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.

Tuesday, 1 April 2014

Philosophy

Principles

Like most people, my investment philosophy has changed a bit over time, but the basic principles remain the same.

About a decade and a half ago, Robert Kiyosaki wrote a book, Rich Dad Poor Dad, which showed a diagram something like the one below which demonstrates the difference between the typical financial profile of a salary earner (lots of expenses, lots of liabilities) and that of an investor (fewer expenses and lots of income-producing assets).

Spending less than you earn and investing the difference was a real "aha!" or "light bulb" moment for millions of people around the globe. Kiyosaki sold 26 million copies of that book alone and went on to build a substantial business empire from this one very simple core idea.


Concept: Robert Kiyosaki

Kiyosaki's point was that investors should try to avoid getting into bad debts (credit cards, car loans, school loans etc) and instead load up the asset column with your business, real estate and stocks.

My one simple big idea

Like many people I've experimented with a few different approaches, including trading or buying speculative stocks. These days I have stripped back my investment philosophy to keep it as simple as humanly possible. My one simple idea as it relates to my investment philosophy is this: 

I want every single dollar I invest to still be going out to work for me if I live to be 110 years old. 

That's my basic philosophy, to think of investment as being like a snowball, compounding and growing its income and capital appreciation year after year, for as long as I live.

What to invest in?

So what assets to invest in to achieve that goal? 

You can spend a lot of time analysing companies and still get it wrong. The simplest method for most average investors might be to pick out some diversified Listed Investment Companies (LICs) which have a proven track record of increasing their profits and dividends for decade after decade after decade.

I don't recommend individual stocks for others to invest in. You have to pick companies which suit your own risk profile. But this is the kind of chart that I look for:


Source: MLT Annual Report 2013


Source: WHF Annual Report 2013


If a company can achieve this type of result with its bottom line profits with its and franked dividend payments then the share price will likely take care of itself over time.  Through investing in these types of diversified companies your dollars can go to work for you from now until... forever.

You don't even need to know what the wires do, although of course, you can lift the cover plate and see what the inner workings are up to if you so desire.


Source: BKI Annual Report 2013


Source: ARG Annual Report 2013


Companies may in theory be perpetual but, surprisingly, many of them come and go. How much more re-assuring it is to be invested in a company which holds 100-120 top companies and trusts? Even if one of the companies held experiences a huge corporate fraud or failure, the investor should not be hurt too much. I covered in more detail why I like LICs here.

Real estate

I apply very similar principles in property investment. I want to invest in cities which will still be thriving if I live to be 110 years old. That means that for the core of my portfolio, I tend to steer away from small regional cities or one-industry towns. 

It's no coincidence that my company has offices in London and Sydney, by the way, for those are two cities with tremendously strong fundamentals for the long term.

Knight Frank reported yesterday that London prices are up by 68% in the last 5 years since March 2009. How on earth and why on earth is that happening? 

It's partly because of desperately inadequate construction. Parts of the market are desperately under-supplied and the activity in the market resembles a feeding frenzy at the moment.

It's also because in recent times, there has been a tremendous shift of funds towards residential real estate as a store of wealth, but only in certain key global cities. It's fairly obvious why prices have been growing when you consider this chart.


If you know your history, you'll know that London has had something of a rollercoaster ride as a city (click chart).


Centuries ago we had wars, plagues and even a Great Fire, and from the Second World War through to 1991 the city population declined for five consecutive decades as the city de-industrialised and went through a process of slum clearance and suburbanisation. 

Since 1991, London has been busy establishing itself as a major financial centre, and international migration combined with an economic boom has seen the population explode from 6.4 million to above 8.1 million.London's population has been increasing at twice the speed of that of the rest of the UK and is expected to surpass 9 million by the end of this decade.

Importantly, the population in inner London has often been expanding at the same percentage rate as that of the Greater City of London, despite the limited availability of land. I don't worry too much what the talking heads in the press consider likely to happen this year or next. I just know that over the decades, London property will continue to represent an absolute no-brainer.

Sydney

As a newer city, Sydney has not been through such a rollercoaster ride: the population trend is simply up, up, up and away.

The below is a dated population projection from the Bureau of Statistics. More recent data suggests that the estimates have been under-cooked and that Sydney's population could rise much more rapidly still than this (click chart) to around 8 million by 2050, instead following the trajectory of the red line (click chart). 



So much energy is diverted towards what might happen to prices in the next 12 months, but as an investor, inactivity can actually be your greatest friend. 

As for the flow of international funds, well let's be blunt: this will have very little (if any impact) on regional centres. The impact will be felt most keenly in inner Sydney where land is scarce, and inner Melbourne.

Through owning properties in suburbs where the supply is fixed you can be assured that your dollars you invested in investment properties will still be out there working for you for decades and decades to come. And more comforting still, the nature of compound growth means that they gains just get better and better over time.