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.

Saturday, 1 March 2014

Snowball

Snowball

The Snowball was the title of a comprehensive 2008 account of Warren Buffett's life written by Alice Schroeder. It became a New York Times #1 best-seller.

The title was a clear reference to Buffett's understanding of how to compound his wealth, growing it over time by investing in the equities markets, though I'm not sure what percentage of willing readers genuinely finished the tome. 

It was a truly massive book and incorporates every minute and innocuous detail of Buffett's life for value investors to pore over. One suspects that the original remit of the book...snowballed.

Compound growth

We've all the heard the compound growth analogies. 

Lily pads can cover a very large pond quickly because they multiply. 

Two dozen rabbits introduced to Australia for a bit of sport became 2 million rabbits within a decade because they multiplied.

And so on.

The key point is that compound growth - growth upon growth - has an awesome power that we as mere mortals find it difficult to comprehend.

The human population has itself exploded to more than 7 billion due to its the potential to grow “at a geometrical ratio” (as in: 2, 4, 8, 16, 32, 64…). 
It was this observation which gave rise to the theory of the Malthusian trap. The problem, noted Malthus, was that the supply of food we are able to provide for ourselves was “growing at an arithmetic ratio” (as in: 2, 4, 6, 8, 10…).
The human race managed to solve the food supply problem by instead compounding our technological knowledge, but few people ever grasp how to use compounding growth to their own advantage in the manner of a Buffett.
Random walk?

Having done a lot of mentoring, it became increasingly obvious to me why most people find it difficult to make any decent money in the share markets.

People tend to look at the market and see randomness. It's very hard to predict what will happen next, as the 6 month XJO (ASX 200) chart clearly shows.

When you look at markets over a short time horizon, prices appear to be jumping around all over the place liked a crazed firework.


Source: ASX

Naturally it helps to look at the market through a telescope, rather than a microscope, and it definitely helps to focus on the growing dividend streams rather than day-to-day price gyrations. 

Also, it's handy to learn what secular bull and bear markets are and use them to your advantage!


Source: ASX

If you look at a 114 year historic chart of the Dow Jones, you'll note that the scale is not usually presented in a linear fashion.

DJIA chart

Source: stockcharts.com/freecharts

The reason for that is that the earliest decades on the chart would be a barely decipherable flat line. 

The greatest crash in modern history - the Wall Street Crash - saw the Dow going ballistic for several years reaching an irrational peak of above 380 in 1929, before unravelling over several years and hitting a low point of just 41.22 in July 1932.

Now you can see what the scale is presented as such. 

If the Dow moves by 5% from its present levels, which it may easily do in a week, this represents a move of around 800 points. On such a scale, the Dow at around 40 points would barely register as a twitch. 

I mean, The Dow moved by 50 points yesterday and nothing of any note happened!

It's for these reasons that stories emerge of investors placing only a few thousands dollars in the index decades ago becoming millionaires many times over.

GDP Preview


Westpac forecasts that next week Australia's National Accounts will show that the economy grew up 0.9% in the last quarter, and 2.7% over 2013, with exports and consumer spending driving the growth. 

That might be a touch optimistic, with the capex data showing mining engineering construction now sliding into its contraction phase, but since forecasting GDP is a fool's errand, let's wait to see what the data shows next week.

It's worth noting that when people discuss a slowdown in China's economy, they are normally discussing 'less fast' growth. 

A slowdown in growth from 8% to 7% per annum, for example, is not so much a contraction in the conventional sense, it's simply an economy which has been growing at a colossal speed, moving down to a somewhat less colossal speed.

You might argue the toss over whether is Australia is due for a recession, but thanks in part to a booming population, the country's GDP has continued to grow over the last couple of decades. 

Growth upon growth.


If you've ever wondering why some people are comfortable buying shares and property at any stage in the market cycle, it's probably because they are taking a long-term outlook.

They understand that compound growth applies to corporate earnings and to wages.

Today's graduates will gradually command very large salaries as they progress through their careers and working lives.


February property prices

The property price data for February will show that property values 'fell' marginally in all major capital cities except for Sydney - in the harbour city they continue to rise.

It's the old microscope versus telescope thing again. Over the past 12 months prices have risen almost everywhere - at least, they have in the capital cities.

I don't know anyone in their right mind suggests that prices becoming more expensive are a 'good thing' for society per se - although economists would of course cite the wealth effect of appreciating markets and the flow-through to increased dwelling construction.

But successful property investors understand the reality, which is that properties in the locations where most people want to live will be bought by those who are working hard on increasing their salaries and equity, while properties in less popular areas will likely stagnate in price or fall in real terms.

Of course, market periodically experience corrections - sometimes sharp corrections - but trying to second-guess when they are is beyond most of us.

This week, we bought a 2 bedroom apartment in Shepherds Bush in London for £500,000!! If. like so many thousands of Aussies. you spent time in your backpacking years in Shepherds Bush, you'll know why that sentence deserved two exclamation marks.

But, with the new Westfield Shopping Centre, and the quite fabulous leafy green suburb of Holland Park and then the West End on your doorstep, it's the new place to be.

That's just the reality of well-located suburbs. People who can afford to live there, do so. Those who can't, make their own new equivalent of Shepherds Bush, as my little bro has in the predominantly Bangladeshi hub of Bethnal Green. 

I've always found the leafy suburbs crushingly dull places to be. Far more exciting to live in a gentrifying area (or a developing country). It's all part of the life cycle of suburbs.

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