Last week, in the editor's note, I pondered over what I described as the wishful thinking of investors betting on a revisit to GFC-like, low interest rate/inflation era. I will follow up next week on what that means for investors if this does not happen. There’s a little hiccup this week, a fallout from the newest podcast. Shani and I stumbled into a maelstrom when we recorded a housing-themed episode. We love hearing what investors around Australia think even if they think we are wrong. We've been wrong before. We will be wrong again. But what I find fascinating and possibly instructive for all investors is the emotional quality of some of the reactions.
As investors we are bombarded with tales of how others have made it. Some of these stories are exaggerated, but most are well-meaning advice. The issue is that what worked once doesn’t necessarily work again. A point we conveyed as best we could in the podcast was that our judgment that housing was an investment happened at an extremely narrow window in time. It was not 10 years ago. It was not 30 years ago. It was on August 28th 2022. All investments are speculative looking forward. Investors can’t get over the past. And housing used to be a great investment.
A little recognized facet of successful long-term investing is not making the big mistake. We keep hearing about how you just need to find a couple of 10-baggers and investing will take care of itself. Sadly, the more typical occurrence is that people “find” these gems after they’ve already run and then pile in near the end. Australian housing prices in Sydney have surged 146% over the last decade ending in October 2021. Throw in the leverage of a mortgage, and you’re not quite at a 10-bagger, but you’re close. Sydney also has the second most expensive housing market in the world. Melbourne, Adelaide, Brisbane and Perth are also in the 20 most expensive markets. Housing is an asset class with a few characteristics that tend to make it more likely than other investments to be a disastrous financial decision. For most of us, it is the largest investment we make. There is leverage involved. There are feelings involved where without trying you find yourself being attached to a future within the four walls. “Auctions bring out the animal spirits in you, and you get to fight with other bidders,” you know, for fun.
I got two mates and all they talk about is winning the lotto, right? They are idealists and it is inspiring to listen to them dream about any number of incredible futures. It’s a counterpoint to my cynicism. And a lottery ticket is a way to one of those dreams in the future: a piece of paper you can hold, and think forward, maybe in terms of a dream future full of everything you believe you would ever want or need. A house, or an equity ownership, can feel the same way. It’s like holding a lottery ticket, dreaming how much the housing prices are going to appreciate the same as they did in the last 10 years. So does an investment in the share market even when the S&P 500 including dividends grew at an average annualised rate of 17.6 percent from the GFC low in March 2009 to the end of 2021. 8:06PM People will get emotional when you question how likely these returns are to recur in the future. The matter you are challenging is not the validity of a specific investment. You wonder if their dream for the future will come to pass.
Ours was not a prediction pod and we hope Hastad proved us wrong. It tried to take a rational measure of a financial decision that is emotional. We should also be making some rational calculations here about what is priced into a share price at a certain point in time in the highly uncertain world of pussy cat shares. We do this to ensure you don’t have to jump too high to meet future expectations. Those investing in residential real estate should not be any different.
In the end, the moral for anyone who wants to respond emotionally to questions about the wisdom of an investment is don’t get involved until you explore where that reaction is really coming from. Do you feel the investment does not look positive? Are you secretly aware that you are one vile son of a bitch, even though you portray a man of confidence on the surface? Because your logic is based on ‘this worked in 2010’?
I shall end with a hack for trying to transcend my everyday article to literary genius. The issue, however, is who is best at promoting independent thinking? Robert Frost wrote, “I took the one less travelled by, And that has made all the difference.” Dostoevsky asked us to think about it when he said, “To go wrong in one’s own way is better than to go right in someone else’s”. But perhaps the most pertinent quote is from A.A. Milne: “The third-rate mind is only happy when it is thinking with the majority. A poor mind is happy when it is thinking with the majority. A first-order mind can only be happy while it is thinking.
