The Phar Lap approach to property investment

What’s the world famous racehorse Phar Lap got to do with property investment?

Let me explain…

A few years ago I went to Canberra for a weekend.

Everyone in Sydney told me I’d be bored stupid, but I don’t buy that: if you visit a capital city and you’re bored then you aren’t using your imagination.

Canberra is a pleasant place. I enjoyed visiting Manuka Oval, and the suburb of Manuka itself is a great spot, particularly if you enjoy Tandoori food as I do.

One of the highlights of that trip was going to see Phar Lap’s mighty heart which is kept in the National Museum. Phar Lap was Australia’s most famous ever racehorse, winning an impressive range of races and capturing the nation’s imagination during the misery of the Great Depression.

When Phar Lap died of a mysterious illness in 1932 – it was suspected that he was poisoned – his passing resulted in a period of national mourning.

The peculiar thing about the Phar Lap tale is that when his heart was examined it proved to be huge, weighing 6.2kg! Racehorses have large hearts anyway weighing 3.2kg on average, but Phar Lap’s heart was truly enormous, and when he raced he just kept going and going…and going…

Buffett

“I think of the economy as being like a racehorse: it’s going fast or it’s going slow…but it’s going.”

Buffett is the master of the one-liner and this was one of the master’s best lines.

It explains in part why Buffett is the greatest investor of all time yet most people struggle to ever build any wealth at all. In today’s world of fast information and quick fixes, most are looking for ways in which to make money over the next few months or years.

Buffett worries himself not with economic cycles or trying to outsmart the vagaries of the market. Instead he buys quality assets at a good price and holds on to them for as long as possible – the most efficient wealth-building strategy there is.

As for Australia’s economy, read what Ross Gittins had to say this week about the mining boom: it is not a passing phenomenon, it is a structural shift in the landscape and is here to stay. Resources will be the Phar Lap heart of our economy.

This week in equities

We saw some good examples of short-termism this week. Australia has experienced a very strong equities bull market over the last half a year or so, and those who stayed the course profited handsomely.

On Thursday, the minutes of the FOMC hinted at a shift in stance in the Fed’s bond buying programme, resulting in a slightly panicked sell-off and a correction of 2.3% on that day.

The online commentary was comical: “the party is over, I told you this was coming!”

Well, yes, if you predict doom and gloom daily for 6 months, sooner or later there will be a down day (even though you missed the 25% upswing). Unfortunately for the gloomers, after Glenn Stevens’ speech – from close to Phar Lap’s heart in Canberra – the market recovered a fair amount of its lost ground the very next day and will probably claw back more of it early next week. Cue deafening silence.

This week in real estate – markets are on the move

Glenn Stevens made reference in his speech to plenty of stimulus still being “in the pipeline”. What he meant by this is that economies do not respond to interest rate cuts immediately – and Australia has had the equivalent of seven of them or 175bps in the past year and a bit with the cash rate dropping from 4.75% to 3.00%.

The delayed response to monetary policy easing is particularly likely to occur in an illiquid market such as property: punters don’t go out and buy a property the day after an interest rate cut. They may decide to make an enquiry about a mortgage and then start viewing a few properties but the point of sale will be some months down the track.

Last weekend Sydney’s property market showed some real signs of life with APM recording an impressive auction clearance rate of more than 71%.

Suspicions that this was an anomaly were erased this weekend when, from nearly 1,500 auctions in the two main metropolises, Melbourne recorded a remarkable 73% clearance rate and Sydney a staggering 76.3% (corresponding week in 2012: 56.6%).

As I’ve long predicted, the Inner West of Sydney continues to be the hot sector of the market, with auction clearance rates coming in at 83% again from the highest number of listings.

Where auctions begin to clear at these sorts of rates, prices will almost certainly follow them upwards.

The racehorse approach

Over the coming weeks we will hear all kinds of excited chatter about both the equities markets and the property markets. Here are some of the things you will hear from the soothsayers of market timing:

The market will become overheated and then it will crash”

“Here comes the boom!”

“The best time to sell will be 3/6/9/12 months from now”

“Property in Australia is in a bubble and will soon crash”

“The interest rate easing cycle is over and rates will go up”

“The markets will hit a double top/form a head-and-shoulders pattern/experience a dead cat bounce/go into a slow melt…”

Will any of these statements prove to be true?

Any one of them might be, I don’t know.

But, crucially, nor will the people who announce them.

And simply saying something more often doesn’t make it any more or less likely to be accurate.

The problem for people who are continually calling a crash is that they are unwittingly playing the game of timing the market, which most professional investors and experts do badly – so the hope of average punters getting their timing right is slim to none.

Interest rates going up?

Not so sure about that – if either Thursday’s capex data or the next GDP figures print weak, the cash rate still has further to fall to record lows of 2.75%, which will only serve to ratchet up property and share market activity levels.

Technical analysis? Who knows? Give a technical analyst a random chart of figures and they will start to see anything from horoscopes and sine waves, to saucepan handles and animal shapes.

Remember: markets are highly irrational and both bull and bear markets have a discomforting habit of lasting for far longer than we believe they will.

Think longer-term

Another illusion arriving in parallel with the advent the rapid-fire market commentary is the myth of the new market mini-cycle. By analysing price charts in ever shorter time frames, we start to see cycles and patterns in corresponding time frames. However, how we interpret charts when reading charts from left to right is very different to what we see when reading them from right to left.

Market prices have never moved in a smooth fashion in the short-term – they simply continue to move in one of three directions: up, down or flat. In the short-term movements will appear to be haphazard, and only in retrospect will a cycle become clear. That has never changed, only our attention span has.

Some time ago we heard that markets were “becoming more rational” and that as they learned from previous mistakes crashes would become a thing of the past. That has clearly not happened and never will happen – markets will continue to be hugely irrational as we are emotional beings.

The best chance that most people have of becoming wealthy is to make a plan to make themselves financially secure 10, 20, 30 or 40 years from now.

I can’t honestly tell you what will happen to stocks and property prices over the next few years, but I can tell you that at some point in the future we will again be discussing irrational exuberance in the stock market and bemoaning housing being unaffordable in Sydney and Melbourne. Only next time around the numbers involved will be much bigger.

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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


'The Phar Lap approach to property investment' have 1 comment

  1. May 7, 2013 @ 4:58 pm a memory of light robert jordan

    Thanks for the blog article.Really thank you! Keep writing

    Reply


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