Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory & buyer's agents, 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

Monday, 21 April 2014

Opportunity

The perils of obedience

In 1961, an enlightened chap by the name of Stanley Milgram undertook a series of psychological experiments which were designed to test the human propensity for obedience, in light of catastrophic global events that had been experienced in the preceding decades.

During the tests, which were subsequently repeated elsewhere since with similar results, volunteers were asked to administer increasingly strong electric shocks to test patients who answered questions incorrectly.

Unbeknownst to the volunteer participants the shocks themselves weren't actually real, but the results of the test were genuinely shocking.

Social psychologists analysed the outcomes in terms of the inflicted insight of participants, many of whom showed themselves to be agitated or uncomfortable with the situation, yet ultimately found it easier to act as demanded rather than to question authority.

In simple English the results showed that rather than question what they are told, around two people in every three would administer a lethal 450 volt electric shock to a random patient just because a bloke in a white coat tells them to.

Naturally, the implications of this when considered in the light of modern history are extremely disturbing.

The evil of war crimes is far too heavy a topic for an Easter weekend, but what the results of the Milgram experiments showed beyond any reasonable doubt is that humans are too obedient to authority and trust what we are told far too readily. It's a worrying trait.

We need as investors to be able to think and interpret information for ourselves, to question conventional wisdom, and certainly not take at face value everything we read or hear.

Grateful or grumbling

If there's one thing I've noticed over the years in investing, it's that where two polar opposite personality types are presented with the same environment, situations and choices, one will be optimistic and will see opportunities and abundance, while another will see unfairness, risk, worry and limitless causes for carping and complaint.

Easter, of course, is a time that we should show gratitude for our good fortune, not only for our sheer luck in being born in an age of peace, health, life expectancy, wealth, tolerance, employment, education and abundance...but also for being so darned lucky as to live the country which ranks as number one in the OECD for social and economic indicators.

Well, you'd never know it...not in 'straya!

Greg Jericho looked at exactly this subject in today's Guardian piece: in Australia we sailed through the global financial crisis better than pretty much any other country to become the world's wealthiest people, but you'd never believe this from what you read in the daily press.

There is a reason why books and courses on investment, personal finance and wealth creation stress the importance of mind-set so heavily - that's because the person who only ever chooses to see problems, concerns and risk, will never succeed in investment. You need to be able to see the opportunities which life always and everwhere presents.

1 - High unemployment

If you want to convince yourself that the world is ending and indulge in groupthink you will surely be able to find friends and a forum to confirm your preconceived bias.

We were supposedly due to have 10-20% unemployment by now, but it never happened.

In fact, if you believe everything you read, Australia is destined to be mired in some kind of awful gloomy recession.

That's not what I see when I look at the employment data (click chart):


A cursory glance at this chart tells me two things:

(i) there must be some great opportunities to invest in wonderful companies in an economy which has doubled its workforce and is continuing to grow.

In a capitalist economy such as Australia, you don't even have to go into business to profit from the constantly growing wealth of our country, you can simply choose to own a share of the greatest companies we have; and

(ii) with the number of employed people growing apace, there must be some terrific opportunities to invest in certain property markets too.

Of course, some areas have higher rates of unemployment such as South Australia and Tasmania. This will always be the case in any economy, and I'd tend to steer clear of struggling sectors of the economy.

But if an alien landed in Sydney today, I reckon you'd have a darned hard job convincing them of our allegedly gloomy future.

The New South Wales economy is cruising along, we're heading into an unprecedented infrastructure and construction boom, the population is growing at around 80,000 persons per annum, the unemployment rate has fallen to just 5.3% and in recent years the state has been adding jobs for fun.


We've added 66,000 more jobs in the past 6 months too.

It's a truism that while a company such as Coles creating 16,000 new jobs rates only a passing mention, a mining company like Santos announcing that it will shed 100 positions will be an automatic headline generator. If it bleeds, it leads!

Whatever, people will always forewarn of a pending depression and suggest hoarding cash, issuing dodgy advice about selling your home or short-selling mining companies, but the economy is throwing up some outstanding investment opportunities if you care to look for them. 

2 - Falling wages

As sure as night follows day, an article which mentions wages will be met with comments about how wages have been frozen in certain cases.

Naturally, individual circumstances always differ, so the Australian Bureau of Statistics aims to capture trends by state and nationally, by gender, and by public and private sector, and by industry.

In my professional career I worked in the accountancy profession and then in the mining industry, and thus am aware, for example, that the latter has fared better than the former over the past decade.

Indeed, it was this very trend which facilitated my shift in employment from the one industry sector to the other.

However, pushing the line that wages are falling is drawing a long bow, for over the past two decades earnings have been growing remarkably consistently at around a very health~4.5% per annum clip (click chart):


Have earnings been growing at a slower pace of late? Sure. But still growing they are, and I'll take a bet they'll still be growing next year, the year after next, and the year after that too.

3 - Share markets are risky

If you want to believe that owning shares in great companies is risky, you can certainly find plenty of people who will support you in that belief.

It doesn't look like a risky strategy to me, though (click chart):


Why the disconnect?

The reason is because share markets have become infested with traders and speculators who focus solely upon price, instead of what investing is supposed to be about, which is owning a share of great companies which will keep paying you a (tax-advantaged) share of their profits in perpetuity.

As an investor you can focus on owning shares of wonderful companies which continue to pay you dividends every year and every half year forever.

Above I've charted the yearly and half-yearly dividend history of a bank (CommBank), a food retailer (Woolies) and a healthcare company (Sonic), but you could pick plenty of others from our index of top 200 companies.

Of course, some businesses fare better than others which is why I'd prefer to hold index funds, LICs and a broad cross-section of industrials, financials, and even some resources companies.

But what about the risk?

Well, share markets are liquid, so you could produce any share price index chart from anywhere in the world and suggest that someone could have bought their whole portfolio at the market peak, and therefore share markets are risky.

Well, that's nonsense. 

As with all forms of investing, the risk doesn't lie in the investment, it lies with the investor. 

If someone wants to take a punt on risky penny stocks in order to get rich quick, they will probably lose some money, and possibly will lose a lot. 

That doesn't mean that share markets are risky, and they certainly aren't if you know what you are doing and have a long term plan worth of the name.

Now, leaving all your in money a bank account for decades on end to be eaten away by inflation...that might be risky.

4 - It's never been this tough...

It's fashionable for people to say that people "have never had it so tough", particularly when it comes to housing affordability for today's younger generations.

If that's the way you choose to look at it, then there is certainly plenty of evidence you can find to confirm the viewpoint. 

As always, it depends on your perspective. 

I see home loans from an unbelievably cheap 4.69% per annum and 95%+ mortgages, and this more looks like an opportunity to me.


In truth, you don't need a double first in maths to know that houses in Sydney and Melbourne are generally not affordable on an average salaried income, but apartments do remain so, and particularly are presently so in terms of mortgage repayments. 

Not everyone in Australia lives in Mel/Syd, of course, and elsewhere dwellings are generally more reasonably priced. 

In any case, when I look back at my data sets, this is what I see for 1990:
  • Sydney median established house price: $189,000 (Source: Residex)
  • Average male annual earnings: $28,912 (Source: Australian Bureau of Statistics)
  • House price to income ratio: 6.5
  • Interest rate: 17.00%
  • Affordable loan $39,000

Ouch.

And for good measure, the unemployment rate then jumped to 11% in addition, plunging droves of homeowners towards forced foreclosure.

People never had it so tough as today? As always, that depends on your perspective. 

The actual data shows that wages have been outpacing the consumer price index over the last decade by well over 20%.

Recent data also suggests that loan impairments in Australia are falling to exceptionally low levels in global terms, the average homeowner is an unprecedented 24 months ahead of their mortgage repayments, while unemployment rates remain moderate and foreclosures are all but non-existent.

Summary

I've only touched on a few areas here, but the same principles can be applied across most areas of the economy, personal finance and investment.

One thing you can be certain of in life is that if you measure your success, results and happiness based upon criteria which you have no control over, then you have set up the game so you can lose, and suboptimal outcomes are all but assured.

Which path do you choose?