Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

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.

Wednesday, 26 February 2014

World-view

Perception is reality?

In the 1960s, English band The Kinks, so named for their 'kinky' fashion sense, became well known for their clever ditties and witty observational humour in their music. One of their popular hits released in 1967, David Watts, told the story of that abominable school head-boy who was better at everything than everyone - from captaining sports teams, to attracting girls, fighting, passing exams...and everything else. 

David Watts was that familiar tale of teenage insecurity with, depending on who you believe, perhaps a bit of an undercurrent of erotic school-days confusion. 

Years later, one of my favourite bands, The Jam appeared on the scene. A group of "angry young working class men" from the regions, their music was variously known as punk/new wave/mod revival, and the songs were frequently political. 

The band leader Paul Weller was well known for his support of the British Labour Party and the 'Red Wedge', and The Jam's music touched on Thatcherite politics, class and employment issues and the growing anti-nuclear spirit of the time.

One of the The Jam's cover singles was described by the ever-creative musical press as a biting "denunciation of the British class system", a brutal account of the privileged few trampling across the working classes, the futile anger of the struggle for equality...among other colourful narrative.



You already know the song title of course: David Watts - a straight cover from The Kinks! Perception becomes reality.

Roll forward to 1991 and Forbes Magazine reported in an interesting article on car sales that the Mitsubishi Eclipse was easily outselling Chrysler's Laser in the US, the Japanese Eclipse averaging more than 100 sales per dealership as compared to a disappointing dozen or so for the American Laser. 

No big deal, you might say, Japanese vehicles once again out-selling their American competitors. 

Just one problem: they were exactly the same model of car! Clearly, the perception that Japanese cars were of a better quality and value-for money counted for a lot. In reality, the vehicles were identical, but, as ever, the perception was very important.

World views

I studied history in my undergrad days, with a particular focus on economic history. Unlike most young lads, I was never all that interested in wars or people blowing each other up, but I always wanted to know about the Industrial Revolution, how people survived in the Great Depression, how World War I reparations resulted in hyperinflation in Germany, and how economics brought about the conditions for World War II. 

One of things which I found quite annoying, though, was how often historians pigeon-hole themselves.

For example, determinist Marxist historians describe every event in history as part of an inevitable progression towards the triumph of the working classes controlling the means of production. The role of class struggle would always result in systemic economic change, and the world would inevitably progress towards the triumph of Communism. No matter that it wasn't actually accurate, it was seen as cool or trendy to define yourself as a Marxist. 

Then there were the revisionists. They take the accepted view of history, then counter that view precisely with the opposite view. The story almost appears to be decided first, then the narrative added later. And so on...you get the picture. 

When spending some time in Germany and learning the language there, I came across a word which, as far as I know anyway, has no English equivalent: weltanschaung, although the internet gives a long and verbose explanation. I guess it loosely translates as "your outlook on and view of the world". 

Whether we like it or not, or whether we even realise it, we all form our own world-views, and this impacts how we invest.

Some world-views

I mentioned in a blog post the other day, how growing up in a city which experienced the decline of its heavy industries and very high levels of unemployment has impacted the way I view the world. Here are a few more views I have developed (note: they may or may not be right, it's just all part of how I see the world):

-there is no bigger economic evil than unemployment - I know some people see recessions are useful, but I don't. Unemployment, to me, represents misery. Britain had unemployment of above 3 million and high unemployment persisted throughout the 1980s...it ruins families and lives;

-companies and their pension schemes can and do go bust - look at the list of the biggest companies on the stock exchange from a few decades ago: how many are still here today? You may be surprised;

-certain industries and even entire regions have a life cycle in developed countries - in Britain, industries like coal, ship-building, car manufacturing and steel all thrived, and then died away;

-I've lived in one of the world's wealthiest nations (yep, that's us - Australia) and one of the poorest, recovering from a modern genocide. I know people who earn 7 figure salaries and people who labour in a tropical climate for a few dollars a week. Since we have food and clean running water, the things that people in Australia complain about are, in the main, trivialities. We're lucky;

-you need to protect yourself from the silent thief of inflation, and keeping money in the bank isn't good enough.

uk inflation

Investing

As noted, these views may not be right, but, my experiences have made them a part of my reality.How does this impact my views on investing?

-You need to protect yourself from inflation. Hold assets that are inflation hedges;

-Don't only rely on your job for financial security;

-I worry about people putting too much faith in one company or a handful of companies. History shows they can and do go under. Diversify into index funds or LICs, at least until you are a very experienced investor;

-Similarly, company pension schemes can blow up, and new defined benefit pension schemes are almost non-existent these days. You need a better financial plan than relying on the state pension and compulsory superannuation contributions;

-Property in regional areas and cities that are reliant on one or two industries can be devastated by recessions. I've seen this first hand in Britain since through several recessions.

Property world-view

It's no coincidence that our company has offices in London and Sydney, and that's also where I choose to invest in property.

Britain was heavily impacted by the financial crisis, and house prices fell from peak to trough by 14% (or 17% depending on your source).

But, as I noted at the time, prices in London and Sydney were never going to collapse. I explained the reasons in more detail in this blog here. Put simply, in large, mature cities, the ratio of new housing to existing stock is tiny, and:

"Land is a factor of production and the demand for it is derived from the demand for housing. Changes in house prices may have consequences for land prices, but it does not follow that changes in land prices will necessarily have consequences for house prices."

Developers are not charities - they are price-takers not price-makers - and when property markets stall, unless developers are otherwise so incentivised, new developments dry up.

London and the south-east of England now has a chronic housing shortage which will take more than a decade to be addressed. Sydney never really had that much of a downturn so construction levels are presently strong.

These are all part of the reasons that property markets cycle. Sentiment ebbs and flows, but stick to the right suburbs of the major capital cities and you tend to do well over time.