Who are the Fools and who are the Suckers

Here is some food for thought... from legendary investor/business man, John Templeton On Market Cycles Templeton died in 2008 at the age of 95, one of the wealthiest investors in the world, he gave away over $1 billion to charitable causes throughout his life

“Bull markets are born on pessimism, grow on skepticism, peak on optimism and die on euphoria.”

The Typical Investor is Always a Step Behind the Market

When the market has been reborn and is growing, investors tend to be pessimistic and skeptical. Fear prevents them from entering the market at the most opportune time. As you may have guessed, Templeton’s strategy was to invest at the point of maximum pessimism.

As the market approaches its peak, more and more investors optimistically jump on board. Eventually euphoria sets in, but according to Templeton, at this point the market has already died. The “greatest fool” was left holding overpriced assets.

Who’s The Fool?
The greater fool theory states that the price of an asset is ultimately determined, not by market fundamentals, but by irrational beliefs and expectations of investors. They buy under the assumption that the asset can always be sold in the future to a “greater fool,” someone willing to pay a higher price.

The boom is over when the greatest fool buys. Once the greatest fool buys, the bust is imminent. It’s anyone’s guess when the greatest fool will buy, but what’s important is to make sure that you’re not the greatest fool.

Who are the fools and the suckers in the property market today? If you’re not sure, perhaps you can find the answer by looking in the mirror.


MTR

 

Good article excerpt, see full version at A Lesson From John Templeton On Market Cycles

 

Great article - i have my own theory "walking dead" - where in the TV series, when there is noise the zombies just all go the same direction. Not directed at anyone or any capital or any suburb but say someone bought place X it has gone up a bit some noise created assuming that is the next greatest thing, everyone follows even at the cost of getting an ip which is negatively geared etc or some other negative factors.

Not to say it is bad, but every investment has to suit each individual's needs. following because it is the buzz word atm does not mean much without proper due research and due diligence.

 

Agree with most of it.

However, a property investment is not just an asset but it's also a personal consumption item for many people. Personal consumption items generally are subject to inflation and their prices are mostly stable or go upwards.

I own a fair amount of shares but I don't have to if I dont want to and stock markets are volatile because people invest in stocks for mainly speculative purposes and can leave the market altogether if investor confidence is low.

I am not saying property investments are not prone to cycles but I think cycles aren't as pronounced as those in share markets.

 

The title is confusing : Are we preparing two lists or just one ? The title asks for fools and suckers and only gives the greater fool theory...is there a greater sucker theory also ?

Went to check the mirror, but realized already sold the dressing table on gumtree for a deposit on toilet bowl in Glen Waverly. After the 20% Capital Gain in about 2 weeks I should be able to withdraw some equity and get something from the 2$ shop if Pauline does not chase away the nice Asian lady there.

 

I like this interpretation of the good old "be fearful when others are greedy, and greedy when others are fearful" mantra.

It really is so true. The missing element that furthers these concepts however, os the notion of 'backing yourself'. See, to get into a position where one is 'greedy when others are fearful' (the position every investor wants to be in, imminently prior to any investment decisioning theyare about to execute), there comes also the idea of human intelligence and research (note I said 'research' and not due diligence at this point).

You need to be able to have conviction in your own methods and skillsets in order to assess a situation to be worthy of being 'greedy' in, when all others are telling you that you're stupid for doing it. Of course, it becomes a problem if you really ARE stupid to begin with.

With investing it is as much about intelligence as it is behaviour and backing yourself.

Here's a contextual example to illustrate:
Today in 2016 if you were to announce to all of your friends that you are buying an IP in a one-trick-pony-mining-town location you'll be ridiculed. But technically, you are doing the whole 'but I AM being greedy when others are fearful, because I've picked an investment location where the walking dead AREN'T in, right?'.

No, you are just being blindly stupid.

But what of the investor who, back in 2009 says to his/her friends "hey, I'm gonna buy 5 houses in Gladstone for $100K a pop, hold them for 3 years then sell in 2012 for $500K a pop, just as the masses jump on board". This person would also be ridiculed at the time by their friends, but would obviously be the success out of the two scenarios.

The difference between the two is obviously a combination of timing of markets, understanding one's own risk profile, and a deep understanding of their market and goals/exit strategy. All of this is derived from being intelligent and not stupid or lazy.

Both made plans to touch markets no one else would, at the time. The second one though understood timing of markets for high risk ventures such as mining town IP's and developed a plan, backing themselves when no one else would, all backed up by independent research and data.

It is an extreme example and not well worded but hopefully it illustrates the importance of being intelligently greedy when others are fearful!

 

Buy in Sydney and hold. You won't be a fool or sucker for ever.

 

I don't know this as I don't invest in this asset class, always happy to learn from others

 

LOL, you are no fool, you purchased in Glen Waverly
But sucker if you followed the herd and jumped into Other markets

 

Pretty much....

 

What I take from this is don't buy at peak, this is the ultimate sucker.

For example it woul be Foolish to buy in Syd today, yet plenty post ...where to buy in Syd..They don't get cycles, it's not ...boom, boom...its boom...bust, supply is increasing

 

Thats right...irs not black-white.
You have to be smart about it. In most cases there are perfectly good and valid reasons why others are fearful or greedy about a certain place or asset.

 

I like this but it does have *.
I think the greatest fool is someone who buys at the top with no strategy versus someone who buys at the top with one.

For example a developer might be the biggest fool. He pays more than anyone for a property in suburb X, the market starts to decline. He then bangs an apartment block on it and whilst the market cooled he still makes a killing because obviously it's still a good suburb with sound fundamentals which still attracts $.

This versus the fool who buys it to sit in it expecting the good times to roll on forever.

 

Can anyone please define top, peak or their opposites for property prices without hindsight ?

 

Exactly right! The media has been calling end of boom since last year, yet "in the three months to June, property prices surged 6.8 per cent in Sydney ......CoreLogic’s monthly house price index recorded".
Property prices continue to surge in 2016

 

Yep, I have been continuously wrong about the Sydney housing market since 2004 i think...and thats mainly from reading the economist and looking at median housing price to income ratios. Still Im happy to rent here and invest elsewhere for now. I am keeping an eye on Rozelle as I think when the White Bay development starts, that a lot of IT geeks will want to love close to the action.

 

Exactly right! x2

Also, the greed/fear sentiment is just part of the picture (thats probably not what Buffet was implying anyway). If it was just about this then you would have the scenario where you buy in Gladstone at totally the wrong time,using C-mac's example.

However, I think it is better to make decisions based on 'the numbers' as the 'the numbers' will incorporate sentiment and a host of other things required to make a good decision.

 

... and that is the point, timing is everything, but developing is still a higher risk proposition.

80% developers apparently lose money.

Even if you get the timing right and half way through developing/building and the market turns, you need to have a plan B in place, because developers are at the mercy of the markets, it generally takes 12-18 months to build.

One way to mitigate this risk, is get the timing right on purchase, stick to bread and butter areas, affordable housing, it will be easier to sell, more people in this market, make sure the rents cover the loan just in case you can not sell, build close to transport and buy where there is good infrastructure.

MTR

 

Stats are dangerous, never pay too much attention to this stuff at all, it will only confuse.

The only real way to find out what is happening in a market is to work out what is happening on the ground, supply vs demand, its that simple.

 

.......but these are stats, it will be a mixed bag because its not on a micro level its general and that is why I don't rely on this stuff, for example some areas in Western suburbs have actually falling back.

Sydney market has been strong since 2013, booms don't last forever.

No one will know exactly what month it will peak, no one has a crystal ball, but the signs will be pretty clear because will we start to see more stock on the market.

Real estate agents have a different mantra, they are not rushing for your business. Market sentiment changes, these are signs, am I the only one who sees this stuff???

It would be pretty foolish to buy in Sydney now because its been running hot too long, perhaps there will be more growth but I personally would not take the risk.

The point is anyone who did not read the paper, watch auction clearance rates, see that there was a lack of stock during 2013-2015 must be totally off the planet. Seriously the opportunity was loud and clear if anyone jumped in Syd or Melb market they would have perhaps doubled their money. What is so hard about this?

Templeton states a different behaviour close to peak - comments below

As the market approaches its peak, more and more investors optimistically jump on board. Eventually euphoria sets in, but according to Templeton, at this point the market has already died. The “greatest fool” was left holding overpriced assets.


Once again what Templeton states rings true, seen this happen time and time again, this is why investors miss the boat and with it easy money its fear, and they need confirmation that the market is actually moving, so they wait wait and wait.

When the market has been reborn and is growing, investors tend to be pessimistic and skeptical. Fear prevents them from entering the market at the most opportune time. As you may have guessed, Templeton’s strategy was to invest at the point of maximum pessimism.