Food For Thought

[Sledgehead]

I buy and sell shares and like everyone else at the moment i make money.

You sound as if you know what the score is. On the other hand, a little less knowledge would probably serve you better, as the maxim goes, all you need to money in the stock market is no experience and a bull market. Perhaps you'd agree with me that that is exactly what has happened to a huge section of the population who currently belive that in property they have discovered a money tree.

[Flat Bear]

dunno what you mean. Vinny seems to be saying all assets are much the same:

I thought he meant if you invested in any asset at the wrong time you would lose financially. Or maybe invest in anything for too long you would lose.

I agree with both of these, although, if houses had taken a steadier course I think there was a case for saying it was a good investment over a life time as you would need somewhere to live and buying and selling is expensive and lengthy, and over say 40 years it hasnt been too bad

[Sledgehead]

I suggest you read a little deeper, maybe into the history of the hay market, corn exchanges or even the Baltic itself.

Sounds like a real class book he's picked up! Such research!

[Flat Bear]

You sound as if you know what the score is. On the other hand, a little less knowledge would probably serve you better, as the maxim goes, all you need to money in the stock market is no experience and a bull market. Perhaps you'd agree with me that that is exactly what has happened to a huge section of the population who currently belive that in property they have discovered a money tree.

agree entirely

Currently all cashed out. Better to be out and unsure than in and unsure.

What was the jib about a little less knowledge?

I was informing certain posters that everyone (well nearly everyone if they spread their risk) is profiting at the moment on the stock market.

There has been a fairly robust market pick up of late (bull market) sorry I thought everyone knew this

Edited May 6, 2006 by Flat Bear

[jonpo]

Im afraid you are wrong sir the Futures market IS a Zero Sum game. Its a large casino for banks probably the largest casino in the world ( Ive been to the MGM Grand (worlds no 2 largest hotel/casino) its pretty big but the CME is bigger).

I would have no trouble beleiving that 80-90% of average Joe Loosers who dabble in the futures market loose money there, they are after all playing against trainned well capitalised Professionals who live and breath the markets they are speculating in and are probably subject to some informational advantages after all for the professionals there is often millions/billions of pounds at stake. lets put it this way on an average day LIFFE will have traded on it probably 1-3 million lots of Euribor each lot has a nominal value of 1 million Euros. so on an average day thats 3 million million euros nominal value or 3 trillion. that is a lot of money. to think that a man could walk in off the street and take this off the banks and hedge funds without a fight is deluded

On the other hand property if you exclude construction activity is also a zero sum game. you say that a large proportion of people make money out of property If they are they are deluding themselves the cost of capital is real. If I have the money to buy a house then if I by a house today then I forego the Interest I am making on the cash. the Capital asset pricing model (with the assumption of "no arbitrage") shows that the future expected value of a non interest bearing asset is the same as the current value discounted at the risk free rate, In a world of positive interest rates this translates to the future price of houses ALWAYS being above the current or spot price of houses. however lets say that houseing appreciates at under the risk free rate then a futures seller of houses will have "won" because at expiry the spot price will be under what he paid for the futures contract.

equities on the other hand Is a different story. the cash equities market simpily reflects the ownership of companies. a companies fortunes can vary greatly but if you had enough money to buy all the ownership of the top 100 companies in the UK say. then I think you would find that you start to get in a shit load of money (profits)

Equities and property are both assets. the more money you have the more assets you can buy. the best way to guarentee to make a lot of money is to have a very large amount of money in the first place.

monetary Inflation is monetary inflation when you borrow money from an bank it devalues the rest of the money out there. the value of a pound is only given by its scarcity value in terms of there being more pounds out there in the economy. in the weimar republic they printed a shit load of money and found out that it only serves to devalue the rest of it.

[malco]

I assume we can agree that property has not been the best "investment" in the last year or so. Demonstrably commodities have done a lot better, and certain stocks. The trendmeister will wisely advise, it's the end points that count.

Isn't the flaw that a house is a place to live and not an investment? In the British culture, there is not appreciation of real wealth creation. The average Brit thinks that you "make wealth" by buying a cheap rag and selling it at a higher price through some con or other. There's no real understanding of the complexity of wealth creation in technical innovation and commercialisation. That is what countries like Germany, Japan, Switzerland, Norway, some of the US, Denmark and various other places miles ahead of us. There does seem to be a connection between effeteness and mere speculation as a source of wealth.

The only reason to acquire property is to use it for worthwhile means, and renting it out is a perfectly useful thing to do within that. I can't see that the wild ride of boom-bust in property in Britain since the late 1960s has genuinely been of benefit to society overall. I think it has been a complete screw-up, and it has serious distorted the motivations and expectation of the general population. They complacently sit back to wait for their house to increase in value due to no merit on their part, simply because credit is easy. It does an economy not good that people can get rich by sitting around doing nothing. It is kind of a perpetuation of the Edwardian aristocrat who was "above work". Most of Britain's economic and social problems may be found in the failure to recover from that childish world of something for nothing.

[El_Pirata]

Hi TTRTR,

I often find your posts very well-reasoned, but this isn't one of those times.

In the long run, the nominal value of your property will go up due to generalised inflation. Do not confuse that with a profit.

As nothing in life smooth, in some periods it will go up faster than generalised inflation, in some it will be slower, perhaps it will even fall in nominal terms for a period. To make a profit, you need to accurately predict when these periods will be and get in and out of the market, otherwise your periods of strong growth will get wiped out by periods of weak or negative growth.

The bears on here believe that the recent period of strong house price growth has come or is coming to an end. It is one thing to disagree with them on timing. I can respect your views on that when they are based on an interpretation of market fundamentals.

It is a whole other thing to say that strong growth will go on forever. That is what people were saying about tech stocks in 2000, for example. They were wrong, as they have been so many other times in history.

[Sledgehead]

What was the jib about a little less knowledge?

I was informing certain posters that everyone (well nearly everyone if they spread their risk) is profiting at the moment on the stock market.

There has been a fairly robust market pick up of late (bull market) sorry I thought everyone knew this

The fact is many pundits have been bearish on stocks for over a year. If we take them at their word that means they hav ebeen either out or short of stocks. So, no, not everybody is making money in stocks. Indeed from 1996 -> 2000 the Nasdaq zoomed up, yet the world's greatest investor, Buffet, made not a penny from this. Putting it simply, he knew too much. Only the inexperienced made massive bucks (and subsequently lost them) because only they failed to appreciate that a stock trading at 1000 times earnings will only pay back th einvestment after a thousand years.

[BoredTrainBuilder]

Investing in any capital asset - be it a house or a factory (via ownership of shares in the company that runs it) is not a zero-sum game. The asset generates or consumes wealth over time according to ever changing circumstances. At any given moment its value is the value that a buyer will put on the future wealth that the asset is thought likely to generate, minus its costs. Simple, really, and applies to any asset. From a poxy student bedsit to BP.

Where did 'zero-sum' come from?

[Flat Bear]

The fact is many pundits have been bearish on stocks for over a year. If we take them at their word that means they hav ebeen either out or short of stocks. So, no, not everybody is making money in stocks. Indeed from 1996 -> 2000 the Nasdaq zoomed up, yet the world's greatest investor, Buffet, made not a penny from this. Putting it simply, he knew too much. Only the inexperienced made massive bucks (and subsequently lost them) because only they failed to appreciate that a stock trading at 1000 times earnings will only pay back th einvestment after a thousand years.

OK

But the truth is all investments are gambles and not until after the event do you really know if it was a good investment. you cant really accumalate without speculating, and that means taking risks, generally the higher the risk the higher the reward. I believe you must go with your own convictions and be prepared to lose, because you can lose with any investment at any time.

The problem is so many people think property is a no lose situation, where if you use your only real tool, knowledge, would tell you all the indicators are saying there is a extremely high chance of a massive loss. It is like a virus where relatively sensable people commit financial suicide (lemming effect) Most of these people have had little experience of business though.....unless someone knows different

Good Posts jonpo and malco

[Sledgehead]

And interestingly the book mentioned that the vitual market seemed to stand alone as the farmers themselves (in the context of the futures that were being discussed) apparently hardly ever hedge themselves.

WHEAT - CHICAGO BOARD OF TRADE Code-001602

Commitments of Traders - Futures Only, May 2, 2006

-------------------------------------------------------------------------------------------------------------------

: Total : Reportable Positions : Nonreportable

:---------------------------------------------------------------------------------------- Positions

: Open : Non-Commercial : Commercial : Total :

: Interest : Long : Short : Spreading: Long : Short : Long : Short : Long : Short

-------------------------------------------------------------------------------------------------------------------

: : (CONTRACTS OF 5,000 BUSHELS) :

: : :

All : 382,991: 66,023 78,661 51,991 241,612 201,925 359,626 332,577: 23,365 50,414

Commitment of Traders Report, latest

What a load of ****** you read TTRTR

let's however suppose you have misquoted the author. Let's assume he / she

is refering not to size of open positions but to total traded volume of futures

contracts. Now consider this, the fact that all asset speculation is gambling and you

statement:

The futures market therefore could be considered just legalised gambling.

As I see it there are two types of gambling when it comes to speculation.

The first assumes you know what the current price is and you are trying

to guess the future price. In futures markets what you refer to as gambling - the

many transactions on buy and sell side - is actually an efficient form of price

discovery. That means you know for certain what thecurrent price is. You only

need guess what the future price is.

The second form of speculative gambling is arguably far more hit and miss as it

involves speculating on future prices when you aren't even sure of current prices.

Because housing is so illiquid as an asset you can pay the wrong current price for

it, ie you have lost money even before you make your guess about where prices will

be in the future.

How do you like that spin TTRTR?

OK

But the truth is all investments are gambles and not until after the event do you really know if it was a good investment. ....The problem is so many people think property is a no lose situation,

Quite.

Edited May 6, 2006 by Sledgehead

[BuyingBear]

The problem is so many people think property is a no lose situation, where if you use your only real tool, knowledge, would tell you all the indicators are saying there is a extremely high chance of a massive loss.

We can include cash in with that too, especially when they've injected an extra 13.1% into the pool YoY.

[godsakes]

I'm going to play Devil's advocate and agree with TTRTR that property for the typical guy on the street is a better option compared with shares provided the property investment is cash flow positive (i.e. profitable after interest payments & maintaince etc).

I'm no DrBubb, and i don't really understand the way the shares market works - so property is an investment which i can at least understand - let's face it most IFAs don't have a clue about shares let alone the average Joe.

Think of it this way if your mate ran a business which generated £20k profit in a year, would you pay him £20k for a 10% share of his company? I wouldn't yet this equates to buying a share with a PE of 10 which is considered cheap by industry standards.

Let me put it another way I currently run a profitable business and if someone came by and offered to buy me out for 4 years profits, i would sell in a flash - hence when typical shares have PEs above 10 i definately think it's foolish to buy them, however there does appear to be plenty of bigger fools out there so people do make money in them but it is gambling as far as I am concerned.

[vinny]

Indeed. Of course this is true, but timing is so frightfully tricky.

It is a matter of logic that asset prices will appreciate with respect to money as long as the money supply is increasing. Which asset class benefits the most is tricky to forecast and any contraction of expansion in money supply could well produce excessive market knee jerking to the downside. It's a tricky old world. It is probably true that in the very long term, asset classes as a whole merely match inflation. However, 'In the long-run we are all dead' as Keynes said. I suppose in this respect I should not have called you clueless and therefore beg your forgiveness. However, I am tired of these silly bears arguing their perma-stance "logic". Th efact is Hong Kong and Japan show that property can be a disasterous investment over ones lifetime, whether it fits their dream world or otherwise.

Cheers

No problem Sledge.

In general response to other reactions I've had:

You don't have to trade every 5 seconds or be that smart to make money.

You have, though, to see the bigger trends and back them.

Example:

Buy gold 1970 sell 1980.

Buy real estate 1980 sell 1990.

Buy stocks 1990 sell 2000.

ALL of these positions made money EVENTUALLY for investors - No positions here pick the bottom or top of the market. (Some would say poor timing - but hey THIS would work).

Pretty much your point about bull markets Sledge!!!!! (Yep and it can be tricky picking them - in hindsight all no brainers).

ARE ALL ASSETS THE SAME? - Pretty much, it's timing that's the key, imagine going the other way and selling/buying the above at the wrong time!!!!!

There is that much debt in the system, supporting all these assets at the moment that I think it is time to take a cash position. I'm pretty bullish on cash at the moment. The only asset that MAY go counter cyclical to a downturn is PERHAPS gold. It's a pretty good hedge against my current position / outlook.

EDIT ( had another thought) : unless you are "good" - ie Dr Bubb level - leverage is a negative sum game - even in some cases if you are "right".

Real estate has tricked many into thinking they are "good" - and not just in this cycle!!!!!

Edited May 6, 2006 by vinny

[vinny]

I'm going to play Devil's advocate and agree with TTRTR that property for the typical guy on the street is a better option compared with shares provided the property investment is cash flow positive (i.e. profitable after interest payments & maintaince etc).

I'm no DrBubb, and i don't really understand the way the shares market works - so property is an investment which i can at least understand - let's face it most IFAs don't have a clue about shares let alone the average Joe.

Think of it this way if your mate ran a business which generated £20k profit in a year, would you pay him £20k for a 10% share of his company? I wouldn't yet this equates to buying a share with a PE of 10 which is considered cheap by industry standards.

Let me put it another way I currently run a profitable business and if someone came by and offered to buy me out for 4 years profits, i would sell in a flash - hence when typical shares have PEs above 10 i definately think it's foolish to buy them, however there does appear to be plenty of bigger fools out there so people do make money in them but it is gambling as far as I am concerned.

Without doing the calc's I'd guess if a bank was to lend a "man in the street" a 125% interest only finance package to be invested in the SM during a bull run - then he would beat the pants off someone buying a home at any time.

But The stockmarket is risky where as real estate is safe - apparently - so no money for the man in the street here then!!!!!!!

[jonpo]

EDIT ( had another thought) : unless you are "good" - ie Dr Bubb level - leverage is a negative sum game - even in some cases if you are "right".

Real estate has tricked many into thinking they are "good" - and not just in this cycle!!!!!

I bet most people were good at shares in the 1990s

leverage leads to gamblers ruin http://en.wikipedia.org/wiki/Gambler%27s_Ruin an effect which can be felt in property as much as the futures markets

[vinny]

I bet most people were good at shares in the 1990s

leverage leads to gamblers ruin http://en.wikipedia.org/wiki/Gambler%27s_Ruin an effect which can be felt in property as much as the futures markets

Yeah. They WERE.

BTW Jonpo, am I right in thinking we are the only two "deflationists" (is that at term)? on HPC?

[jonpo]

I think there were quite a few people who could see where we were coming from but it is true that there are very few outright deflationists out there.

any other deflationists around ?

[ronnie]

Want great returns?? start your own business then ,most small businesses would make far greater % returns than higher risk stock market investments. got capital? start a business.

[vinny]

Want great returns?? start your own business then ,most small businesses would make far greater % returns than higher risk stock market investments. got capital? start a business.

Starting a business at this juncture is probably financial suicide.

I can't get my thinking away from there being a massive turndown in demand for goods and services in the very near future.

Sure, some businesses can go counter trend, but which ones will they be - and to what extent can they prosper?

I think there were quite a few people who could see where we were coming from but it is true that there are very few outright deflationists out there.

any other deflationists around ?

None in all probability.

I think the only way - at least I have seen - we differ is your view on gold.

I think you must consider 3 possibilities with gold, if I may say so?

1/ Perhaps we will see a printing press "overdrive"?

2/ Perhaps gold will be seen as real money rather than an asset?

3/ Perhaps, considering previous cycles - The current gold run - IF it is a true bull - is too short to end here.

I think I remeber Jim Rodgers saying that the shortest commodity bull market was 15 years. If true to form, gold has a lot longer to run and alot higher to go. I can't dismiss this view lightly!!!!!

Any thoughts Jonpo?

[Time to raise the rents.]

It aint "Futures"/ It's the Gearing that brings the losses...

==========

Given time, and the right cyclical move...

You can lose everything in Property too. Just wait several months, and you can tell us.

The problem in Futures is the high gearing, and the big move.

We are seeing high gearing in property, and the down move is coming.

= =

BTW, I think Stocks are VERY RISKY right now,

and it is time to think about "SELL in May and Go away"

I am buying puts like mad these days

Morning Dr B. Are you predicting in several months from now property gains built up over years will be wiped out?

[Time to raise the rents.]

Sounds like a real class book he's picked up! Such research!

The book: A Fool & His Money by John Rothschild. Written in the 1980's.

He lost his stake while following advice of people he met during his research. His wife apparently doubled hers during approximately the same time by leaving it with a managing broker. However the last couple of pages of the book tell how his wife was also wiped out in the Oct 1987 crash.

http://www.amazon.co.uk/exec/obidos/ASIN/0...8002636-7707667

[othello]

I invested a substantial sum from a previous employee pension scheme into a stakeholder pension in 2003. My money has doubled since then and I have enjoyed tax relief on every penny invested. If I had put the same money into property, I would have lost around 50% of it.

I would suggest the claim that you have made £500,000 since mid 2004 is pure fantasy on your part. Or would you care to enlighten on where, how much etc?

The book: A Fool & His Money by John Rothschild. Written in the 1980's.

He lost his stake while following advice of people he met during his research. His wife apparently doubled hers during approximately the same time by leaving it with a managing broker. However the last couple of pages of the book tell how his wife was also wiped out in the Oct 1987 crash.

http://www.amazon.co.uk/exec/obidos/ASIN/0...8002636-7707667

Indeed, many of those who have invested in property will lose their stake by following the advice of the banks, building societies, estate agents, mortgage brokers, TV programmes etc. etc. Try reading Bob Beckmans' book from the 80s - The Downwave - in which he rightly predicted the last HPC.

[Realistbear]

The economy is just one aspect of the overall rhythm of life. We are born, grow and die. Within our lifespan there are good years and bad years or, as the writer of Ecclesiastes eloquently put it, a time to reap and a time to sow, a time to be born and a time to die. For everything there is a season and there is nothing new under the sun.

In the world of economics, there is a time to buy and a time to sell. Some have tried to tie the seasons for investing with the seasons in nature. Hence, the bulls pack up and go away in May and return again in October. Over the long haul, this stockmarket strategy has paid off handsomely and is accordingly legitimate.

Property has a similar rhythm. There is a time to buy and a time to sell. If you are in it to make money as opposed to finding a place to simply live then it pays to examine the rhythm of "property life" and avoid buying when the market is high and to jump in when it is low. In other words: buy low and sell high.

I agree with the learned Dr. Bubb that anyone who bought into this current property market early on in the up cycle will not see much value erode from their property purchase. The rhythm of property investment is nicely charted by the Nationwide graph on the home page of this site. The ups and downs are a pattern that reflect the rhythm of the economic life of property investment. There are valleys that represent about 50% of the previous peak. The higher the peak the deeper the valley that follows. Its all about rhythm or seasonal ups and downs. Given the size of the current peak (and notice the absense of any significant plateaus, or soft landings, that follow a peak) the valley will see some sharp adjustments with perhaps the usual 50-65% of the gains of the past 6 or 7 years wiped out. More if you bought in late in the cycle.

Now is simply a bad time to buy and a good time to sell if there is still time to get out in whatever segment of the market you happen to be in. If you are in my area, the peak was probably early 2005 as employment and confidence has taken some hits recently that suggests that the decline in values begun last year will continue to gather pace.

The biggest mistake investors make is being blind to the economic cycle or rhythm of economic life. There is a time to sell and becoming emotionally attached to your investments is another reason people lose money. It may be a pride issue that drives people to hold on in a falling market. And pride always precedes a fall.

[Time to raise the rents.]

"Are you predicting in several months from now property gains built up over years will be wiped out?"

Depends on how many months...

I do think those (like TheMonkey) that bought last October, may find themselves in loss by year-end,

if the dramatic market moves that I am expecting by year-end play out.

Those that bought in 2002 or so will also be in loss within 2-3 years, I believe too.

My overall thinking is this:

"We are only two turns of the credit screw away from a Crash:

The first will put HP inflation into reverse, and the second will be a more severe credit tightening, which will be a reaction to all the problems thrown up by the first. When the tightening is done, BTL loans will be back down to a maximum of 60-70%, and a price slide will be well underway."

The first tightening, and the beginning of the slide should be in place by year-end, i reckon. But if it was delayed for several more months, it would not change my strategy one bit. Property still seems "boring at best" compared to the opportunities that i am find elsewhere.

Bold predictions. We'll have to see.

The economy is just one aspect of the overall rhythm of life. We are born, grow and die. Within our lifespan there are good years and bad years or, as the writer of Ecclesiastes eloquently put it, a time to reap and a time to sow, a time to be born and a time to die. For everything there is a season and there is nothing new under the sun.

In the world of economics, there is a time to buy and a time to sell. Some have tried to tie the seasons for investing with the seasons in nature. Hence, the bulls pack up and go away in May and return again in October. Over the long haul, this stockmarket strategy has paid off handsomely and is accordingly legitimate.

Property has a similar rhythm. There is a time to buy and a time to sell. If you are in it to make money as opposed to finding a place to simply live then it pays to examine the rhythm of "property life" and avoid buying when the market is high and to jump in when it is low. In other words: buy low and sell high.

I agree with the learned Dr. Bubb that anyone who bought into this current property market early on in the up cycle will not see much value erode from their property purchase. The rhythm of property investment is nicely charted by the Nationwide graph on the home page of this site. The ups and downs are a pattern that reflect the rhythm of the economic life of property investment. There are valleys that represent about 50% of the previous peak. The higher the peak the deeper the valley that follows. Its all about rhythm or seasonal ups and downs. Given the size of the current peak (and notice the absense of any significant plateaus, or soft landings, that follow a peak) the valley will see some sharp adjustments with perhaps the usual 50-65% of the gains of the past 6 or 7 years wiped out. More if you bought in late in the cycle.

Now is simply a bad time to buy and a good time to sell if there is still time to get out in whatever segment of the market you happen to be in. If you are in my area, the peak was probably early 2005 as employment and confidence has taken some hits recently that suggests that the decline in values begun last year will continue to gather pace.

The biggest mistake investors make is being blind to the economic cycle or rhythm of economic life. There is a time to sell and becoming emotionally attached to your investments is another reason people lose money. It may be a pride issue that drives people to hold on in a falling market. And pride always precedes a fall.

You make it sound SO simple. Why didn't you buy when the signs were leading the way?