Think Independently; Act Decisively

When I was twenty-four, I knew virtually nothing about business and less about banking. I had very limited self-esteem and assumed that, if someone was wearing a suit, he knew what he was doing and I shouldn’t question him. 

At that time, I came into some money for the first time in my life and opened a CD at a prominent bank, to keep the money “safe.”

That was in the early 1970’s and bank rates were phenomenal. I had chosen the bank due to the fact that they were paying 11½% - more than anyone else. One day, I decided that it would be prudent to visit the bank and meet the manager. When I went in, there were quite a few young pretty women walking around in designer outfits – something I’d never seen in a bank. One of them said I couldn’t see the manager right away, but she showed me to a leather sofa and offered to bring me a drink. 

I’d never heard of a bank serving alcoholic beverages, but it made me feel a bit special to sit on the nice sofa and have a rum and Coke.

By the time I’d finished my drink, I asked again when the manager would be seeing me and the young woman said, “Soon. Would you like another drink?”

At that moment, I suddenly began to feel a bit uncertain about the bank. I refused the drink but remained waiting. As I waited, I watched the other customers, who were being pampered by the staff and it occurred to me that my idea of a banker was somebody who was careful and frugal with my deposit, not lavish. After being in the bank for an hour, with no manager in sight, I called the young woman over and said, “I’d like to see the manager now.”

She said that it wasn’t possible at the moment, but that he would be available “soon.”

I said, “In that case, I’ll take all my money out of the bank right now.”

She tried to discourage me, but I said, a bit loudly, “Are you saying that withdrawals are not possible?”

She looked a bit nervous and asked me to wait just a moment while she got the manager. She returned a few minutes later and said that he’d see me now.

I was brought into the manager’s office who smiled, shook my hand and asked if I had any questions regarding my account. I said, “No, I’ll be withdrawing all the money now.” He pointed out that that would be a mistake, as, in a few weeks, I’d be receiving my quarterly interest and it would be better to leave the money in the bank.

At that moment, I reminded myself that I knew nothing about banking and the manager seemed to know everything. Also, what he said made sense. Surely, I was over-reacting. But I had an uneasy feeling in the pit of my stomach. I thought for a moment, took a deep breath and said, “I want to withdraw it all now. I accept the loss of interest.”

He stated that what I was requesting was unusual and that, in any case, he was unsure if a clerk was available to provide me with the withdrawal at that moment.

I said, “You can give me the money now, or I can leave here and go to the newspaper office and offer them a front page headline that your bank is refusing to provide depositors with withdrawals. Which do you prefer?”

He then lost the smile and told the young woman to bring in a statement of account. We agreed on the balance and I was paid out in cash.

Two weeks later, the bank closed its doors and an announcement was later made that it had gone into liquidation. The directors had left the country. The liquidators charged exorbitantly for their work and took a full five years to perform the liquidation. When they were done, the depositors received less than 5% on the dollar.

So… this may be only a moderately entertaining story, but I learned a major lesson from it. 

I was just a young no-account, who was entirely unqualified to judge those “in the know.” But my instincts told me that this was no way to run a bank. 

Of course, the hook here was that, in a few weeks, I’d be getting that fat interest payment. If I could just be reasonable and wait until then, I’d be getting my hands on more money. Surely that was worth waiting for?

No, it wasn’t. In fact it almost never is. When your gut tells you that a situation has turned sour, it doesn’t matter if it sounds like the best deal in town. The smart move is to get out – immediately. Don’t wait for the alleged payoff – accept your losses and run.

Throughout my life, I’ve been fortunate that this lesson has stuck with me and, although I’ve missed out on the occasional good deal, I’ve avoided far more bad ones and, on balance, I came out way ahead.

Unfortunately, though, we’re trained to follow the accepted path. 

As an advisor, I frequently meet Americans who are counting on their 401k’s to provide for their retirement. My advice to them is that their 401k’s are invested in stocks, which are overdue to go south, so it’s better to get out now. They invariably say, “But if I do that, I’ll pay a 10% penalty.” My advice is to take the hit now to avoid a bigger hit later.

But many, many people cannot bring themselves to face a small loss in order to avoid a greater loss – they blindly follow the “bird-in-the-hand” concept.

Similarly, these same people often say that they don’t need to create a better economic future for themselves, as their pension will cover their needs.

I remind them that pensions are also primarily invested in the stock market and are likely to go south. Further, their past president declared that the US government plans to require pension funds to be invested substantially in US treasuries, to “assure value.” 

Unfortunately, treasuries may be hit even harder than the stock market in the coming crisis.

However, when I offer these warnings, the response, more often than not, is, “I’m sure that they know what they’re doing,” or “I don’t waste time worrying about it – it will be okay,” or “They can’t let everybody go broke. They have to come up with a solution.”

Unfortunately, these rejoinders are extremely flimsy at best and economically suicidal at worst. When a crisis is imminent, it’s every man for himself and he’d better learn to rely on his instincts and create an alternative plan, or he’ll be going down with the ship.

I was fortunate to have been faced with being cleaned out early in life and, of course, even more fortunate that I took a contrarian view and abandoned the sinking ship. (It was sheer luck that I visited the bank when I did and got out at the last minute.) 

The significance of this is that, although your banker, broker and all the “experts” on TV news programmes may advise you to accept the status quo without question, you unquestionably should, first, question everything and, second, listen to your gut.

Those who remain reliant upon banks, governments, pension plans, the market, etc. to save them during the coming crisis, will very likely become casualties. Those who take a contrarian approach will have no guarantees, but will have greater odds of survival, through diversification out of conventional investments and problem jurisdictions.