Why were the property bears so wrong?

Have you ever had a strong opinion (belief) about investment markets which was subsequently proven to be incorrect?

Investor TrapA recent example was when many people predicted borrowers would be forced to sell their properties due to the Covid lockdowns and the market would crash.

This outcome now seems unlikely.

It is my view that a humble mindset is the best way to avoid being blindsided by unexpected investment risk, whilst at the same time spotting all opportunities.

Let me explain.

Robert Glazer wrote about the concept of cognitive dissonance in his recent blog:

“… the authors examined the followers of cult leaders who predicted that the world was going to end on a specific date, and told everyone to prepare. When that day passed without a fiery inferno, you may have expected these cult leaders to have lost all credibility with their followers.

Instead, the exact opposite happened. The leaders simply declared their prediction was incorrect and declared a new date. Like clockwork, their followers doubled-down and began preparing for the next apocalypse.

Why would they do this? According to Tavris and Aronson, it was likely too painful for the cultists to admit they had fallen for a fraudulent prophecy. It was easier to avoid interrogating their own judgment, and to instead dig a deeper hole of delusion for themselves.”

This shows the danger of holding strong opinions and leaving no room for the possibility that you could be wrong, particularly when you are investing money.

Perpetual property bears seem to ignore the evidence

There are two prominent commentators that have been perpetually bearish about the Australian property market since I started ProSolution in 2002.

They are Martin North from Digital Financial Analytics and economist Dr Steve Keen, who is now working in London.

Of course, there are others but these two stand out in my mind.

They have both been outspoken and incorrectly predicted property price crashes on a number of occasions.

In fact, I recall watching Dr Keen on the TV program, Sixty Minutes in 2008 telling all Australian’s to sell their property.

Apparently, he even sold his apartment.

He predicted that prices would crash by 40% between 2008 and 2010.

He was so certain.

Of course, he was wrong.

People that hold perpetually negative views, that leave no room for the possibility they could be wrong and ignore all the evidence, lack credibility.

Financial advisors that hold strong beliefs are also dangerous

I know some advisors that hold very strong beliefs about the methodologies they utilise.

Financial AdvisorThey believe their way is right and everyone else is wrong.

Whilst I admire their conviction, such strongly held beliefs are dangerous.

In life, things are rarely that black and white.

There’s almost always some nuance.

Hold strong opinions, loosely

The saying “hold strong opinions, loosely” perfectly suits investing.

You should have a strong conviction in the robust investment strategy you adopt, especially since it should be supported by sound, evidenced-based methodologies.

However, at the same time, you must leave room for the possibility that you could be wrong.

That every investment you make may not work out how you had hoped.

This humble mindset will greatly reduce the risk that you will be blindsided by unexpected risks.

It will also ensure you spot investment opportunities that you may not otherwise see.

Beware of confirmation bias

Confirmation bias is a tendency to look for, and take notice of, information or evidence that supports our beliefs.

Bad AdvisorWhen it comes to investing, confirmation bias is dangerous.

The best way to avoid confirmation bias is to force yourself to argue for the opposite case.

For example, when I wrote in May that property values wouldn’t fall materially, I forced myself to think of all the reasons why there could be a property crash.

I pretended to debate myself.

I do that with economists and portfolio managers that I meet too – I argue for views that are opposite to mine e.g. why the US tech sector isn’t overvalued (BTW, I think it is!).

Being the devil’s advocate allows you to test your own views and to not get sucked into confirmation bias.

What strongly held views do you hold? And are they limiting your investment options?

Here’s some examples of beliefs held by people I have met over the years:

  • Investing in shares is risky.
  • All financial advisors are greedy and should not be trusted.
  • Property is over-valued and cannot generate double digit returns in the future.

It is my view that none of these beliefs are correct in absolute terms.

For example, some share investing methodologies are high risk.

But there are lower risk methodologies too.

It is good to regularly test your own beliefs and look for evidence to the contrary, as they could be costing you in terms of missed opportunities or exposing you to unnecessary risk.

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Stuart Wemyss

About

Stuart was a Chartered Accountant before establishing mortgage broking firm ProSolution Private Clients. He has authored two books and shares his experience with readers of Property Update. Visit www.prosolution.com.au


'Why were the property bears so wrong?' have 7 comments

    Avatar

    October 17, 2020 Nostradom Aus

    My property predictions:
    Values will fall…….I just don’t know where and when.
    My other predictions:
    Australia will have massive bushfires…..I just don’t know where and whwn.
    Australia will have massive floods……..I just don’t know where and when.
    Australia will experience drought conditions…..
    +

    Reply

    Avatar

    October 17, 2020 Geoff Bednal

    Perhaps its a little early to call the property bears out just yet. The effects of Covid and job losses, pressure in mortgages has not flowed though fully I suspect. I am in the middle of selling a property and buying another so not dissueded from acting but still think caution and due dilligence might be wise.

    Reply

      Michael Yardney

      October 17, 2020 Michael Yardney

      Geoff, there are still many headwinds slowing things down, and there are various segments of the property market that is still suffering and will continue to, but in general the mood has changed in the property market should be improved

      Reply

    Avatar

    October 17, 2020 Jeremy

    The reason they were wrong is they forgot how much the LNP is prepared to screw over ordinary people to prop up the wealthy. They will do anything they can to make sure property prices stay ludicrously high. They don’t care how many people that makes homeless or how so much money being locked in housing costs the rest of the economy. Until Australians kick them out and elect a government that gives a shit about ordinary people, the parasites getting rich off this broken market will continue to profit. And everyone else will continue to suffer.

    Reply

      Michael Yardney

      October 17, 2020 Michael Yardney

      Jeremy – 70% of Australians own their own home, half of them with a mortgage – they aspire to improve their lot in life. Are these not “ordinary people”?

      Reply

      Avatar

      October 20, 2020 Lex

      To reply to Jeremy’s comments re LNP who encourage lower taxes for ordinary folk and for those who have worked very hard and taken risks provide more housing for lower income people than any Govt has ever done. The amount of Housing Commission homes boarded up for years does not happen in private enterprise. Landlords FIX and maintain their properties allowing renters good housing at market prices. Given most properties rent for 3% less rates / insurance / repairs etc the ONLY benefit after Interest cost is capital growth.which is taxed heavily when sold. The Labor Party has no concept of small investors needs and the housing market would have been crushed had Labor won the last election. Labor wants to kill the mining industry. It pays good wages and royalties to support FREE schools and Medicare etc. The LNP understand small business. They employ many Aussies.

      Reply


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