Did an interesting exercise today which I thought to share with you all. We all know and want to pay the lowest price for an asset but more often than not get excited/impatient and overpay. $100 invested over 20 year period with 6% growth per annum will turn to $320.71. Now, if you managed to purchase the same asset at 50% discount for $50 and held on to it for 20 years when it's worth $320.71 your investment return per annum jumps to 9.74%. That's nearly 3.74% higher. In property you don't often get opportunities to buy assets at 50% discounts but in sharemarket due to its inherent nature of being highly volatile you get such opportunities much more often. So if you like shares and have the temperament to be patient and buy when things are on sale your investment returns will be much higher over long term. While the DOW hit 22,000 Warren Buffett is sitting on nearly $90B (link) in cash and knows the above rule. He will patiently wait for when there is blood on the street and buy up big when everyone else is trying to get out. Cheers Oracle.
Not in Australia, unless you get some out of area agent and you get lucky......but you can do this with property in USA today
Same thing can happen if you can time the purchase in an upswing property market or shares. But if is not as easy as I wrote it.
How often does it drop 50%? If it takes 20 years and you miss out on 20 years of gains is it really worth it? Similarly with 40%, 30%, 20% how often do these opportunities actually come along and is it worth keeping your money in cash earning nothing during these long stretches? I am assuming there is some amount it drops when you should keep some percent of your available cash to invest when the market dips, but I have no idea what percent the dip would be and what percent of your available cash you should keep. I'm quite sure that waiting for a 50% drop can not possibly be worthwhile. It might be somewhere in the 10-15% drop? Oh and another problem of course is, if you then wait for the 10-15% drop, what happens if you put your money in and it then turns out to be the 1-in-20 year collapse where it drops to 50% and it takes you 7 years before your recoup the extra 35-40% it dropped right after you put the money in? It all sounds all nice and rosy to say "buy low sell high" but unfortunately we can not go forwards or back in time. This is one of those things that sounds good right up until the moment you actually think about how to apply it in a practical sense and then it falls apart. My question to you would be what specific strategy, with the details, do you have that would work in this situation in a practical sense? What percentage of your cash would you not invest, where would you put it in the meantime (in a bank?) and what percent drop would you wait for and how often does it drop this amount?
The volatility of the market and the amount of funds you need in the market (most likely leveraged) to make it worth while, is enough to scare the pants off most people, not to mention a few cardiac arrests along the way.
Buy low is not some fairytale strategy. Lots of people including myself do it. It requires the right temperament. The following are 52 weeks high and lows of some of the big name stocks on ASX. Stock: 52w High: 52w Low: % difference CBA: $87.74: $69.22: 27% BHP: $27.95: $19.24: 45% TLS: $5.77: $4.00: 44.25% WES: $46.06: $39.52: 16.54% This is just for one year. You have to have patience sometimes to not buy for several years until the right opportunity comes. The strategy is finding quality assets and waiting for significant drop in price. There is no strict hard and fast formula and you don't have to pick the absolute bottom. During GFC Warren Buffett bought Goldman Sachs and Bank of America shares and they went on to drop another 50% after his purchase. So you can see even the greatest investor cannot time purchases so trying to do that is not going to help. You need to always keep cash around, if the market goes higher try and reduce your purchases and save more cash. When the market is going down gradually start purchasing at say 10%-15%-20%-25% falls. When you actually start purchasing depends on how overvalued the market was before the falls start to happen. This is something you need to decide. Nobody can tell you. At the end of the day if you feel all this is too hard it's best to get someone else to manage it for you, or use dollar cost averaging or just invest in term deposits. Cheers, Oracle.
You don't need leverage to succeed in stockmarket. The greatest investors of all time all advise against leverage. What you need is temperament. If you can prove that you can achieve above average market returns without leverage there is enough money around the world looking for such managers. You will not need leverage to earn big bucks. Cheers, Oracle.
I can agree on that. I know I don't have it. If others can make it work to meet their financial goals then more power to them I say.
