We will defy history if the bubble doesn't burst
- Thread starter Property Meister
- Start date
Do you know what data that was ? And if the underlying reasons are temporary (eg stimulus) or permanent (eg dual incomes) ?
Do a search on SS for 'bubble' & sort in ascending order - you'll find threads from 2001, worrying about the bubble back then..... I guess that must be one of those bubbles that got culled by survivor bias
.Do a search on SS for 'bubble' & sort in ascending order - you'll find threads from 2001, worrying about the bubble back then..... I guess that must be one of those bubbles that got culled by survivor bias
took 8 years to burst but the D&Gers predictions came true. mind you even at the end of last year, values were still well above 2001 levels!!
So... you haven't bothered to read his research, yet you're confident enough to declare his methodology unsound?!?
Grantham defines a bubble as any asset class that jumps two standard deviations above the historical trend at the time. This means that anything you've described above as a "phantom bubble" Grantham would have defined as a bubble. It is not based on survivorship, since the bubble does not have to burst to be classifed a bubble by him.
So the question is, how many "phantom bubbles" (by your definition) have existed in this period? And the answer is... at most two - the Aust property market and the UK property market - as both meet his definition of a bubble and neither have dropped below the mean reversion value. Grantham himself has said, "...you could imagine a paradigm shift in an asset class price, even if we have been unable to document one yet in history." They could be the first. They may not too...
FWIW, I remain agnostic about his approach and conclusions, but I respect the success he's had and how much money he's made from correctly predicting previous bubble collapses. I also took the time to read his work, rather than blindly criticising something I didn't bother to understand...
Do you know what data that was ? And if the underlying reasons are temporary (eg stimulus) or permanent (eg dual incomes) ?
Do a search on SS for 'bubble' & sort in ascending order - you'll find threads from 2001, worrying about the bubble back then..... I guess that must be one of those bubbles that got culled by survivor bias
Not according to Grantham. Again, if you'd bothered to read his work, you'd have realised that the Australian property market did not reach his definition of a bubble until well after 2001. So no survivorship bias there at all...
As I said in my above post, I'm not an apologist for him and don't necessarily agree with all his views. But pulling examples that don't meet his criteria and then using them to "disprove" his theories is simply not sound...
Do you have a link to his research ?
White papers are available via subscription at www.gmo.com.
I think you can subscribe for free as an individual investor, but don't quote me on that...
2 standard deviations above? that's conservative by any definition.
The UK in particular is now stratospherically above that cutoff.
FWIW, for an old codger like me it's a bit of an academic interest. Personally I suspect there's a bubble and it'll probably burst. When? I don't know. But equally I don't care. I've paid down my debt and am living extremely comfortably off rents and dividends.
Thats right my exact words were kind of guarded...
I think thats pretty reasonable on reflection, and I'm comfortable with it.
Also can I show you why 2 standard deviations is a lame measure of a bubble. By defenition 2StdDevs is the 5% (rounded) extremes of the dataset. So therefore every dataset is Booming or Busting 5% of the time. Equally on average of 5% of all markets would be booming at a time. Surely then Mr Grantham could have found more than 32 markets to study, he could've found thousands.
A moving standard deviation (Bollinger Band), has a moving average as its trend line, and that trend changes with every new datapoint, moving up if the datapoint moves up. Almost by definition the price must cross the trend line again because the average will move up with the price. But that doesn't mean the price will drop much.
The S&P500 is widely held to portray its asset class.
S&P 500 Chart (You need to click on MAX time scale button)
April 1 1954 it was above 2 StdDevs, it did touch that moving trend line again in 1957, but its lowest point was still 30% above April 1 1954.
There are many examples on this chart alone, what about May 1996 S&P500 was above 2 StdDevs, didn't hit the trend line till Nov 2000 If you'd have gotten out as it hit the top band you wouldv'e missed a 100% gain.
If shorting the market every time it hit the upper BB was all it to to predict the market I'd have been a squillionaire 15 years ago.
I'm sure Mr Grantham has some very useful things to say, but he isn't saying them in that article.
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Sounds like a story worth hearing...
HE,
Here's the headline version...
Started buying property in the early 90s in Melbourne and picked up three very poorly researched IPs in inner city hi rises. At the time I was too highly leveraged, too reliant on rental income and tax breaks, too naive as to how much body corp rates and other incidentals could impact on cashflows and when I found myself without tenants for a (in hindsight) short period of time, I went close to wiping myself out. (I've talked about this in another thread a while back).
Started a business in 94 which has been the key to my current financial position - haven't used shares and property as a mechanism for creating wealth, rather as one to store wealth. I nominally retired about five years ago but that doesn't stop me coming in the office more days than not as it's still a passion.
Read a lot after my early foray and decided I needed to buy for future cashflow, so broadly a "value" investor if I had to be themed. Put together a list of "rules" for asset purchasing in different asset classes. My rules for resi property were:
Must be free standing house on own title
Must be within 10km of Bris/Syd/Melb or 5km of Adel/Per
Must be in a median or higher suburb on a socioeconomic scale
Must be cashflow positive at current interest rates
Must be cashflow positive at 9% (my view on long term interest rates)
I was recently talking about my "rules" and had some smarta$$ Gen Y tell me that "well, if that was your criteria you've obviously never BOUGHT any property!" The reality is, in 94/95 you could throw a dart at a map and anything you hit would pretty much fulfil the criteria. I picked up 9 properties through the mid to late 90s without much effort. Being cf+ from day one and given that I felt leverage was overrated, I used the rental income to pay down the debts.
By 2000, it was becoming increasingly difficult to find anything that fit my criteria, but I did manage to pick up one further IP in 2002 in Brisbane. I haven't seen anything that's even remotely close since 2004.
I continued to patiently pay down my debt using the cashflows from the IPs to fund the repayment as fast as I could. Along the way, I've had several tax advisors scream at me that I'm not making the most of my tax advantages and maybe I haven't, but I'm now debt free. If I was still heavily leveraged I'd now be having to work out how to manage my debt into retirement and that's a stress I don't want.
A little bit off topic but I wonder whether property will come back to what you have described where you could easily find cf+ property at a 9% interest rate. It seems at the moment, it's hard to find anything that would be suitable (except Nathan of course, I'm sure his got a new 15% yeild property coming
).May I ask what LVR you had when you started buying more IPs, before you started paying everything down?
This is the same path I'm heading down now. I tend to buy higher yielding properties (generall units), and have enjoyed some good capital growth by picking location carefully, but am planning over the next 15-20 years to pay down all the debt. My accountant also wants me to carry debt 'to reduce tax', but I can't help but think that reducing tax is only part of the story, and what I'm ultimately shooting for is a comfortable retirement, with either no or reducing debt.
Property was cheap by 1997, there's no doubt about that.
Everyone had done it tough in the 70's and 80's with high interest rates and high inflation. My family owed half a million at one point when interest rates were 22% for farmers. We nearly went under and it was just luck that saved us. Heaps of business's and homeowners did go under. Everyone had pulled their heads in. As interest rates dropped and dropped people took a long time to realise what was going on. We bought a farm in 1997 for $2000 per hectare that's now worth $6000 and it had a house on it too that we valued at zero.
I'd imagine it could happen again. It might happen again 10 years after the next period of high interest rates and high inflation or big recession. After everyone has been a bit disillusioned.
Sort of the exact opposite of now. Where on a place like this if you have a 6 million dollar debt and 1 million assets, everyone thinks your some sort of hero. Back in 1997 you'd have been thought of as a nutcase.
See ya's.
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that's my point - essentially he's said that anything growing at faster than a cash rate return is a bubble.
very, very conservative.
Thanks for sharing that Gremlin. There are many ways to make money in this game and I'm glad you found one that worked for you!
A little bit off topic but I wonder whether property will come back to what you have described where you could easily find cf+ property at a 9% interest rate. It seems at the moment, it's hard to find anything that would be suitable (except Nathan of course, I'm sure his got a new 15% yeild property coming
May I ask what LVR you had when you started buying more IPs, before you started paying everything down?
Sorry for hijacking the thread with stories of little ol' me...
As TC said, property was cheap in those days. I don't know whether I'll see property that cheap again in my lifetime. But if I were a betting man, I'd bet a dollar that my five year old grandson will see it that cheap in his lifetime.
Other than my first foray into disaster, I borrowed to 80% on each property. Although my calcs were done on a 100% borrow (ie it had to be cf+ assuming I'd borrowed 100%) to ensure I was getting sufficient ROI. The debt wasn't insigificant, but having 9 or 10 substantially cf+ properties providing cash flow meant that I could accelerate my debt elimination over time.
Now I realize many will disagree but I think it has to burst b/c these prices are unsustainable it's as simple as that . It will probably burst louder and longer than all the others b/c it's been poked and prodded at to go on even longer and to even more surreal levels than it already was.
As far as CP goes though , what at these prices . But CP can be twisted into C-Creative and then back into CP which is the way I'm handling it .
From this last few yrs , we could do anything. Hell I wouldn't be surprised waking up to million dollar fibro's tomorrow but to be sure, creativity is the only way to move ahead protected from here I reckon.
Cheers
As far as CP goes though , what at these prices . But CP can be twisted into C-Creative and then back into CP which is the way I'm handling it .
From this last few yrs , we could do anything. Hell I wouldn't be surprised waking up to million dollar fibro's tomorrow but to be sure, creativity is the only way to move ahead protected from here I reckon.
Cheers
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When people say "the ASX is going to crash" - the usually reply is "so what are you shorting?"
