# The value of a long term approach to investing.



## darag (17 May 2005)

In the "How to make money in buy to let", I resisted the urge to get involved in an "it's a bubble/it's not a bubble" debate about property.  The point I wanted to make is that trying to time the market is a waste of time more often than not and also that over the long term, that whether property is "cheap" or "expensive" (relative to what?) at the moment is not as important as people think.

To illustrate, imagine the worse case scenario.  You invest all your savings in one go in shares or property at the peak of a bubble and in the subsequent 12 months the market crashes spectacularly and drops 25%.  (Note that even during the stock market crash of 87, the market didn't fall by this much year-on-year and I'd imagine you'd have to a bit of searching to find an example of property prices sliding by this much in a year.)  The question is how much does this shave off your return over the subsequent period?  It obviously depends on the period; if you sell up after 10 years, you need an extra 4.1% growth per annum to recover the loss; if you wait 20 years, you only need 1.9% to recover while if you wait 30 years, you only need about 1.3%.

Now obviously,  it'd be terrible to find yourself in this position after the first year but even in this worst case scenario, unless you need to liquidate quickly the situation isn't a complete dead loss as long as you can leave things for a long enough period of time.  If you need to liquidate quickly, you are screwed but you should never have put so much vital money into such a volatile investment in the first place.


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## Brendan Burgess (17 May 2005)

Hi Darag


I used to have a much more purist view to investing. I believed that you can't time the stockmarkets, therefore invest when you have the money. So I would have probably invested during the peak when people were saying that it was overpriced. 

A few things have changed my mind - I never invested in tech stocks as they appeared to me and to most people to be a bubble. This was not consistent with my purist approach. 

Likewise at the top of the ordinary market, shares did seem a bit overvalued. I did invest a little, but it was part of a long term investment plan. In retrospect, I probably should have waited. But of course, when I would I have bought back in? I might have waited too long and invested after the previous peak was reached. 

Property investment is very different. The main attraction is the ability to borrow to invest. OK, I am a long term investor but I would not feel at all comfortable borrowing at the current prices to invest in the Irish residential property market. If I had 100% borrowing, it's quite possible that I would be facing 25% negative equity in a year or so. 

Brendan


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## CoffeeBrew (17 May 2005)

When I purchase a property here I will be purchasing it for the long term. Therefore I see no problem in just waiting for another couple of years to see what unfolds. Mad house price appreciation is finished so I don't feel at all hurried. 

Why wait ?
Look what's happening today overseas. Can we learn anything from that ? Probably the most important thing is that interest rates (small increases!) take a toll. The toll taken in the UK is much more than was anticipated. That gives us a clue that the global housing boom may be more fragile than we have been led to believe.

I want proof that Irish house prices are robust to the interest rate rises necessary to take us back to normal levels. That's my strategy ! I wouldn't dare purchase property here now with ECB rates at 2% and considering where we are on the property curve.


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## joe sod (17 May 2005)

I don't know if many people have read this article from the sunday business post a week ago 

[broken link removed]

but the jist of it is that buffet considers property in the US to be overvalued. By the way he also considers stocks in the US to be overvalued so he is holding $40 billion in cash and is not doing anything with it until asset values return to their long term means. The price of stocks are determined by the P/E ratio with the DOW still having a ratio close to 20 even after the fall in stocks from 2001 to 2003. The long term average is about 12. 

As for property the long term average is 4 where the average house price has historically been 4 times the average salary. It is now running at 10 times the average salary in ireland. Of course two incomes are now being used to justify this new ratio. This is madness because it assumes that both husband and wife will still be earning above average earnings until they retire. 

So yes investments are for the long term but only when these are at or below their long term averages. If they are above then the thing to do is to wait until they do just like buffet.


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## Gabriel (17 May 2005)

joe sod said:
			
		

> As for property the long term average is 4 where the average house price has historically been 4 times the average salary. It is now running at 10 times the average salary in ireland. Of course two incomes are now being used to justify this new ratio. This is madness because it assumes that both husband and wife will still be earning above average earnings until they retire.
> 
> So yes investments are for the long term but only when these are at or below their long term averages. If they are above then the thing to do is to wait until they do just like buffet.



So then, given an average salary of say €40,000 (one earner) and an average house price of say €300,000 (an approx figure in Dublin) you're waiting for the price to drop to €160,000?

Best of luck with that.


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## CoffeeBrew (19 May 2005)

Check out this graph of land prices in Japan. 

1990: Ridiculous - a crash can't happen here 

1992: Small correction. Based on fundamentals 

1995: What da !  

2000: Bought late 80's - so much for long-term investments ! 

[broken link removed]


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