I bought 3 Kings Cross units at auction this evening. I’ll post the details tomorrow. I always get scared when bidding. “What if I this is all a very big mistake?” goes my self talk.
I’ve bid at more than few auctions, been under-bidder often but only won an Auction four times before this. Maybe it gets better with experience, but real estate is not the sort of investment people normally do hundreds of transactions in.
Now I’ve bid successfully at unclaimed jewelry auctions. The emotional roller coaster was the same. That’s good practice if I’m moving into an auction buying phase.
These auctions are advertised in Saturday’s SMH, pawn-brokers use them to clear unredeemed pledges. Most of the regulars are jewelers and traders so it can be fun. I have not seen screaming bargains but I did buy an electric guitar and and a swiss watch at good prices.
It’s been a year since I’ve been to these clearences. Time to find a SMH.
“The past 12 months has seen huge growth in Sydney’s western suburbs, with the top five local government areas for growth Concord (nearly 26 percent), Camden (23 percent), Fairfield (nearly 21 percent), Blacktown (20 percent) and Burwood (nearly 20 percent).” A Current Affair story.
So is location^3 a lie? Well, mostly yes. Every suburb has good and bad areas. Returns are influenced by relative location factors. Down beside housing commission estates and train lines, up near the beach and on quiet roads.
The median price in an area is the greatest factor in price movement. Sydney’s west has played catchup this year and “close to schools, buses and transport” has nothing to do with it. Lower priced houses appreciate more as the median price moves.
That doesn’t mean buy median and below. Steve Navra advocates buying 30% above median house price with apparent success. Good profits can be made in all market segments if you invest wisely. Just don’t fall for the location, location, location line.
Negative gearing has a lot to answer for. I was sent an article with this quote buried deep in it.
“If you desire to identify potentially overpriced markets, compare
the monthly cost of owning a given home to the monthly cost of
renting that same home. After factoring in taxes, if owning costs
significantly more than renting, than you’ve got more potential
downside risk,” Tyson added.
The original US Realty Times article is here.
In Australian capital cities renting is normally cheaper than owning. There is a premium paid for potential capital gains. But reread the quote… “after factoring in taxes” and “significantly more”. So add the tax refund at 30% to 48.5% on the loss and ask if the cost gap between renting and owning has grown?
I’d guess it has, but I don’t know where to get the data. It’s another point to ponder when assessing a market.
Long term investors deal with this uncertainty through buying quality for the long term. Short term market fluctuations do not concern them. “Time in the market” not “timing the market” is their slogan.
In Housing Boom I touched on a price-to-income measure for the state of the housing boom. For those who missed it, I simply questioned the disconnect between property prices and household wages.
There is a flaw in my logic. Median priced homes are not bought by median income earners in every suburb. In Sydney’s eastern suburbs especially, many people say they could not afford to buy the home they are in today if they had to pay today’s prices.
This may mean the prices are unsustainable but it more likely means owners will stay in their current homes for at least another 7 years (the average first mortgage life). At 10% compound return, an investment doubles every 7.2 years. Coincidence? I don’t think so. Historically that is what Sydney has done.
Median incomes include all income earners. School-leavers and low income earners skew the figures lower. Home and investment property buyers are not in that demographic.
I don’t know what the immediate future of the Sydney (and other Oz capitals) property market is.
Will it continue to boom? Historically low interest rates, poor stock market performance and the need to increase suburban densities suggest business as usual. Superannuation and commercial/industrial property funds are adding asset allocation pressure as well.
The counter argument points to rising vacancies (with falling rents), and the obvious disconnect between household wages (or rents achieved) and property prices.
Every past property boom has corrected. Why would this one be any different? I just don’t know when and by how much the correction will occur. Therefore I don’t know anything, right?
My guess is provided credit remains “easy” there should be a soft landing. In the meantime the market could surge ahead enough to counter the correction. Waiting around for the market to bottom could be an expensive exercise in missed opportunities.
How do I use this? Have a plan of action in case things go worse than expected. What will I do with my investments, my residence an my business if the market corrects? If the worst occurs then I’ve got a plan. If things keep booming then I’ve lost nothing.
I suffer from analysis paralysis — a delusion that if I get enough data and study it enough, I can remove risk from an investment.
To deal with this shortcoming I talk to myself. More than normal ;). I remind myself that Mark Twain has an answer for every occasion. In this instance he said
Good decisions come from experience
Experience comes from making bad decisions
— Mark Twain
What a neat concept. Click comments and let me know what you think of that.
I recently read a piece of marketing fluff posing as research from a financial advisor. It recommending holding firm in the face of losses in the stock-market to benefit from the bounce back.
A lot can be learned from how an investor reacts to losses and continuing uncertainty.
One option is to hold tight. All markets have historically turned around so eventually the investment come good.
The other option is to sell and crystallise a loss. Wipe the slate clean and begin again. Remember you may be eligible for a tax deduction on the loss (capital or income).
Thirdly it may be possible to sell part of the investment and holding part. Let’s ignore this for now. Just note you may want to do that.
What are the risks of following either strategy?
The first exposes investors to ruin if the investment collapses and below-average long-term returns if it plays catch up.
The second strategy leads to over-trading. Nobody can time the market perfectly over a long period of time. Transaction costs of entering and exiting investments can be exorbitant.
I am constantly evaluating investment opportunities. My money must work so hard it sweats. Therefore I prefer to cut losers free and allocate the funds elsewhere. This only works if I identify a better investment. If I don’t have an alternative need I ride out the storm.
I do head-miles when I make a bad investment decision (for that matter I do mental gymnastics when a deal goes well). I take pride when I admit my error and get on with life; reminding myself that investing is part of life.
As I make more investment decisions, they become easier. It also gets easier to deal with the inevitable mistakes.
Ask yourself how do you deal with your mistakes. Don’t try to act in a way inconsistent with your values and makeup. Look for what makes you feel physically uncomfortable. Compare crystallising a 10% capital loss followed by a 20% gain to the thought of holding on for a year or two until the poor performer turns around and goes up 8%. This is the same result via different paths.
I was writing and publishing paper-based ‘zines and newsletters back when the Apple Macintosh was first released. They were a beautiful piece of kit and introduced the phrase WYSISYG to the world (What You See Is What You Get). Strangely, new writers asked published authors which computer to buy to write their novel.
Did you know that Jack Kerouac typed On The Road on a big roll of paper?
I progressed to publishing children’s books and adult non-fiction. Again the questions were about the tools not the technique nor discipline. I moved on to writing, editing and reading movie scripts. This time I was asked how to bind a script, what font to print in, whether to use US Letter or A4 paper.
These days I build businesses and invest in creative real estate like wraps. I get more questions about what software I use to track buyer’s payments than I get on negotiating strategies.
I think this is because we need to feel in control of our environment. Investing involves conquering fear and taking action. I always feel butterflies in my stomach until I take that step. In the early days, my response was to look for something to explain that discomfort. I used to hunt desperately for anything to logically hang that feeling on. Until I recognise what happens in my guts, I waste time and energy fixing problems that don’t exist. Am I installing an accounting system because I have legitimately identified a shortcoming? Or is it something from the to-do list that feels like progress?
However fear is not logical. Logic can sometimes overcome fear, but it really takes courage to recognise the situation and take action in the face of fear. If this step is missed, we don’t learn from our previous deals. The internal battle must be fought for each new deal.
Am I counselling a headlong rush without considering support systems? No, of course not. Take the time to set up, NASA is a good example – the countdown doesn’t end at zero.
The mission begins with Lift-off…; T+1…; T+2…; T+3…
Your preparation steps are for the main show. Focus on what gets you paid.
Surprisingly often, beginners do good first deals in real estate, the financial markets and business.
Why? Answer by clicking comments, but I’ll lead off with a fairly analytical approach.
My theory is successful newbies are cautious and actually begin. What do I mean by this?
Character traits of the cautious:
Have an inbuilt drive to do some sort of research (also known as due diligence);
Discover (or formulate) some simple guidelines;
Understand the investment enough to describe it simply;
Consult with experience;
Take responsibility for their decision.
Beginners who begin:
Overcome analysis paralysis;
Deal with the fear of making mistakes;
Take action until they get results.
Then what happens? Intermediate investors overestimate their abilities once they gain knowledge. Did you know that most people rate their driving ability as “above average”?
Investors tweak their system. Instead of following the simple guidelines that led to success in the first place, they make adjustments. The strategy becomes a patchwork of plans. Few intermediate strategies can be articulated in one sentence.
Experience leads to on-the-fly decisions, because overconfidence creeps in. This allows emotion to take over the rational decision-maker. Greater risks are taken to avoid a loss and exit strategies become poorly defined
Three steps for Intermediate Investors to avoid the trap.
Express your strategy in one sentence. e.g. “buy big cap stocks with a P/E under 12 and a Price/Asset ratio over 1” or “3 bedroom houses within 10kms of the CBD with a yield above 6.5%”.
Build on the basics. Musicians practice scales and exercises as the building blocks of performance. Your wealth creation strategy is the same.
Use a written plan to outline the deal. This forces you to think ahead, remove emotion from the process and develop an exit strategy.
I used this metaphor back when I ran courses. So here’s a freebie.
Remember when you learned to drive?
As a child you were Unconsciously Incompetent. You didn’t know how to drive and didn’t realise it.
Consciously Incompetent – your first time behind the wheel. You didn’t know how to drive and hooboy do you know it!
Consciously Competent – Somewhere between L’s and P’s. You can drive, but nobody is allowed to talk to you while you do it. You can drive but it takes all your attention to keep doing it.
Unconsciously competent. Drive, talk, eat, abuse other drivers and check the street directory AND street signs. Did you really pay attention to every gear change and turn on your last drive. Yes it is mastery, but it happens without your attention.
To bring this back to your WealthEsteem…
Learning a skill takes attention and experience. Eventually experience takes over and requires little attention.
Investing takes courage to begin or return to after a setback. Experience teaches you to say “What else can I do?”
Hope you apply it.