The economic truth according to Vern Gowdie

‘[Business] is a bit like swimming in the ocean. It can be exhilarating, refreshing and fun. However, the ocean you swam in yesterday; the one that provided you with an uplifting experience may not be the same as the one you swim in today.

The conditions may have changed and there could be a strong undertow, dumping waves or even sharks in the water.

The world of investing must be treated with the same respect you give the ocean.

Investment markets are powerful forces and they can create and destroy personal fortunes. Investment conditions are constantly changing: markets (property and shares) boom and bust and economic conditions are continually evolving.

The business cycle goes through a regular process of expansion (boom) and contraction (recession) just like the tides of an ocean. This is a normal course of events.

The thing to be aware of is where you are in the cycle. Is the economic wave about to rise or are you on the crest, about to be dumped? 

‘When you decide to enter the investment world, it is wise to adopt the same caution as you would when deciding to swim in an unknown body of water. Gradually feel your way in.

‘Not to put too negative a point on it, but so many people have faced financial ruin by being naïve. Investment markets can be very rewarding, but it is important to remember some of the golden rules.’ 

And, one of the rules I alerted my daughters too is…

Booms always, always, always BUST. There is absolutely no exception to this rule. The longer a boom goes on the greater its gravitational pull to draw in as many suckers as it can before it busts. The US property boom (propelled by sub-prime lending) carried on for nearly five years before it finally collapsed. The 2003–2007 share market boom was the lure that Storm Financial used to attract many unsuspecting investors. The boom times felt like they were never going to end. For four years in a row the market returned a hugely impressive 20 percent per annum.

Because this incredible run went on year after year, people began to think that these results were normal…

The only difference with each boom is the duration. Some are short and others are long. The best tell-tale sign of a boom is when everyone is talking about it (whatever the “it” is) and they know someone who has made a small or even large fortune or they personally are about to make a small fortune. Resist the temptation to follow the herd (in fact they are lemmings headed for a fall from a very high cliff).

As you know, it can be rather uncomfortable going against the popular trend, but when the trend has exhausted itself you will be the smart one. As Charles Mackay once said, “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.”’ 

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