Will you be caught naked?

[MichaelW]

Guys,

An interesting article with a fair bit of insight from Warren Buffet in today's SMH:

Its been too good for too long

IT'S only when the tide goes out that you can see who's been swimming naked, remarked the billionaire investor Warren Buffett. The world has been swimming in super-cheap liquidity for the past five years.

So my question to you all is, when the tide goes out (as it seems it is doing currently across the board) will you be caught naked?

i.e. Are you over-exposed on speculative positions due to super cheap capital? And have you factored a sufficient buffer in your borrowing holding costs on your illiquid assets such as property?

We might be in for some serious corrections to over-priced asset categories in the coming years as the cost of capital returns to more normal "neutral" levels globally and we see an end to the Japanese yen carry trade.

Cheers,
Michael.

 

[skater]

Will you be caught naked?

Gee I hope not! Not a pretty sight!

 

[RichardC]

WB posed that question a few years ago and I have asked it here in the past while waging my campaign against high debt and negative gearing.

He has also described the enormous levils of deivatives traded in the US as "toxic" and I agree with that too.

Nice to see some little green shoots on my watch-lists. XJO up a mere 8 pts but what a relief.

 

[MJK]

We might be in for some serious corrections to over-priced asset categories in the coming years as the cost of capital returns to more normal "neutral" levels globally and we see an end to the Japanese yen carry trade.

Cheers,
Michael.

Hey Michael,

I thought we were riding this bull for all its worth? Do you still have a bullish outlook for the next year?

MJK

 

[Bill.L]

Hi all,

Anyone care to say what 'normal' levels are for the cost of capital???

Anyone care to mention for how long the cost of capital has been at 'normal' levels in the past??

bye

 

[alexlee]

Global interest rates are increasing. The only way the increases will stop (if even then, given climbing oil prices that may be independent to economic factors) is if there is a recession.

Time to batten down the hatches, get some nice cash ready and be prepared for the inevitable bargains that will come up soon.

I have a worst case scenario of an immediate 3% increase in interest rates, 6 months vacancy of all properties, 30% fall in shares. Also keep an eye on job markets in various countries.
Alex

 

[RichardC]

Thommo has been warning along these lines for some time and made himself unpopular while doing so.

When TSHTF he who loses least wins. The way to lose least is to be invested in critical resources (water, grains, copper, uranium and other energy, and many more) and "store of wealth" resources ie Gold Silver. I must have said a dozen times now to buy some "insurance" in the form of readily recognised bullion coins. The wonderful thing about this insurance is that it is eternal. It does not need to be renewed each year and if you never need to cash them in they are wonderful pressies for the grand kids.

 

[willair]

So my question to you all is, when the tide goes out (as it seems it is doing currently across the board) will you be caught naked?

Michael,
imho..
you can look at this week several ways,and somepeople have been
eagerly awaiting a sharemarket downturn you will always have people that line themselves up for this stage of the cycle,they sell everything
turn 40% of the portfolio into cash then run to defensive stocks the last few days of trading have shown that style, and if history is any guide
i would not worry i% if you purchase long term then in 5 years time
the returns will always be compatible with real estate so why worry
the only key is you must have total control, if you do not have total control then change everything..
good luck
willairx.........


the

 

[MichaelW]

Hey Michael,

I thought we were riding this bull for all its worth? Do you still have a bullish outlook for the next year?

MJK

MJK,

Yes, I still consider the Aus Equities market to be at or below fair value so am bullish on that asset class. But that's just my opinion of course. I tend to use yields on investments as a good yardstick of value and note that the yields on Aus equities are still favourable. They're still much better than Aus residential property for example.

Willair, I posted this before the minor correction in Aus Equities this week and am talking in more broader terms that that one asset category. I see the minor correction as more of a retreat to gather strength than a full blown bubble bursting. The ASX is still trading within its medium to long term channel range, even following this pull back.

I was talking in more generalised terms as a heads up for those that don't consider the cost of capital when valuing assets or calculating their holding costs and buffers. My personal opinion has the Aus property market as currently over-priced pretty much across the board. I've posted this before with links to reports showing how we stack up against the rest of the world in this asset class.

My personal investment mix at the moment is still cash heavy. I've got $600K odd in the Aus Equities market but only at 40% leverage. So that's over half of it as my own cash and the rest leveraged. This is well below what I could leverage to and leaves me a fat buffer before a margin call is possible. Even after this recent pull back I'm well up on when I placed this money in that market. I'm still up some 10% odd. I've also got about $200K in cash in offset accounts and LOCs, but this is intentionally not in any market just yet. Its mostly tagged for some direct residential property but I think that has some way to fall before it represents good buying just yet.

My current plan is still to pay down my bad debt on my PPOR as soon as possible whilst continuing to re-assess the markets for potential value. This should see me bad debt free on my $800K PPOR within 12 months. My income managed fund is kicking a lot of money in to that tin and has helped pay it down by $35K in the last six months via distributed earnings.

I've always been quite conservative and I reckon debt reduction in turbulent times is not a bad approach. My first rule of wealth accumulation is foremost wealth protection.

As always just my personal ramblings. Hope they help others in some small way to crystalise their own thinking, but its really just me sharing my personal approach to investing more than recommending any specific course of action.

Cheers,
Michael.

 

[pete_w]

My personal investment mix at the moment is still cash heavy. I've got $600K odd in the Aus Equities market but only at 40% leverage.

time to update your sig

i agree with the sane levels of leverage, things are pretty conservative for me. as long as i dont go through an extended period of unemployment im not too concerned. when push comes to shove an extended period of unemployment would be pretty rough on most people.