comment that he could, “calculate the movement of the stars, but not the madness of men”.

The first real systemic threat to the financial system in Britain following the Second World War arrived in 1973 with the secondary banking crisis that affected the ‘fringe’ banks (we were living in England at the time and I still have the newspaper clippings). They had provided finance to speculators during (causing?) the property boom. When the crash came, the Bank of England launched a ‘lifeboat’ to prevent the crisis from threatening the first-tier banks.

Similarly, with Japan’s problems in the 1990s which were caused by the pricking of a massive property bubble in the late 1980s that resulted in banks seeking to liquidate massive losses. Whilst the Japanese government was subjected to criticism for failing to act quickly enough at the time, I think it is now a case of ‘those in glass houses shouldn’t have thrown stones’.

An understanding of this history should have given all those in power today enough foresight to have avoided the worst but perhaps the balance of bankers/mathematicians to historians in positions of influence is wrong!

I doubt that any of what is happening presently will be enough of a scare to curb the hubris of future government’s and their ill-advised generosity, or to avoid the waste of productive capital inherent in artificially supporting property prices. If consumers cannot be happy without irrational rises in property or share prices, then we are all off to hell in a hand cart.

I forlornly hope that consumers have had enough of a scare to understand that just as nations cannot live beyond their means; the same rules apply to them. Reckless leverage and a misguided reliance on property can destroy nations, banks, and you and me. I personally am confident that nothing will change in the long term.

To understand what the future holds I commend “Extraordinary Popular Delusions and the Madness of Crowds” written by Charles Mackay and first published in 1841. To help get a handle on the present I commend “Manias, Panics, and Crashes” by Charles Kindleberger. Both these books are recommended reading on my website.

On the larger issue, Kindleberger goes on to say: “It is necessary now to move to a critical question, one that probably cannot be resolved. Assume that we have demonstrated that destabilising speculation can occur in a world of individuals whom it is convenient and fruitful to consider as normally rational. Permit this world to be perturbed by a ‘displacement’ of one sort or another, largely from outside the system, giving rise to prospects that individuals misjudge, either for themselves or for others. At some stage, investment for use gives way to buying and selling for profit. How likely is the speculation to lead to trouble?”

How likely indeed. I think I can say from my understanding of history the answer is an unequivocal YES.

Where present events will lead in the short term, I wouldn’t have a clue. As I indicated in my last newsletter, despite the substantial decline in our portfolio values, I have been monitoring the dividends during the current reporting season and can now update the earlier sketchy results.

Of 54 companies in our portfolio that have reported so far, five have reduced their dividends with the reductions ranging from very little to a complete suspension. Twelve have maintained their dividends and the balance have increased. I haven’t yet worked out the impact in dollars as we have made a substantial number of purchases since prices began to decline so a further bit of work is required. Suffice to say, and ignoring purchases, we will have more income this year than the same time last year.

I have discussed in previous editions of ‘My Say’ the implications a cut in dividends would have for us so won’t go over old ground. The next test for us will be in March/April 2009 when the next dividend season gets underway. Whether this is a sustained decline and a depression results I don’t believe anyone knows. However, if it should come to pass then I will rely on history.

Our parents were in their late teens/early twenties when the depression arrived. Our grandparents went through two world wars and the depression. The only social security system was the community.

I do not believe that my wife and I are any less resourceful than they were (by observation I cannot speak for others). I do not wish to sound melodramatic, but I am tired of all the hyperbole and self-seeking wailing associated with current events. Personally, we are not over-geared so we will simply pull in our belts, live within our means, hunker down and wait for the cloud to pass; just like our parents. As for our children; hopefully they will learn a valuable lifetime lesson!

There is a famous saying; “it’s always darkest just before the dawn”. A perversion of this is attributed to Mao Zedong which goes; “It’s always darkest just before it is completely black”!
Remember, your perception is your reality.

That’s the end of the 2008 article content and I would just like to make some observations regarding the differences between now and then.

I have written previously about my concern over the decades of the ‘rescue at all cost’ policies of central banks and governments generally; they predate the GFC and have become increasingly irrational with each new rescue. We all need to become more resilient rather than relying on larger and larger handouts to alleviate our discomfort.

The GFC was purely a financial problem whilst we are now facing the covid19 ‘black swan’ event overriding the ‘rational’ market correction we were long overdue for. With Donald Trump now having his Moses moment and the US government supporting speculative ETF’s to part the waters and allow everyone to escape the looming problem has capped every other ridiculous attempt.

There is a brilliant article by Stephen Bartholomeusz in the finance section of the Sydney Morning Herald 21st April edition. It is titled “Zombies must live or die on merits, that’s capitalism”. It is brilliant; I have cut it out to frame, and I would encourage you to do whatever it takes to obtain a copy of the article. It captures everything that is wrong with policy.

Over 2000 years ago, Plato observed that the longer democracies existed – the longer their freedoms and equalities extended – the more incoherent they became, leaving them susceptible to the cynical corruption of a tyrant, who “offers himself as the personified answer to the internal conflicts of the democratic mess. He pledges, above all, to take on the increasingly despised elites”.  Let us hope that everyone learns from this event, not just you and I but politicians and leaders of industry.

I spelt out in the above article our personal strategy and it remains thus 12 years later. As I have mentioned in previous My Say articles, the GFC had a hugely positive impact on our finances, despite the dividend cuts and the huge number of capital raisings at the time. No doubt this will probably be repeated now.

On a more positive note, we must acknowledge that industry is the dynamo that drives a nations fortunes and this dynamo is driven by human endeavour. As I have said many times; human endeavour is not about to grind to a halt unless of course history can be ignored and this time it is different!

Stay safe and calm.

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