The Rising Tide

It’s a stock market maxim that 70% of a stocks price movement is due to the market as a whole, 20% due to its sector (eg Banks, Mining) & only 10% attributable to the individual company itself.
Anyone buying the ASX200 index in Feb 2003 would have made over 80% by now. Conversely buying the ASX200 in early 2000 would give < 0% return up until 2003.
I think the same can be applied to IP. In 2000 anyone could double their money by buying virtually any IP & waiting 3 years. But anyone buying the best possible IP in 2003 is unlikely to have doubled their money by 2006.

The tide is still rising for shares, but has been flat for most IP for a while.

Several conclusions could be drawn from this -

• It doesn’t matter what you buy, provided it’s the right asset class
• Much of the effort put into buying specific assets gives little additional gain. Provided it’s the correct asset class at the correct time, it’ll give good returns. If IP is similar to shares, then 20% of the gain is buying in the right suburb/city & 10% picking the right house, but 70% is simply being IN the market.
• The big picture (that moves markets) is more important than local/specific issues.

Thoughts ?

Excellent observations Keith.

As they say in technical analysis, "the trend is your friend".

Currently, the trend is pushing shares. That's where I put my funds in.

Let's ride this one until property starts moving...

Cheers,

keithj said:

It’s a stock market maxim that 70% of a stocks price movement is due to the market as a whole, 20% due to its sector (eg Banks, Mining) & only 10% attributable to the individual company itself.

Click to expand...

I've heard this before but I'm not sure if I accept it or not. Up until a certain point, sure, but ultimately the share price rise isn't sustainable if the underlying earnings aren't keeping up.

Thats my investment stratergy to a T. Focus on the asset classes that are rising and let everyone else do the work for you. Trend Following by another name

On a side note, I have noticed an interesting divide on this board regarding investment strategies - some who are trying to pick the property cycle and others who claim its all about buying about the right property. It sounds somewhat similar to the trend-following/techincal analysis and value investing divide. Anyone eles notice this?

keithj said:

The tide is still rising for shares, but has been flat for most IP for a while.

Click to expand...

Keithj,
imho..
It wouldn't be the first time that the rise in dividends, rapid price growth
and rampant speculation starts to comes into play, and everyone thinks
that the ASX is the new fast bucks way to retirement,as was property
3 years ago. My feelings are that as long as Chinese/Indian/demand
ours and other countries resources then this bull run despite the official
inflation numbers and the price of petrol will continue until a aussie
company does a Enron .Disasters are always easy to spot with
hindsight.Identifying them in advance is always the hard part.
good luck
willair........

Glebe said:

I've heard this before but I'm not sure if I accept it or not. Up until a certain point, sure, but ultimately the share price rise isn't sustainable if the underlying earnings aren't keeping up.

Click to expand...

I think external factors like interest rates, state of economy, sentiment, govt policy, desiribility of other asset classes play a significant part in moving markets. PEs for shares & IP vary greatly over time - in recent times the ASX200 PE has varied between <14 and >22, and Syd IP has yielded between 8% and 3%. So I'd argue that Earnings don't necessarily have to track Price especially closely while the tide is rising.

For individual shares I'd agree with you. Over the long term (more than 1 cycle) I'd agree with you.

I'm a 'big picture' sort of person (& fairly lazy). So the part of the point I was trying to make was that if I put a lot of effort into working out which specific suburb/house/share is going to perform better that the rest it's largely wasted since only 30% of it's performance is related to that.
OTOH if I put that effort into working out when to buy something average that will contribute to 70% of it's performance.

Sounds good to me.

keithj said:

It’s a stock market maxim that 70% of a stocks price movement is due to the market as a whole, 20% due to its sector (eg Banks, Mining) & only 10% attributable to the individual company itself.

Click to expand...

It's not one I've heard and I would alter the percentages significantly.

I suggest that sector choice is the most important. I'd like to think so anyway, because I enjoy reading the big picture which gives me the lead on sectors. I become lazy though researching individual companies because good research is hard to find and historic by nature.

It just crossed my mind that if 70% was in the market generally, then funds would almost match the performance of individuals who (correctly) commit to a sector they are passionate about. I am totally committed to resources and can assure you that my returns are ('05 - '06 yr) at least X5 that of the "general" or "growth" funds.

stretchy said:

On a side note, I have noticed an interesting divide on this board regarding investment strategies - some who are trying to pick the property cycle and others who claim its all about buying about the right property. It sounds somewhat similar to the trend-following/techincal analysis and value investing divide. Anyone eles notice this?

Click to expand...

It's one of the major recurring themes on the forum and at the heart of many ( somewhat heated ) debates.

See Change

Kieth,

I agree with the theme of the post. i.e. Ensure you ride the trends by picking the right market to be in at the right time. I have been criticized quite a bit lately for inaction in the real estate market, but I joined these boards after the peak of 2003. Since then I've seen no compelling reason to rush to buy just any old IP. Instead, I've leveraged as heavily as possible into the stock market and intend to ride that bull run for all its worth. It has already significantly increased my net worth and will likely result in my paying off completely my PPOR within the next 12 months.

I do passionately love property as a wealth generating vehicle, and will definately buy up big in that market as soon as it shows signs of life at an holistic level. I know I could work hard to try and make money in a dead market, but I don't know that I've got the energy. I am still persisting with that ambition, but its hard work in a flat market and is taking a toll.

Watch this space though, in 10 years time I'll have a huge property portfolio. I guarantee it! At some point before then the market will turn up again and then I'll be in for all I'm worth.

Sorry if my strategy offends some, but its my strategy and I'm sticking to it.

Cheers,
Michael.

MichaelWhyte said:

Kieth,

I agree with the theme of the post. i.e. Ensure you ride the trends by picking the right market to be in at the right time. I have been criticized quite a bit lately for inaction in the real estate market, but I joined these boards after the peak of 2003. Since then I've seen no compelling reason to rush to buy just any old IP. Instead, I've leveraged as heavily as possible into the stock market and intend to ride that bull run for all its worth. It has already significantly increased my net worth and will likely result in my paying off completely my PPOR within the next 12 months.

I do passionately love property as a wealth generating vehicle, and will definately buy up big in that market as soon as it shows signs of life at an holistic level. I know I could work hard to try and make money in a dead market, but I don't know that I've got the energy. I am still persisting with that ambition, but its hard work in a flat market and is taking a toll.

Watch this space though, in 10 years time I'll have a huge property portfolio. I guarantee it! At some point before then the market will turn up again and then I'll be in for all I'm worth.

Sorry if my strategy offends some, but its my strategy and I'm sticking to it.

Cheers,
Michael.

Click to expand...

Makes perfect sense to me Michael.

I've been in a similiar position (timing wise) and I agree 100%.

Cant see how this would offend some

Trogdor said:

Makes perfect sense to me Michael.

I've been in a similiar position (timing wise) and I agree 100%.

Cant see how this would offend some

Click to expand...

Ditto , Can't see how what you're saying there would offend many , if any .

See Change

Hi Keith,

Great post as usual.

I certainly agree with you that asset class selection is most important. With stocks in particular this is where I feel LICs and Index funds come into their own. One can remove stock specific risk and focus purely on timing if you are confident you can do this. Or if the focus is on building an ever increasing income stream with less concern for short to medium term capital gains then one could also dispense with trying to time the markets and just dollar cost average into the market at regular intervals. This would certainly work very nicely with LICs and index funds. Of course all this stuff has been preached by the financial services commuity for years and over time I have come to actually agree with them . However I stay away from unlisted managed funds with their high MERs and trailing commissions. With many unlisted managed funds there are just too many greedy hands dipping into the unit holders earnings. This is not so obvious in a strong market but it stands out like dog's balls in a poor market.

Anyhow as I get older I have less and less desire to want to research individual assets, constantly monitor the existing portfolio, stare at charts and keep track of endless trades etc etc. Also timing the market is always easier in hindsight. Although one doesn't throw common sense entirely out the window and ignore very obvious market sentiment. My long term goal is to have a "set and forget" portfolio that continues to pay an ever increasing income stream and then get on with enjoying life with minimal hassles.

Cheers - Gordon

stretchy said:

On a side note, I have noticed an interesting divide on this board regarding investment strategies - some who are trying to pick the property cycle and others who claim its all about buying about the right property. It sounds somewhat similar to the trend-following/techincal analysis and value investing divide. Anyone eles notice this?

Click to expand...

To me there are three main divides, as follows:

1. 'Time in the market' vs 'Timing the market'. The former (with Jan Somers a notable champion) is 'buy when you can afford to do so and hold'.

Timing the market includes holding off buying until one's preferred statistics look good (whether it be yield, affordability, mortgage payments vs average incomes, interest rates, etc).

The timing the market model has different variations. At one end is the high risk Henry Kaye type approach of buying multiple off the plan properties with deposit bonds, with success dependent on an immediate market upswing before settlement. Then there is the low-risk John Fitzgerald approach which is to not buy at the peak of the boom when affordability is poor.

2. Buying in a location vs buying the merits of the individual property. A common slogan is Location Location Location. The papers publish league tables of our fastest-growing and most expensive suburbs. People pay money to Residex, etc for forecasts. And I've spent a lot of time travelling around looking at various suburbs.

However if you find a property that (i) is on the market 20% below what you think it's worth, (ii) lends itself to renovation, adding a room or even subdividing, (iii) is suitable for a special high-yielding purpose, (iv) has some other attribute that allows you to generate 'instant equity', or (v) there are special conditions in the contract that make its purchase attractive, then it could make a lot of money even if the location isn't tops. For 'creative investors' seeking these deals, location is second to the benefits of the individual property.

3. Another is 'Never sell' vs 'may sell'. The dominant view here seems to be 'never sell', or if you do any developments, keep at least one unit from each one. The existence of (i) a capital gains tax, (ii) banks willing to lend on the basis of property equity and (iii) high LVRs allowable all lend strength to this, though Steve McKnight champions selling in order to keep debt down.

Rgds, Peter

Then of course there's the divide over where the divides are .....

See Change

MichaelWhyte said:

Kieth,

I do passionately love property as a wealth generating vehicle, and will definately buy up big in that market as soon as it shows signs of life at an holistic level. I know I could work hard to try and make money in a dead market, but I don't know that I've got the energy. I am still persisting with that ambition, but its hard work in a flat market and is taking a toll.

Click to expand...

Hi Michael,

The main reason why property is so enchanting is that you can control your own destiny. No matter what the market, you can always find a seller that HAS to sell. The flatter the market, the more likely you can purchase under the market value. The Henry Kaye model was flawed because he emphasised new properties far too much. This is a highly risky business, and there are as many losers as winners.

Not sure about how you set up, but I have not really been able to do this on the share market. The old saying is that you make your money when you buy, not when you sell, is far more appropriate in property. Buying average established properties in average suburbs will always have a majority market appeal if you have to exit.

While ever I have the power over the offer process, I can make money in property regardless of the market. The flatter the better when buying I say.

Then I also have control over the value-add process. The more value I add at a lower cost, the more capital I make, allowing me to leverage more property.

Why ride someone else's wave when you can make your own? Maybe that is the control freak coming out in me!

keithj said:

Anyone buying the ASX200 index in Feb 2003 would have made over 80% by now.

Click to expand...

Should have made this comment initially.

If you'd combined good timing ( mid 2002 to be precise ) , leverage , and good selection of shares , you'd be up over ten fold.

Fine, take the rising tide, but why not try stock selection on the way and throw in leverage as well.

See Change

salesscience said:

Hi Michael,

The Henry Kaye model was flawed because he emphasised new properties far too much.

Click to expand...

Wrong .

The Henry Kaye model was flawed because he got gready , and got his timing wrong.

People who followed his strategy when he started , apparently did quite well.

It was the mass marketing , and his attempts to use it at the wrong time of the cycle that stuffed up the system , and his making false claims that stuffed him up .

See Change

RichardC said:

It's not one I've heard and I would alter the percentages significantly.[

Click to expand...

I've spent a long time trying to find a reference....and failed. I read it a long time ago, so I guess it must been on a paper medium. It sounded as though it might come from 'A random walk down wall st', so I scanned the first 200 pages..... not there.

see_change said:

If you'd combined good timing ( mid 2002 to be precise ) , leverage , and good selection of shares , you'd be up over ten fold.

Fine, take the rising tide, but why not try stock selection on the way and throw in leverage as well.

Click to expand...

Absolutely. We do that with IP ATM. Stock selection will give us that extra 10%, leverage an extra 50%(?).

Implementing leverage is a 10 minute exercise, selecting a promising bunch of stocks may take some weeks of effort. I know where I'd prefer to spend my effort.