Aussie Investor

I’d love to invest in a market that is growing at 15% per annum (like the Chinese plastic pipe market) — and yet, even with that growth, competition has become cut throat.

But more disturbing is the subtle undertone in the article about environmental risks. It is very heartening to see China making forward-thinking commitments for ecological (and health) reasons. But it makes you realise that if you’re investing in the Chinese real estate market, you might be building with the 2005 equivalent of asbestos — leaving you with an expensive oversight to correct down the track.

I mean, really, who would think to check what heat stabiliser they were using in manufacturing their PVC?! On the other hand, I suppose it’s not dissimilar to the playgrounds built with wood that was chemically treated with toxic chemicals — a relatively recently identified shortsightedness. Every investment comes with risks, the best we can do is to research thoroughly and insure appropriately.

Investing takes effort — and discipline. You’ll need a good reason to spend the time and to make the sacrifices you need to make. What is your reason? Why do you want to be wealthy? If your goal is simply to be rich, you will never be satisfied — there is always another dollar that could be earned, another scheme that could be invested in. You must find a deeper and more abiding purpose for being wealthy. Is there some dream inside you; something you enjoy doing, but are not free to invest in because you ‘have’ to work?

You have probably heard the story of the businessman and the fisherman (if not, choose one of these If we are not careful, we can spend a lot of working on something that doesn’t bring us closer to our true desires.

These days, most investors have a ‘passive income’ as their first wealth aim — Kiyosaki calls this ‘escaping from the rat race’. When your investments return an income that you can live off, with minimal input required from you, you will be free to pursue your dreams — to live like the fisherman.

So, take some time, and think about what kind of future you want, and what kind of legacy you want to leave. Write it out, and keep it in the forefront of your mind when you need to make those difficult decisions. As Covey says, it is important to ‘begin with the end in mind’

Apparently the Sydney property market is still slowing down — and other cities may be following. Meanwhile Perth and Darwin are growing from mining dollars — and mining companies are turning into property developers.

The growth data presented in the article seems a little confusing to me. Yes, the All Ordinaries has grown by 40% — but that only helped it catch up to the average price of housing in capital cities (see graph below). And Perth and Darwin outperformed the All Ordinaries by 37% and 20% respectively (from December 2004 to June 2005).

As previously discussed, the stock market — requiring more risk — should, on average, provide greater returns. And in general (as the graph shows), it does. But in 2003, the housing boom pushed temporarily past the stock market in growth, and it is only the recent strong performance of the stock market (e.g. the resources sector) that has helped it catch up. So if you invested in the stock market in December 2004, you’d be pretty happy right now, but if you invested in 1994 (as the articles discusses), you’d actually be in pretty much the same place as a property investor (which the article doesn’t communicate — at least, not clearly).

Update: See a similar houses vs stocks graph from ‘House of cards‘ in The Economist.

In recent times, the message to ‘invest in incoming producing assets’ has been perhaps most popularised by Robert Kiyosaki in his bestselling book, Rich Dad, Poor Dad. Originally marketed as an autobiography, it appears that it is really more of a business fable — but nonetheless, many owe their start on the path to financial freedom to the simple principle that Kiyosaki highlights in this book: compound investing.

It is easier to spend than it is to save. And it is easier to save than invest. But if you invest, and then reinvest your returns from investing, you get compound investing. To achieve this, you must invest in appreciating assets (like houses or stocks) that produce a positive return, rather than depreciating assets (like cars or expensive ‘toys’), that tie up capital and produce no return, or even worse, require further capital for maintenance (= a negative return).

The path to wealth is a disciplined one — it takes effort to prepare to invest, effort to identify the right investments, and effort to manage the growth of those investments. But if you consistently commit time to your investments, you should see consistent growth. As your investments grow, they will provide a greater return, and your capacity to invest in larger opportunities grows, leading to even greater returns — just like compound interest.

Start out with an overview of the remarkable growth of the Chinese real-estate market (and it’s only been around for 10 years! And then consider that, because of government regulation intended to curb overheated growth, it is currently in a state of stagnation, but about to see further dramatic growth as demand exceeds supply by nearly 190%. Finally, note that foreign investors own as much as 15% of this (either directly or through loans, etc.), and as much as 23.2% in Shanghai.

Then tell me — is this the next big thing, or are we already too late? If China is in a similar slump to the rest of the world (but for different reasons), and even the government agency that instituted those regulations is predicting continued growth, perhaps China is as good an investment as any other likely candidate. And from the sounds of things, it would be easy to provide a differential product (concrete shells where you have to install your own plumbing?!) . Perhaps it’s time to start an investment consortium…

An interesting statistic from The Age: Only 31% of dwellings in the city are owner-occupied (the rest are investor-owned rentals). This compares with 76% owner-occupied in the rest of metropolitan Melbourne. And 82% of city dwellings are residential apartments (that’s right, the ones I don’t recommend you buy right now

They project population growth of 124% by 2021 (about 5.1% pa), with 186% growth in the Docklands area (about 6.8% pa). Other stats of interest (from the council’s summary and full report) include:

• 52% of city residents are aged 18 – 34 compared to 26% in the wider metropolitan area (= what happens when they return home, or stay home longer? (as they are))
• 23% of city residents are full time students (compared to a metro average of 9%) (= what happens when international student numbers drop? (as they are))
• City investors may be earning around 1% less than their metropolitan counterparts (average mortgage of $300/week, rent of $238/week vs. $207 and $166)
• One bedroom apartments are aimed mainly at students, a number have 50%-75% students (mostly from overseas)
• The city is the third fastest growing municipality (6.8% pa since 2001), behind Melton (10.5%) and Wyndham (7.4%) and followed by Cardinia (5.1%) and Casey (5.0%)
• 63% of city residents used the Internet in the week prior to the 2001 Census, compared to 41% of metropolitan residents

In addition to depending on two markets that are seeing significant contraction, there is one statement I find particularly disturbing — the major drive of population growth is ‘the very large number of new dwellings that are expected to be constructed’ (mostly apartments). The drive for growth is supply, not demand?

This principle is not only true of investment property, but of investments in general. For stocks — you should research the company, the industry, the key factors — and watch the latest news that can effect the future value of your stocks. For businesses,
market research is essential — what are your competitors doing, where are the gaps, opportunities, etc.

For property in particular, you should be able to estimate the purchase price of a property to within $2-3K of the purchase price.
Yes, that’s around 1%! This level of familiarity is not difficult to acquire — you should be able to do it after a month or two of
regular property watching, visiting, etc. in your target area (e.g. suburb).

You should also do ‘due diligence’ in finding out about major changes to the area. A new freeway can significantly increase the
property in an area — and significantly decrease the value of houses right next to it. Similarly, new or upgraded major infrastructure such as shopping centres, public transport, schools, etc. can all have a positive impact on prices. Much of this information is available on council, state and national government websites describing their 5/10/20 year strategic plans.

Other significant factors that can affect the local market include demographics (often available from census data, e.g. the Australian Bureau of Statistics), percentage of owners versus renters (especially for new developments) and zoning (i.e. regulations relating to redevelopment, subdivisions, etc.).

Reuters reports annual growth rates from 10 to 42.9 percent in New Zealand. Although Auckland prices grew only 4.4%, other major cities had 10-20% growth and some provincial areas grew in excess of 30% in just 12 months! Again, will be interesting to see if this article will accelerate the growth in those areas.

Steve McKnight is keen on the NZ real estate market — he’s even written a guide on it. Might be a good time to buy this guide, I think…!

Most people are familiar with the concept of risk vs. return, i.e. in general, you must seek higher risk investments to achieve higher returns. For example, government bonds are a reasonably safe investment, but tend to provide a minimal return after inflation. In contrast, highly volatile stocks can be very risk, but can also provide a great return.

This risk/return relationship can be seen in who lends money to whom. For example:

1. Banks lend money to:
   • Real estate investors (relatively easily)
   • Businesses (somewhat easily)
   • Stock investors (with significant constraints)

   Therefore, in most cases, people renting real estate, running businesses or buying stocks expect to get better returns from their activities than the bank itself (because they must first make their profit before passing some of it on to the bank).

2. Businesses rent property from real estate owners
3. Stocks are, in a sense, stockholders lending money to businesses (either for dividends or capital growth)
4. Venture capitalists lend money to businesses

Obviously businesses range from relatively safe/conservative (e.g. mainstream banks) through to high-risk endeavours (e.g. mineral exploration companies — or Internet ‘dot coms’ But in general, a business has the highest level of risk, and the best opportunity for return.

More than any other field of learning, responsibility for your financial education lies with you. Sure, you need to continue learning for your career, your family, your life, etc. But these tend to be facilitated by your company, your church and community groups. Financial wisdom is far less likely to fall into your path — it needs to be pursued.

The goal of this blog is to help you get there. It will regularly review the current news in context of well-known investing principles. It will provide key insights from some of the leading books in the field. And it will discuss investment, investing principles and investment opportunities. I hope you enjoy your time here — but remember, it’s up to you to ensure that are preparing for your future (home, holidays, kids, University, retirement). So take control today, and do some reading, some talking and some thinking. Get a group of friends who want to learn together, to share success, failure and discuss opportunities. Get educated!