Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

Sunday, 11 November 2012

Can you achieve returns like Buffett?

The greatest ever equities investor

In its 2010 Letter to Shareholders, Berkshire Hathaway reported that it had generated a phenomenal 20.2% compounded return over the 46 years to 2010.
While a 20% compounding annual return represents a phenomenal achievement, even the mighty Berkshire Hathaway is unlikely to continue to achieve these returns in the future.
Berkshire was able to achieve these returns partly because of its focussed approach to investment through holding massive stakes in only a few companies.
The pool of capital invested by the company today is so large that it is not possible to be invested in so few ventures and future returns will necessarily therefore be lower.
Furthermore the 1970s and 1980s represented a period of higher inflation than we might expect to see in the future, so absolute returns naturally likely to be lower for that reason too.
Future returns for Buffett?
Capital invested in equities
$75 billion
Total return on capital employed (ROCE)
$11.25 billion
ROCE %
15%


Now I’ll admit that this is a gross and slightly ridiculous over-simplification of the likely performance of Berkshire Hathaway in the future, for the company does not only buy ordinary shares and hold them in the conventional manner.
Berkshire will also engage in shorter-term arbitrage transactions and take positions in convertible stock, preference shares and fixed-income securities, for example.
But the figure for Return on Capital Employed (ROCE) may well prove to be pretty close to the mark over the long term. You can buy a single share in the Berkshire company and possibly attain similar returns too, if you have a spare $100,000, which is approximately how much one solitary share in the company now costs.
So how might we fare as individual investors if we tried to compete in equities? Truth be told, over the short-term I have absolutely no idea, and nor does anyone else.
Over the long haul a share investor in the past might have achieved returns somewhere in the region of 10% to 15% per annum depending upon the time period spanned and the investments selected, but as noted, inflation and therefore absolute percentage returns in the future are likely to be lower than was the case in the past.
For the sake of argument, let’s use the numbers below:
Future returns for average shareholders?
Capital invested
$100,000
Return from dividends
5%
Return from capital growth
5%
Total return on capital employed (ROCE)
$10,000
ROCE %
10%


If we were to maintain this approach over good period of time we will start to build some handy capital. Indeed, at 10% growth rate, due to the snowballing or compounding of wealth, over seven years we would very nearly have doubled our initial capital to $200,000.
The reason that I believe most average investors should consider residential investment property is that the leverage involved gives them the opportunity not only to compete with Buffett, but to outperform Buffett on a percentage ROCE basis.
You may think that I have lost the plot in saying that, but let’s look at some simple numbers.
Let’s assume that you learn the appropriate skills to invest in property at a long-term capital growth rate of 5% per annum, which is some way lower than growth rates in the past, but might be a realistic goal for the future.
Future returns for residential property investors?
Capital invested
$100,000
Purchased investment property value
$500,000
Return from capital growth
5%
Total capital return on capital employed (ROCE)
$25,000
ROCE %
25%


So, am I really claiming here that your average investor might return an extraordinary 10% more on their capital than the legendary ‘Sage of Omaha’ Warren Buffett?
The answer is: possibly yes, but with a caveat. By taking on board a controlled level of risk and employing leverage, being the use of the bank’s money, we can accelerate our returns.
I should clarify here that in the early years of ownership the cashflow from a prime location investment property may be negative (particularly as interest rates will one day again run far higher than where they are at the time of writing), but over the life of a long-term property investment rental income increases until the property is cash-flow neutral and then eventually positive.
Now one might say that Buffett’s returns are superior on a risk-adjusted basis, and that would indeed be true. Although Berkshire Hathaway does use leverage, it does not do so company-wide to anything like this level, its debt to equity ratio being only moderate.
But the reality for average investors is that: if you want to become wealthy more quickly you have to expose yourself to a controlled level of risk.
As for the future growth on residential property, over the short term, growth could be stunted and is inherently uncertain. Over the longer term, I'd expect to see median property price growth dovetail with the growth in household incomes.