How Good is Your Bullsh*t Detector

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The markets are unhappy with the ECB’s latest stimulus attempts. Interest rates aren’t negative enough and the bond buying program isn’t big enough. It seems you just can’t please greedy people. They always want more.

The fact that additional stimulus is required at all (after seven years of stimulus) should tell anyone with half a brain things are not OK in Euroland. The share market should fall. Not because the spoilt children didn’t get their way but because the underlying economy says all this talk about recovery is bullshit.

Which brings me to the topic of today’s article.

How good are you at recognising bullsh*t?

Pretty good, you say.

Most people can detect when someone is bragging a little too much. You know, that person who’s always done something bigger, better and more often than you or anyone else.

But what about professional BS?

Can you spot it?

The Natural Sciences and Engineering Research Council of Canada funded a study titled ‘On the reception and detection of pseudo-profound bullsh*t.’ Now there’s a mouthful.

The researchers conducted their academic experiment on a cross-section of the community. Random, vague buzzwords were illogically inserted into statements. While the statements made no sense, some people judged them to be profound. They fell victim to the Emperor has no clothes syndrome.

According to the researchers:

Those whose cognitive skills are lacking and dont have the requisite desire or intellect to challenge obfuscating language are most susceptible to think a meaningless “bullshit” statement is in fact profound.

…focus on pseudo-profound bullshit, which consists of seemingly impressive assertions that are presented as true and meaningful but are actually vacuous.

The less you know about a topic, the more susceptible you are to being deceived by impressive assertions that lack any real foundation…especially in the professional world.

The financial services industry has its fair share of professional bullsh*tters: fund managers, share brokers, financial planners and bankers.

Whenever money is involved, you can expect the truth to be stretched in an attempt to win business.

Not all BS is obvious. The best BS is the stuff that becomes accepted wisdom.

Statements like — ‘in the long term shares always go up’ or ‘money in the bank is dead money’ or ‘negative gearing saves you tax’ or ‘property values never go down’.

If it’s said often enough it becomes an established fact.

The PR machines for the investment and property industries are BS masters. They take a kernel of truth and repeat it over and over again until it supports the industry’s agenda.

The investment industry sells investments — predominantly share based investments.

The property industry sells property…no kidding.

The sales forces attached to these industries use these accepted statements of BS to convince would be investors to buy their product.

In fact a good deal of the sales people actually believe the BS themselves.

In 2011, Howard Marks wrote ‘The Most Important Thing: Uncommon Sense for the Thoughtful Investor.’

Howard Marks, is the multi-billionaire chairman and co-founder of Oaktree Capital Management — the world’s largest distressed-debt investment firm.

This extract from the book is one that all investors seeking long term success should take notice of (emphasis is mine):

For your performance to diverge from the norm, your expectations – and thus your portfolio – have to diverge from the norm, and you have to be more right than the consensus. Different and better: thats a pretty good description of second-level thinking.

Most investors make decisions based on ‘first-level thinking’. They accept the standard BS as fact without applying critical analysis to the statements.

Yes, share and property markets do go up. But they also fall in value.

Your investment experience may or may not be a positive one. It depends on a whole host of variables: at what point you enter the investment cycle; interest rates; population growth; changes to taxation legislation; consumer spending patterns; geopolitical tensions (another World War); council zoning changes etc.

While markets have demonstrated certain characteristics, there is no guarantee the future is going to be a repeat of the past.

Share markets do indeed go up in the very long term, but they also can behave very badly for a decade or more. For example, the Australian share market (as measured by the All Ords Index) is back to a level it first reached in April 2006 — nearly a decade ago. That’s a long time for most investors.

A number of long term valuation metrics (Tobin Q ratio, Shiller PE, Market Cap/GDP) are warning the US market is over-valued and vulnerable to a sizeable correction. Given that our market plays follow the US leader, a decent fall in the US could well take our market back to levels last seen 15 or 20 years ago.

Cash can be dead money in a sustained period of inflation and rising asset values.

However, in a period of deflation and falling asset values, cash is king.

The more prices decline, the more your dollar in the bank can buy.

‘Cash is dead money’ is just another piece of BS propaganda aimed at convincing you to buy whichever product the investment or property industry is trying to sell you.

Sure there are times when cash is better off being invested in assets with growth potential. But when those same assets are in an environment where they are more likely to shrink than grow, it’s better to be in cash.

Would you like to pay less tax?

Well, have I got a deal for you. A subscription to an investment newsletter is usually tax deductible. What if we bump up the subscription price for The Gowdie Letter to $5,000? Subscribers in the 39 cent tax bracket would save nearly $2000 in tax. How’s that for creating a tax saving?

If you want to save even more tax we could push the price to $10,000…giving you a $4000 tax refund.

I know you’ve already seen through my BS.

Negative gearing (borrowing to invest) works the same way. The more interest you pay back to the bank, the bigger your tax saving. Pay the bank back $20,000 in interest and you may save $8,000 in tax. But you are still $12,000 out of pocket.

If the investment doesn’t appreciate in value to offset your out of pocket cost, you’re tearing up money.

Investing to save tax is close to one of the dumbest decisions you can make. What happens if the Government decides the budget bottom line can no longer wear the tax cost of negative gearing? You’re in deep trouble.

The investment and property industry knows no-one likes paying tax. Promoting negative gearing as a way to beat the taxman is sure to press the right button. But it is BS.

The old chestnut ‘property values never go down’. If you live in Sydney and Melbourne you need no convincing of this.

However, markets are the most vulnerable when people think they are bullet proof. Property investors the world over found this out in 2008/09. Property values fell across all markets.

The long held belief is that property is an excellent inflation hedge. Yet in recent years there has been little or no inflation. But we have seen property values — in selected areas — rise well beyond the official inflation rate. What gives?

Property values in the world’s major capital cities have been the beneficiary of central bank liquidity (QE) and ultra-low interest rates.

How much higher can values rise? Who knows? However there is a point where underlying rents (paid by ordinary wage earners not receiving generous pay increases) can only rise so much to support borrowing levels.

Someone buys a home for $1 million with an annual rent of $40,000 — receives a 4% (before expenses) return. If the house price rises to $2 million but the tenants can’t afford to pay a higher rent, the rental return drops to 2% (before expenses).

Eventually home prices will succumb to reality and be tied to underlying incomes. When this phase of cheap and abundant money is exhausted, then what?

With workplace automation and globalisation of labour keeping a lid on wages growth, we may well see the ‘property always goes up’ mantra being put to the test.

Apply a little second level thinking to your investment decisions and you’ll find your bullshit detector is a lot more receptive than it used to be.

Regards,

Vern Gowdie

Editor, The Daily Reckoning

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Vern Gowdie

Vern Gowdie

Vern Gowdie has been involved in financial planning in Australia since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top 5 financial planning firms in Australia. He is a feature contributing editor to The Daily Reckoning and is Founder and Chairman of the Gowdie Family Wealth advisory service and editor of the Gowdie Letter To follow Vern's financial world view more closely you can you can subscribe to The Daily Reckoning for free here.
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