Know when to hold 'em, or when to fold 'em

Warren Buffett's long-term business partner , charlie Munger who incidentally will turn 100 in January next year has famously said the big money is not in the buying and selling , but the waiting . And really , the more the experience that I've accumulated with investing , the more I appreciate how true this statement is .

And it's interesting that a lot of Australians fall into two camps Either they're procrastinating beginning their investment journey , so they're always delaying making investment decisions , or they're in a hurry to build wealth as fast as possible and , arguably , are willing to take too high a risk to do so .

Really , the aim is to try and achieve a perfect balance between these two extremes , and you obviously must invest as much as necessary to achieve your goals and do that as soon as possible , as soon as it's safe to do so . But once you've done that , once you've made those investments , you've got to have the discipline and patience to let them do their thing .

Some things just take time and just can't be rushed . I guess the last couple of years has certainly reminded us that returns are never linear , they're never straight line . In fact , they vary dramatically from year to year and that's certainly been the case over the last three or four or five years .

Really , in the short run , investment returns are really unpredictable . But over longer periods of time , such as decade or multi-decade periods , investment returns can become a lot more predictable because really the volatility evaporates over that period of time and cycles even out .

For example , the property market moves in two distinct cycles as I've shown a chart previously and of course the link is on the blog , on the website and those cycles are either a flat cycle or a growth cycle . They're the two distinct cycles that a property market moves in .

And for you to enjoy average returns so your expected returns really you must hold a property long enough so that you experience the same number of growth cycles as flat cycles . So if all you've experienced is a flat cycle , of course your returns are going to be below average .

And when we look at how returns even out over time , we can only turn to the property market for a perfect example of this . And when you look at the average meaning house price between Melbourne and Sydney and look at over a few periods of time . Over the last year it's down 11% . Over three years it's positive 5.4 .

Over five years it's positive 3.8 , which is barely inflation , and over seven years it's 5% . So really , over the last one to seven year period it ranges from a negative 11% to a positive 5.4% . Very volatile , it shows . It's very volatile over relatively short periods of time .

Well , when you look over decade periods over 10 years at 7.1 , over 30 years at 7.1 , over 40 years at 7.5 . So when you look at those longer periods of time , you can see that returns are actually very consistent and don't vary that much . Now , the period of time that I missed talking about was 20 years , because I spoke about 10 , 30 and 40 years .

At 20 years , the average return over that period of time 5.4% . It's low , mainly because Sydney over the last 20 years has experienced two flat cycles and only one growth cycle , so it's kind of the outlier , if you like . But even then , if you even include that 20 year period , your returns range from a positive 5.4 to a positive 7.5 .

Again , it's pretty tight range , but I think when you look at those returns you're really looking at long term 7% , and if you've held a property for 10 , 30 , 40 years , you should expect to have enjoyed really good returns and , just as a side note , a five year return of 3.8% from the property market .

It's been a tumultuous sort of five years , but it really does show that property prices aren't particularly overcooked by historical standards . The point I'm trying to make is that you've got to have a lot of patience With most investments , but even in particular property . So let me give you a real life example .

One of my clients purchased an investment grade property in Ashgrove , brisbane , in 2007 . So quite some time ago , for 555,000 . Ashgrove is a great suburb and it is a really good property . The problem was that the Brisbane market didn't really grow much between 2011 , only a few years after he purchased it and 2018 . So it wasn't a lot of growth in that market .

Therefore , by 2019 , almost 12 years later the property was only worth 750,000 . So it's gone from 550,000 within 12 years to 750,000 , and then it equates to a company annual growth rate of only 2.6% . Naturally , my client was concerned and really wanted to sell the property .

Of course , I talked him out of doing that for the very reason of this podcast that we really need to have patience Today his property be worth about 1.15 , maybe $1.2 million probably actually in a decent market 1.2 . So over the first 12 years the property only appreciated in value by 195,000 . However , over the last four years it's appreciated by 400,000 .

And I think it's a perfect example of how growth is in linear , that you're not going to experience the same amount particularly in dollar terms , of capital growth every year and in fact you could have to hold a property for more than a decade , and sometimes a lot more than a decade , to really enjoy those gains .

Now the overall growth of his asset since 2007 is only 4.8% . So it still is underperformed and that's because of the timing when he bought it , which I'll come back to later , and also the fact that he's had a flat cycle during his ownership period .

Now I have a high level of confidence that if my client retains this property for another 10 years which I'll definitely advise him to do that the average growth rate since 2007 , so since he purchased it will eventually revert to the mean of around 7% .

So that is more growth to come from this asset and it's a perfect example of how you must really persevere and hold assets hold property assets in particular for more than 20 years to really enjoy the full gains . So you've really got to know when to hold them and when to fold them , as Kenny Rogers would say in his famous song .

For those that are old enough to really remember that song , I should probably point out when it comes to successful investing 9 times out of 10 , or maybe even 9.9 times out of 10 , the best thing is to do nothing , just wait , and once you've done that , wait even longer . However , sometimes investors push back on this fact . They're unhappy to do nothing .

They feel like it's not being proactive . But this is really untrue . Exercising patience is something and it's a very important action that successful investors must take . Now I understand that doing nothing can be really challenging . It's not always easy . It feels like you're accepting of substandard returns .

So , for example , after 12 years of owning a property , why should my client hang on to this ? It hasn't delivered the returns that he expected and you worry that if you do nothing , that you won't actually achieve your financial goals .

This really is a skill and it's something that needs to be learned over time , but really successful investing in any asset class , but in particular property , is really summarised by two simple but not easy steps . The first step is make sure your investment is fundamentally sound , so you know , evidence based , low costs , high quality asset , etc .

All the sort of stuff that I bang on about in this podcast . The second step is to hold that investment for many decades and do absolutely nothing . Again , very simple , not always easy to do , but if it was easy to do , everyone would be doing it , of course , and building wealth would be really simple and very common .

Okay , so what can you do if you don't want to have to wait for investment returns ? Well , in short , buy into markets that intrinsically undervalued . So therefore , you really need to consider past returns , most recent returns .

If you're investing in a market that has recently experienced above average returns , then there's a risk that you're buying at the peak of the market and a flat cycle or , even worse , a correction , is just around the corner . So if I go back to my example property that my client purchased in 2007 , he purchased the right asset .

It's a good asset in a good location . The problem was that in the six years leading up to when he purchased in 2007 , so between 2001 and 2007 , the median house value in Brisbane grew by an average of 15% compounding per annum . So really the problem was a timing issue with my client .

No wonder he didn't experience much in the way of returns in that first 12 years , because one he bought just after a growth cycle and two he might have ended up buying at the peak of the market . So you have to be careful about these sorts of things . I mean .

Another real life , current example is the NASDAQ , which is a US tech centric share market that's traded in New York . It's returned over 22% compounding over the last 10 years . That's a 7.3 times return . Like you invest 100 grand 10 years ago , it's now worth $730,000 .

So be careful investing in the US tech sector today , because surely that market will either experience mean reversion or two won't deliver 22% compounding returns over the next 10 years , or at least it's highly unlikely .

Therefore , to avoid waiting for good investment returns , you should invest in proven markets that have underperformed over the last 5 to 10 years , using proven , evidence-based methodologies . That is investing . Markets are intrinsically undervalued , but never , ever do that at the cost of compromising the investment's underlying fundamentals .

It's not about speculating , it's about investing , and investing is about achieving the highest return for lowest risk . But if you take this approach , you'll most likely benefit from the trend of mean reversion and therefore enjoy above average returns early on in your ownership period . Now , does that mean we have to be patient with all investments we hold ?

Well , no , there's one exception here If your investment is not fundamentally sound , if it's not of a high quality , no amount of patience will help . No amount of waiting will help an asset like that . I've always said that there's never a bad time to buy a really good quality investment .

You should invest in good quality investments when the timing is right for you . You don't really need to worry so much about the market per se , apart from what I've just discussed today . But if that's true , then it's also true that there's really never a bad time to sell a fundamentally unsound investment .

Also , now , of course , you don't want to give it away . You don't have to fire , sell it . You want to be strategic about it . But if you do have a done investment that has been underperforming , that you think is substandard , then you really need to do divestive it and move on .

You don't need to do it this year and maybe not even next year , but really you should set yourself a period of , say , two to four years where you can divestive any underperforming investments . Try and find the best market to do that in , but you don't want to be hanging on to them for the next 10 years .

Patience is only necessary after you've established that your investment is fundamentally sound . Now let me leave you with a Warren Buffett quote . Warren says that the stock market is a device for transferring money from the impatient to the patient , but I think this statement is true for all asset classes , including property .

Invest well and then do nothing for many decades . Simple , but not always easy . Okay , that's it for me for this week . Next week's podcast is all about 2023 financial year superannuation returns and a review of the major industry super funds , which I've got some really interesting and , I think , insightful information to share .

So hopefully you look out for that one . Okay , until next week . Bye for now .