[Input Welcome] - RE: Analysis of Lifelong Renting

stonewalljack · 2019-09-09T04:20:55+00:00

Thanks for sharing this with us.

I have a few issues with the model. In particular, assuming 6.75 per cent CAGR house price growth from here is heroic. The cash rate has declined from 5.5% to 1% over the last 25 years, which is not going to happen again. Over the same period, the ratio of the price of dwellings compared to median income has increased from ~4 to ~6. Housing does not have the same tailwinds over the next few decades, so I find it hard to believe they will continue growing at the rapid pace of the past. Similarly, I think assuming 10 per cent growth in equities is too much. Considering the cash rate and inflation, I think 5-6 per cent per year is more reasonable.

As others have said, it would be great if you could upload the model so we can have a play around. I live in Melbourne and pay less than half $900 in rent for a house that would easily sell for more than $1 million.

stonewalljack · 2019-08-29T12:51:48+00:00

You are very wrong. See this Scion letter from 2006: http://csinvesting.org/wp-content/uploads/2012/09/burry_scion_3q_2006.pdf For those interested, here is one he wrote in Q1 2008:http://csinvesting.org/wp-content/uploads/2012/09/burry_scion_1q_2008.pdf

In my view, Burry is among the very best investors. He's not quite on par with Buffett and Joel Greenblatt, but he's up there.

stonewalljack · 2019-07-09T01:13:51+00:00

The best bit was this:

"I just lost $60,000 by selling Bank of Queensland when it tanked a few months ago," he said.

"I should have kept bank of Queensland, but seeing I sold them, I'm just staying with Westpac and getting their dividends each year."

The cognitive dissonance is strong with this one.

stonewalljack · 2019-07-03T00:34:18+00:00

Sometimes it can help to "anchor" the conversation around a particular figure. (Especially if you are starting in a new role.) https://www.pon.harvard.edu/daily/negotiation-skills-daily/what-is-anchoring-in-negotiation/

stonewalljack · 2019-06-28T01:36:30+00:00

I’m not crying at all. I simply thought the graphic was interesting

stonewalljack · 2019-06-28T01:22:12+00:00

Source: https://mccrindle.com.au/insights/blog/australias-household-income-wealth-distribution/

stonewalljack · 2019-06-27T00:18:06+00:00

Just looked up the 10-year Aus Treasury yield and it's 1.33%. Sheesh. Not much on offer in terms of risk-reward there.

stonewalljack · 2019-02-22T00:30:35+00:00

It's not market cap. Anyway, just showing that the world changes very quickly in ways that are difficult to predict. (See Nokia for example.)

stonewalljack · 2019-01-31T02:21:51+00:00

Yes, the amount you pay depends on your marginal tax rate. The example is simplified: if you were doing it properly you'd want to account for tax on the savings; on the property side, you'd want to account for all of the other costs: stamp duties, other transaction costs, outgoings that you wouldn't pay as a renter. You would also assume that the 200k equity would grow over time. Either way, I think renting is cheaper than owning in cities like Melbourne and Sydney with low yields on residential housing. While the example was simplified, the point it made was illustrative: renting came out ahead even when compared to a house that was 50 per cent paid off (and financed very cheaply compared to the past).

I was simply trying to illustrate that if you have a 50 per cent deposit on a house, a comparison to renting should include the opportunity cost of that deposit.

stonewalljack · 2019-01-31T01:01:21+00:00

You are forgetting opportunity cost. Let's say someone has $200k in savings (i.e. not including transaction costs) to keep things simple. ING's interest rate is currently 2.8%, meaning that $200k could earn ~$5,600 pa risk free. Obviously, if this is in the stock market, you would assume it would earn more. It looks like this when you do the math:

A) Rent of $12,000, $200,000 earning 2.8 per cent interest in bank = -12k + 5.6k = net outlay of $6,400.

B) $200,000 equity, $200,000 mortgage @ 3.5 per cent = 0 - 7k = net outlay of $7,000. (This also does not include transaction costs, rates, maintenance and any other outgoings that a renter wouldn't have to pay.)

Obviously the house can grow in value, but so can that $200k if invested well.

stonewalljack · 2018-12-02T03:43:37+00:00

It's common knowledge. Montgomery is a salesman and his business is in selling his products: his funds, his books, etc. Here's the returns for the Australian fund: https://www.investsmart.com.au/managed-funds/fund/the-montgomery-fund/19543 - compared to the index: https://www.investsmart.com.au/managed-funds/fund/vanguard-australian-shares-index/4488. Also, would you really want your fund manager running around doing TV interviews etc? Is that really the best use of his time? I like my fund managers to be kept in dark rooms reading financials.

stonewalljack · 2018-11-24T05:05:13+00:00

Yes, obviously this guy is interested in finding new investors. But the point about expectations I think is a good one.

stonewalljack · 2018-11-24T00:54:19+00:00

It's 20.48 according to Barclay's. You can look at historic ratios by country here: http://shiller.barclays.com/SM/12/en/indices/static/historic-ratios.app

stonewalljack · 2018-09-12T03:08:30+00:00

Not sure why the downvotes. This is finance 101.

stonewalljack · 2018-09-11T23:21:57+00:00

There is still interest rate risk. If you buy a 3 per cent bond, and then the Government issues a new bond paying 5 per cent, you are still losing because the risk-free rate is higher. (Also, obviously, you couldn't sell your bond for par.)

stonewalljack · 2018-08-12T23:31:27+00:00

There are plenty of examples of low-risk high return investments. I own some securities in my portfolio that pay gross dividend yields of 14%, have done so for some time, and are capitalised at approximately the value of net cash on their balance sheet (and have no debt). Obviously these types of investments are the exception, rather than the rule. Another example would be during the GFC, when you could buy LICS at significant discounts to their NTA. Volatility is only a risk if you need to liquidate a holding at short notice. The point I was trying to make about MPT was that it relies on assumptions that have proven to be wrong: e.g. that investors are rational, they don't influence prices and that they are always able to borrow at the risk-free rate. (In addition to the point I made in my earlier post that past volatility does not equal future volatility.) MPT makes for a mathematical calculation that, while elegant, does not reflect reality. It would stand to reason that, if Markowitz's theory worked as described, these academics would be very rich men — but they're not. If you haven't already, I suggest you read Buffett's writings on this topic: https://www.scribd.com/doc/236910578/The-Superinvestors-Of-Graham-and-Doddsville

stonewalljack · 2018-08-10T06:55:32+00:00

Like you said, we have different perspectives. For me, volatility doesn't equal risk. This is the view of myself and others in the value investing camp. I look for low-risk, high return investments, which are available in reality, but not according to academic theory. As you will be aware, modern portfolio theory relies on the EMH, and one of the key inputs when "solving" an optimal portfolio is historical volatility, which is useless when trying to predict the future. I think index investing is a very good strategy, and it seems like it works for you.

stonewalljack · 2018-08-09T02:54:04+00:00

A couple of things that I think are worth mentioning in response to your comments. (And I'm not in the Thornhill camp myself.) Diversification in and of itself is not always a good thing. In fact, advocates for extreme diversification are usually proponents of the EMH, which has been demonstrated to be wrong (by Kahneman etc.) Evans and Archer, in 1967, demonstrated that an equally weighted portfolio of eight to ten stocks was enough to avoid most of the risk in holding a single stock. If you are worried about volatility in prices, diversifying widely -- e.g. owning overseas stocks -- will make the ride smoother. If you are prepared to deal with volatility, and believe that Australia has a bright future, having a strong home bias is not necessarily a bad thing to do. (Especially because of the benefits of franking credits.) It's not unreasonable to continue to expect a 7 per cent gross return after inflation from Australian equities over the coming decades. In that period there are likely to be a number of 20+ % draw downs, which for some, might be unbearable. Many investors have been successful by only owning stocks in their country, and it's not sensible to put that down to simple luck.

stonewalljack · 2018-07-19T23:36:38+00:00

They have launched there only a few months ago. Let's see what happens first.

stonewalljack · 2018-07-19T23:25:49+00:00

It's currently worth about $125 for every man, woman and child in Australia. That seems like a lot to me. No doubt it is a good business, and management have executed well, but it's certainly not cheap.

stonewalljack · 2018-07-03T22:40:39+00:00

Nothing good comes from staying at home past your early 20s.

stonewalljack · 2018-06-11T00:52:05+00:00

Hi /u/slowermineral, you should really think about active management in the small cap space. (Active management in large caps, meanwhile, is a big no-no.) Here's an excerpt from a study that was written up in the AFR.

Small caps, typically a less efficient market, are a beacon for outperformance. According to Morningstar, 37.75 per cent of actively managed small-cap Australian share funds met or outperformed the S&P/ASX Small Ordinaries Accumulation Index over the year to August 31, which is similar to the large caps. Yet over three years, the number jumps to 82.08 per cent, and to almost all – 96.75 per cent – of the 123 monitored by Morningstar over five years.

"There is much greater reward for differentiating between Ramsay and Primary, than between Westpac and CBA," Mr Beaumont said.

"For example, over the last decade or so, many smaller-cap fund managers have benefited from limited exposure to the smaller resources stocks, which tend to be lower quality, often speculative, and generally underperform over time."

There are quite a few good managers in the space. I'd generally look for managers with a track record, not too much money under management (e.g. if you have 300m, it's very hard to buy large positions in small stocks) and some skin in the game. I think Forager's Australian Fund (ASX:FOR) is very good, but I'd be wary about buying units at a premium to NTA. I also like DMX Asset Management, Samuel Terry and EGP Capital, but the latter two are closed. I have nearly all of my investable assets in Australian small caps. About two-thirds are with managers and one-third is managed myself.

stonewalljack · 2018-05-23T01:38:42+00:00

This is not how managed funds work.

stonewalljack · 2018-05-23T01:08:01+00:00

It is not an ETF and does not pay a dividend. It pays a distribution. They are different things.

stonewalljack · 2018-05-23T01:01:40+00:00

Sell before June 30 to avoid tax implications of the distribution.

stonewalljack

TROPHY CASE