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'Unprecedented' should be 'here we go again'

With ‘breaking news’ shattering our peace, I would like to add some comfort for committed investors. Whilst this current crisis is the result of a pandemic over which we, as individuals, have no control, each one of us has control over our financial response.

Readers familiar with my views will know I advocate the boring long-term predictability of shares, such as in this article.

The last time we faced a financial meltdown was the GFC and I was browsing through an article I wrote at the time and relating it to earlier events.

I reproduce it here in an edited and amended form as my view of the financial implications has not changed. I ask for your indulgence to recall what was written in October 2008.

What a difference a day makes!

London Evening Standard, Thursday 25 September 2008: "BAILOUT HOPE BOOSTS SHARES"
London Evening Standard, Friday 26 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.

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.

Fear is stronger than greed

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, such as:

"On Wall Street, the key Dow Jones index fell below the key psychological level of 10,000 for the first time since 2004" or "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 counts 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".

There have been many other crises during the twentieth century. An understanding of history should have given all those in power today enough foresight to have avoided the worst but perhaps the balance of bankers and 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 governments 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 by Charles Mackay and first published in 1841. To help get a handle on the present I commend Manias, Panics, and Crashes by Charles KindlebergerOn the larger issue, Kindleberger says:

"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?"

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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. There have been substantial declines in our portfolio values, but of the 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.

The 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, nobody knows. However, if it should come to pass then I will rely on history.

Our parents were in their late teens and 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 overgeared 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.

On to 2020 and too much reliance on governments

That’s the end of the 2008 article and I will make some observations regarding the differences between now and then.

The decades of ‘rescue at all cost’ policies of central banks and governments 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 Covid-19 ‘black swan’ event overriding the ‘rational’ market correction we were long overdue for. With Donald Trump now having his Moses moment, the US government is supporting speculative ETFs to part the waters and allow everyone to escape the looming problem. It caps every other ridiculous attempt.

This article by Stephen Bartholomeusz in the Sydney Morning Herald, 21 April 2020, is brilliant. It is titled “Zombies must live or die on merits, that’s capitalism”. It captures what is wrong with government 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, including politicians and leaders of industry.

I spelt out in the above article our personal strategy and it remains the same 12 years later. The GFC had a hugely positive impact on our finances, despite the dividend cuts and the huge number of capital raisings at the time. This will probably be repeated now.

On a more positive note, we must acknowledge that industry is the dynamo that drives a nation's fortunes and this dynamo is driven by human endeavour. Human endeavour is not about to grind to a halt unless history can be ignored and this time really is different. Stay safe and calm.


Peter Thornhill is a financial commentator, author, public speaker and Principal of Motivated Money. This article is general in nature and does not constitute or convey specific or professional advice. Share markets can be volatile in the short term and investors holding a portfolio of shares will need to tolerate short-term losses and focus on a long-term horizon, and consider financial advice.


May 04, 2020

Am I the only one who thinks that the economic destructive response to an event that has so far taken less than 100 lives in Australia (all elderly) is a complete over-reaction?
I understand that it is a case of dammed if you do (implement shutdown measures) and dammed if you don't, but our circumstances in Australia with a younger population, generally healthier lifestyles and less cramped conditions meant that we were not going to suffer the high death rates experienced in places conducive to the spread of respiratory illnesses.
Could we have treated COVID-19 just like any other flu, taken appropriate but not excessive remedial measures and avoided the economic pain we have now inflicted on ourselves?
What is the 2020 COVID-19 mortality rate compared to deaths from flu in previous years?
Have overseas mortality rates been inflated by including deaths with COVID-19, not of COVID-19?
There will be flu in the future (COVID-X) and we just cannot have more shutdowns like this. The cure is worse than the disease.
Peter mentions the 1841 book 'Extraordinary Popular Delusions and the Madness of Crowds,' which contains the observation: "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
I hope we recover our senses soon.

SMSF Trustee
May 04, 2020

No, but like the rest of those who do you're wrong.
Without the measures taken, we'd be talking about a lot more deaths and most likely an overwhelmed hospital system.

No we couldn't have treated it like any other flu, because it isn't. I know people who've had it and they say it's unlike any health experience they've ever had. I know someone who died from it.

Also, the medical evidence is that this virus is far more contagious and infectious than the normal flu. You don't have to search too far on google to find research showing that the deadliness rate is about 10 times.

And so what if folk died 'with COVID19'. You're inferring that they'd have died anyway, so why care?

If more folk had thought more seriously about this virus than you do, then they wouldn't have allowed the Ruby Princess folk to walk off into the streets of Sydney. That was the single decision that contributed the most to Australia not being able to take advantage of our island situation more effectively, more quickly.

Get real AlanB. The economic cost is awful and that's why the government is now hoping that we can come out of it. How about you urge everyone to download the app so that contact tracing can take place. Then the economy can restart and restrictions be lifted.

But this wasn't just 'the flu' mate, it's much worse than that and needed a response.

If a few public health officials in NSW had realised that earlier then some of the lockdown might have been avoided. But I suspect they let all those folk wander off the Ruby Princess because someone thought that those folk weren't a clear and present danger to our well-being. That's the decision I'm angry about, not the ones to take severe steps since.

Richie Rich
May 06, 2020

Well said SMSF Trustee!

May 02, 2020

I am a big fan of Peters broad philosophy, preferring to invest for income from growth assets which over time always wins. To me though the big difference this time is that it is not whether a business is well run or a 'zombie', it is the nature of the business and the decision to totally cease some businesses from trading. You might be the best managed pub/restaurant/stadium in the world but you are forced to close by circumstances totally outside your control. This is not in any means normal capitalism, which assumes all (legal) businesses have the opportunity to function and compete. Of course the more highly geared businesses have a much harder time, so going for businesses with low debt is yet again seen to be a big plus when the dark clouds arrive.

April 30, 2020

Peter, An Excellent article I agree with you.
Fear - Greed - Ignorance - Negativity does not mix with Rational Investing.

April 30, 2020

Jan - absolutely correct. But I don't think it matters in the context of the article. I think Peter's point is that regardless of whether Covid-19 was / is predictable or unpredicatable the response from Governments / regulators is the same in terms of assistance / bail out. And that if you have been prudent in your investing then such events are, from a purely investment perspective, the time to perhaps reign in your expenditure and also to invest further (given discounted asset prices) for the longer term recovery...

April 30, 2020

Taleb even claims this is not a black swan event but I would argue it is a "long tail" event ie a very low probability event particularly as to it's timing. As a result economists and a lot of investors don't include the probability of such events into their models or investment decisions

Jan X
May 01, 2020

Rod: I don't agree that the probability or timing of this pandemic was low. Research indicates that pandemics are expected to increase with global warming and as evermore forests are cleared releasing new viruses. In fact, we could have another completely new virus pandemic emerge at any time, which makes this very scary indeed, especially if it comes thick and fast before the global community has had time to recover from Covid 19.
PS There are two people named Jan on this site. I am distinguishing myself as Jan X. Moderator, please note.

April 30, 2020

Good article, Peter. Government intervention is not the solution some wish it to be. It only kicks the can down the road and incentivises "picking up pennies in front of a steamroller", as Taleb might say.

April 30, 2020

With due respect, Covid-19 is NOT a ‘black swan’ event. We have seen pandemics in the past and the probability of another has been forecast by many, eg. Michael Osterholm's 2017 book, "Deadliest Enemy" for one, and our Dept Defence, warned if three threats to security: climate change and natural disasters; a global power conflict; and a pandemic, not to mention all the disaster films, eg. "Contagion" recently aired just to remind us that this was not sci-fi after all.
A black swan event is completely UNPREDICTED, named after the sighting by Europeans of black swans in Australia. Completely unexpected because they only knew WHITE swans. Please read Taleb's book for more info.


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