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.

Monday, 6 October 2014

Don't know, don't care...

Long term horizon

I've long been an unashamed fan of the buy-and-hold approach to investing and love the idea of quality investments that can be held in perpetuity.

The advent of the internet seems to have turned investment into a gladiatorial competition - who can be the "most right" about what happens next. In truth the only person you need to be in competition with is yourself, and as long as you are on track to meet your own goals, you neither need to know nor particularly even care about what everyone else is up to.

If you can adopt a long term investment approach which allows you to say "don't know, don't care" to what happens in the markets on a day-to-day basis, your odds of success are surely heightened.

Over-trading

The greatest advantages of buy-and-hold as an investment approach include efficiency and the minimisation of transaction costs and taxes, although this only works with certain types of quality assets. That is not a trendy viewpoint, but it's nevertheless true.

Stockbrokers would no doubt be inclined to disagree and instead suggest that you should trade more often in order to time the market. But then brokers benefit from activity not inactivity, and the empirical evidence that even the professionals can consistently outperform the market materially through superior market timing is at best sketchy.

In the real estate world books and media articles written by estate agents also often somehow seem to imply that there has never been a better time to buy property...or sell property. Or upgrade your property. Or just do something...anything! Take this short article excerpt by way of just one of a thousand example:

"While market demand in a booming Sydney has eased slightly in winter, I am expecting a very strong spring season with more stock likely to ramp up activity over the next three months.
Over the past four weeks, auction clearance rates in Sydney have returned to above 80% after drifting down into the 70% bracket during winter. Clearance rates are among the most important forward indicators of a market because they tell us about consumer sentiment in real time. Right now, it looks like we’re in for a buoyant season.
Vendors are listing with supreme confidence right now after 18 months of excellent growth. There are plenty of buyers around waiting for those new purchasing options to come online after the usual reduction in supply over the colder months, so competition should be pretty intense.
A genuine plateau is still quite a way off and if the spring market is as hot as we think it will be, we’ll see a material change in median prices by Christmas and this might settle buyers down for 2015, thereby making growth more sustainable over 2015/16."
Hang on, say wha...?

Reading and then trying in vain to digest that I have absolutely no idea whatsoever what this is all supposed to mean for the market? It's a Sydney booom...but it's easing. Vendors are supremely confident...but there are also now loads of buyers coming into the market. A plateau is some way off...however, it's coming by Christmas, and when it does come growth will actually continue (not sure how that works), but in a sustainable manner, of course.

The reason for all this double-speak, obviously enough, is that without market activity an estate agent has no business. Agents need people to buy and sell so the rhetoric forever remains purposely and decidedly ambiguous.

Be clear - for investors buying and selling property doesn't make a whole lot of sense. Frequently trading incurs very hefty transaction costs and taxes, and the more you trade the further behind you are likely to get. 

And, indeed, that fact remains the same regardless of the asset class.

Benefits of the index

Investors in the Warren Buffett/Ben Graham mould would doubtless argue that the only sensible approach for an average investor with a long term outlook of 20-30 years would be simply to keep buying stocks on a monthly or quarterly basis come rain or shine, and to buy whenever else you can afford to do so too.

If the market is lower than last quarter you will buy more stocks, and if it is higher than the last quarter you will buy fewer. You will keep receiving growing streams of tax-favoured dividend income. Sell only if you need cash urgently. Simple, low cost and effective.

The comforting thing about a low cost index fund is that when the inevitable weekly debates take place about which direction the market is heading in next (or which sector will outperform the rest), the dollar cost averaging investor neither needs to know nor care about the answer. 

You also don't have to delude yourself that you do know the answers, when you quite obviously don't!

For example, I've long held the belief that capital intensive resources companies would be the long term under-performers in Australia, paying significantly weaker dividends than the financials. An amazing decade for resources stocks seemed to be proving me wrong as commodity prices bubbled ever higher, although now the miners are indeed finally coming back down to earth.

In fact over 20 years the two sectors have matched each other, although the financials tend to pay stronger dividends. Regardless, the owner of an index fund will own all significant sectors of the market and need not know or even care about the answer, which is a rather pleasant position to be in!

Australian Share Price Indices graph

Of course, you won't be able to buy "the next big thing" for a few cents per share by investing in index funds - that can't happen - but you will own the next big thing when it gets big enough and successful for you to own it.

You will own every stock that is actually worth owning, while dying companies will eventually drop out of the index and you won't hold them any more. Perhaps the biggest disadvantage of the low cost index fund is simply that it is boring and you cannot brag about beating the market with your brilliance in stock picking at the barbecue or at the pub! 

Admittedly, for some people picking stocks is a fun part of the equation, if fun is what you are seeking from investment (it probably should not be - good investment should instead allow you to have fun in other ways). Indeed it is the boring nature of the index fund which is also its greatest advantage.

If you can adopt an investment strategy which gives you peace of mind, then you are far more likely to be successful than if you are constantly looking over your shoulder at what the market is up to, or stressing about what everyone else is doing.

With a long term outlook a market crash is not something to be feared, rather it is simply a grand opportunity to buy more of a good thing at a cheaper price, although in truth even the hardiest of investors to some extent feels the impact of a significant market correction ("you'd have to be dead not to feel it" as one well known share market expert once said to me).

Business life cycle

As implied above, for me there is no better investment than one which you can hold onto forever. 

While it may seem that there are certain companies such as the major banks or mining companies which are here to stay forever, a look back at the stock market's largest companies by market capitalisation from only a few decades ago shows a surprisingly low survival rate - companies frequently either die, become insolvent or are reborn in a new guise.


Some companies have stood the test of time such as BHP Billiton (BHP) which has been pumping out dividends for over a century, but even that comes at a cost - re-investment in exploring, drilling, constructing and exploiting new projects is a type of business re-birth by another name.

The index fund neatly side-steps the business life cycle problem for the long term investor by retaining a share holding in all thriving businesses worth owning, while those in decline eventually drop off your radar.

Property

For the same reasons, I like to invest in property that is close to the centre of large and growing capital cities like London and Sydney. Cities can have life cycles too, but I take it is a good bet that these cities will have lifespans which survive and thrive for much longer than my own lifespan.

Sydney has a population which is forecast to explode to nearly 8 million by 2050, by which time I should be pensioned off (or hopefully playing bowls or something) while London's population is set to hit 9 million as soon as 2020. That's a heck of a lot of underlying demand for prime location property.

My basic philosophy has always been to own the property types and in locations where people will always want to live regardless of what is happening to the wider market, such as on Sydney harbourside or within 10-12 minutes easy commute by train to the city.

I recall in 2008 pundits predicting that the Sydney market would hit an inevitable peak and decline sharply, but I never once thought of selling. After all, even today I am still three full decades away from the traditional retirement age so why would I want generate hundreds of thousands of dollars in capital gains taxes and agent fees?

I noticed with interest and half a raised eyebrow this week that the apartment next door to mine on Darling Harbour sold for more than $1.5 million (and not to a Chinese buyer - I checked that out especially!).

When they were built in 1994 these 2 bed/2 bath apartments were initially sold for just under $300,000. Is $1.5 million a crazy price? Indeed! Unsustainable? Probably! That is, after all, an 8.5 percent compounding capital growth for 20 straight years.

But I still won't be selling for the same reasons. In 30 years' time people will still probably want to live on Sydney harbourside, assuming the polar ice caps don't melt and put Sydney under water. I might even go back and live at Darling Harbour again myself, all being well.

And if 2008 taught us anything that was what a complete waste of time all those market predictions were - prices are up by around 50 percent since then. People often think they can forecast the market with great accuracy, but generally, they can't. In property, just as in shares, timing the market is much harder to do than folks tend to think.

From time to time it seems to make sense for people to invest in property in remote locations and small towns or cities. Entry prices are cheap and yields can be a bit higher. However I remain sceptical as to whether you would be likely to make such strong returns in regional centres over the long term, especially now that household debt levels have hit a plateau. 

Just like businesses, small towns and cities can have life cycles too, as I considered just the other day, and the long term strategy may not work so well with low quality assets in secondary locations.

Precious metals

To some extent these principles apply across all asset classes.

Even though I worked for a mining company which produced the stuff, I don't know much about the fundamentals and drivers of the gold price outside of production costs per ounce, although I'm always willing to learn more.

But even with prices are at now around their four year lows, but I'd be willing to take a bet that long term buy-and-hold investors will still do pretty well for themselves regardless of how the market performs over the short term since they understand the fundamentals thoroughly enough to recognise the buying opportunities.


"Don't know, don't care..."

Remember, investing doesn't have to be a competition to beat everyone else. That is a game you can never win anyway. Investment is more about having the self-control not to be swayed by what everyone else is up to, and concentrating on your own game - getting the processes right and allowing the long term outcomes to follow in time.

As long as you have a solid strategy to reach your own goals you can adopt a "don't know, don't care" attitude to the daily noise, safe in the knowledge that your long term strategy is a sound one.