My Monday rant

Not sure if my ‘Monday Rant’ is a thing, but it seems to becoming one. Here’s what’s on my mind:

+ If recent events hadn’t convinced you that you should largely ignore market forecasts and headlines, here’s a friendly reminder.

+ Auction clearance rates in Melbourne and Sydney over the weekend still strong. 


Source: AMP

Even after the rate hikes by the banks, the RBA’s attempt to talk down the property “bubble”, as well as APRA’s pressure on the banks, we’re still seeing strong clearance rates. We can dance around the issue for as long as we like, however, at some point in time, we will need to face reality. The reality that we have a supply issue. And until such time as the supply side is dealt with, we will see prices continue to rise over the long run.

It’s as simple as this, yet we all try and over complicate it.

+ China’s market turmoil = Rise in Australian real estate prices?

A guy overseas put this info graphic together about a year ago to help justify the rise in Canadian property prices. I thought it was as relevant to the Australian property market and wanted to share it with you. It’s a great little summary of what is happening.


Source: Ludovic Siouffi

The key, as I wrote about in my previous point, stands out again…supply. Cover it with whatever you like, at the heart of it, this is what it is.

+ Foreign buyers aren’t as prominent as you think. 

NAB recently released their property survey, and here’s my favorite chart. Total foreign purchases by state, broken down for property type. Foreign purchases make up around 1 in every 3 of house purchases. Apartments are a lot higher, which is more in line with the lifestyle of those purchasing.


Source: NAB

Just because the Chinese looking guy outbid you at an auction, it doesn’t make him a foreigner with millions of dollars. He might simply be working two (maybe three) jobs.

+ Here’s where each capital city’s house price sits on the property cycle according to Dr Andrew Wilson of Domain Group.

We still have a little whole to go folks. Low rates, foreign money, limited supply = higher prices.

+ Innovation is not new, it’s just sounds a lot cooler today. I was reading the 1897 Washington Post over the weekend, well…sort of, and came across this paragraph:

…ban cars, because it will frighten the horses.

For every “disruptive” and “innovative” path we take is simply evolution. I’m an optimist. I believe in our ability to progress, to better our lives and the lives of our children, through persistence, through hard times, and through technology. Think about this:

  • The iPhone is not even 10 years old. Think about what mobile phones were prior to the iPhone. I’m only asking you to think back to 2006.
  • We now Google everything, when we used to have to look it up in the Encyclopedia. How cool was it when Encyclopedia made it onto CD-ROM!
  • Facebook went live in 2004. Prior to that we were chatting on ICQ, MSN, and mIRC. Facebook now has close to 2 billions active users a month.
  • A Garmin GPS used to cost close to $1,000. It’s now free with Google Maps.
  • Think about how much it cost to speak with someone international. It’s now free with Skype.
  • You book a random guys house for your holiday using your phone.
  • You book a car in minutes, and you know exactly who it is, where it is, how far away it is, and when you’ll make it to your destination.

Why am I telling you this? I’m telling you this because the world is ever-changing. What was yesterday is not tomorrow. Just because we’re seeing a new trend today, it doesn’t mean it’s some sort of bubble that is going to explode any minute or a fad that is going to wear off in a months’ time (unless it’s Pokemon Go). I’m tired of people telling me and others why things can’t be done, why things won’t work, and why things should be the way they were.

Here are all the stories you will hear and the things people will tell you why we can’t and won’t progress. Yet the picture tells us a different story. Click for larger image.


Source: MarketWatch

Over the last 20 years we have seen remarkable global progress:

  1. The world now has the largest generation of young people. Ever. In fact, 1/3 of the population.
  2. People living in extreme poverty has been cut in half.
  3. The world’s population has grown by a quarter.
  4. Adolescent childbearing has fallen by half.
  5. Maternal deaths were almost cut in half.
  6. Life expectancy around the world has grown by 5.2 years.
  7. New HIV/AIDS infections have dropped by 33%.
  8. More children are attending school than ever.
  9. More than half of all people live in urban areas.
  10. We could be living in the most peaceful time in history (as difficult as this my be to believe right now).

I’m sure one day I’ll tell my children how I used to ride around in yellow cars, after waiting 30 minutes for them to arrive, after waiting 20 minutes on hold to book the darn thing. Just like I’ll tell them I bought the Australian stock market index at 5,800 points. Play the long-game – you’ll always be ahead.

Here’s why you’re not a long term investor

You hear people talk about it all the time, you know, “long-term investing”. In my experience, everyone is a long-term investor when markets are going up. The truest test for long-term investors is when markets are going down…fast.

It may seem like a distant memory for some, but stocks around the world plunged almost 50% during the GFC. What did you do when this happened? Did you panic? Did you ‘buy the dip’? Did you bail?

1. Have a plan…and stick to it!

My guess is the above question will be largely dictated by whether you had a plan or not – because in good times and bad, your investment plan will make the decision for you.

Since the GFC, I’ve heard many commentators and investors complain that a diversified portfolio failed to keep up with the raging bull market since 2009. In fact, this is only half of the story! As the chart below shows, a portfolio that included bonds saw reduced losses during the financial crisis, and recovered much faster than a portfolio that only held stocks.

Source: JPMorgan Asset Management

2. Ignore the noise, listen for the signal.

Every year, we’re told this year is the year markets will collapse. History tells us that every year has a rough patch. Take a look at the chart below. The red dots on this chart represent the maximum intra-year decline in every calendar year for the S&P 500, since 1980. While these pull-backs can’t be predicted, they can be expected; after all, markets suffered double-digit declines in 21 of the last 37 years.

But despite the many pull-backs, roughly 75% of those years ended with positive returns, as reflected by the gray bars. Investors need a plan for riding out volatile periods instead of reacting emotionally.

Source: JPMorgan Asset Management

3. Diversification. It works. Stop complaining.

Markets are always volatile, and the last 15 years have been a rough ride for investors. That’s what makes a market, and that’s why you’re compensated with a return (if you remain invested).

Despite the rough ride, cash has been among the worst performing asset classes shown in the below chart. Meanwhile, a well-diversified portfolio of stocks, bonds and other uncorrelated asset classes returned nearly 7% per year over this time period (and over 150% on a cumulative total return basis).

Next time sometime tells you to sell out of an asset class and get into another, show them this chart and ask them how predictable the future is.

Source: JPMorgan Asset Management

4. You suck at investing.

This has to be my favourite charts of all time.

It’s the famous Dalbar study titled “Quantitative Analysis of Investor Behavior.” It estimates that over the last 20 years, the average investor has achieved a scant 2.1% annualized return as compared to more than 7% in a 60/40 stock/bond portfolio.

Why? Because we (human beings) are wired that way. We would prefer to avoid losses to acquiring equivalent gains – it’s better to not lose $10 than to gain $10. Studies have shown that losses are twice as powerful, psychologically, as gains.

Source: JPMorgan Asset Management

There are so many forces preventing you from becoming and remaining a long-term investor. It’s hard, I understand. Yet you don’t have to suck at investing, really, you don’t.

I’m going to stick my neck out here and make a prediction. Stocks will fall 30%. I don’t know when, but I know it’s going to happen, and I’m mentally prepared for it, so too is my balance sheet. Think about what this could mean for your portfolio. Translate it into dollar terms, it makes it feel more real.

Ask yourself, if stocks fell 30% tomorrow morning, will this impact your life in the short-term? If the answer is yes, you need to make some changes so that you can remain a long-term investor when markets aren’t going up. And most importantly, you can continue to live the life you want. Because money is simply a means to an end.

 

My Monday Rant

It’s been a little while since I’ve had the opportunity to write to you, as so much has been happening. We held our first investment forum for 2017, discussing the great property bubble with some of the best in the business, which was a great success. We had a full house of clients, developers and investors. I’ll be sharing key take outs of the forum in the coming weeks.

Over the past few weeks, a whole bunch of stuff has been happening, so I thought I’d give you a run down of what I’ve been seeing and thinking:

+ Don’t be fooled. Everyone talks about how great the performance of the US stock market has been over the last decade. A closer look will tell you that even the German stock market has performed better than the S&P 500. Don’t believe everything you read in the paper.

Source: Yahoo Finance

+ The US stock market has been falling over the last few days leading up to the healthcare vote in the US. Financial media had been reporting the impact this has had on markets. This is the drop they’re talking about…

Source: Thomson Reuters

I’ve also been reading about what this means, and what impact it will have on financial markets. No one still know’s what caused the Black Monday crash in 1929…88 years on, and we expect people to have the answer to something that hasn’t even happened. Let’s get serious for a second folks. The same doomsayers that were telling us a Trump Presidency would be catastrophic for financial markets continue to publish their pessimism and expect the general public to hang off their every word.

In the end, the bill was shot down and stocks rebounded.

+ This is why you shouldn’t take forecasts seriously, even from Central Banks. Wage data was released last week. I thought it would be amusing to revisit this chart, which shows the RBA’s regular forecast of wages with actual.

The RBA has been forecasting higher wages since 2011. They’ll be right eventually.

+ Prime Mister Turnbull has been considering allowing First Home Buyers (FHB) to access their super to purchase a home. This has to be the height of stupidity. I will not waste your time and expand.

+ Apparently foreigners are “hoovering” up all of our property. No one could really quantify this, until now. We have the data (dun dun duuuuun):

  • NSW – 25% of new supply
  • VIC – 16% of new supply

So, 1 in every 4 in NSW and 1 in every 6 in VIC. Not very “hoovering” is it?

When we hear the the term “foreigner”, most people think of the Chinese. And rightly so. Here’s how much the Chinese make up of foreign buyers:

It’s quite staggering actually.

Nevertheless, do you ever wonder why this is the case? This is one of many reasons. Although a compelling one, the storage of wealth probably ranks higher than price, certainly from the discussions I’ve had with Chinese investors. Anyway, here’s price and yield from the point of view of our Chinese neighbors.

+ The Melbourne/Sydney apartment property boom/bust theory continues. We’re told construction, prices etc. have all the traits of a bubble not seen anywhere else in the world. If we take a look at other mature apartment markets in the world, such as New York, we’ll quickly learn that this has happened before and has not ended the way the doomsayers claim. Here’s New York apartment prices (per square foot) since 1910. They’ve been climbing since the 1950s.

In the end, no one really knows what the future holds. No one really knows what impact certain events will have on financial markets. Trying to front-run the global markets’ investors is nothing but pure speculation. It’s easy to do it when it’s not your money. Next time someone tells you what they think, or what you should do with your money, ask them what they’re doing with they’re money.