In Search of the Perfect Investment

My father started an investment bank. His friends gave him their savings. He paid them 24% a year interest. He loaned the money out at more than that and made a handsome living. In those days, Australia lacked industries — like nylon manufacturing, tire distributors, commercial office developers and even Italian gelato bars and pizza parlors.

When he came to retire, I watched a parade of unhappy depositors arrive at our house. “Richard, nice you’re going to retire, but what am I going to do with my money?”

Father had no answer. He offered sympathy, wished them luck and wrote them a check. Many had never taken out a penny of interest.

Things were different then. There were a zillion easy opportunities, but little money.

Now there are zillions of dollars, but few easy opportunities.

Suddenly, interest rates are zero. We are chasing the same few opportunities everyone else is chasing. There are more of us than ever before. And those “opportunities” are no longer obvious, nor cheap.

Cash is everywhere. Tech companies have it. Pension funds have it. You and I have it.

It’s not 2009. Nothing is cheap. There is no blood in the street. There are oodles of predictions of “bubbles” and imminent stockmarket collapse. It’s a scary world, for many.

We had our regular investment club meeting yesterday. There were some “solids” — SLB, AMZN, TOLL, LEN, FWM, Softbank. and some speculations: MGCD and PATR. But none that got my juices flowing.

If you’re fed up with volatility, Dimensional Fund Advisors is for you. Click here.

Given volatility and high stockmarket prices, everyone is piqued by “alternative investments.” There is real estate. There is contemporary art. There are watches, And there are diamonds.

Good news about alternative investments: Knowledge about them is not played out publicly on the web. In these you can actually get an advantage — if you know what you’re doing.  But you’d better stay with ultra-high end, pricey stuff because that’s where the money and growth is. That’s where duplicating is most difficult.

Bad news: Alternative investments are always illiquid. There are no Stop Loss Rules. And there are plenty of “gotchas.” For example, it’s nice to buy a building with Home Depot as the sole tenant. But you’d better find another tenant before your lease expires, because Home Depot will want to move to a fancy, smantzy, larger store. And you’ll be sitting there with an empty building, and looking pretty stupid.

There are four “solutions”:

+ Diversification.

+ Research, research and more research. Knowledge is your friend. Check for gotchas.

+ Only get involved with investments you like watching — a painting on your wall, a watch you like wearing, a company whose products you enjoy owning.

+ Do your own thing. Your own business is still the best.

Here’s more on real estate as investment: From the latest New Yorker by an excellent financial writer, James Surowiecki

Real Estate Goes Global
When price-to-income or price-to-rent ratios get out of whack, it’s often a sign of a housing bubble. But the story in Vancouver is more interesting. Almost by chance, the city has found itself at the heart of one of the biggest trends of the past two decades-the rise of a truly global market in real estate.

We’re all familiar with the stories of Russian oligarchs buying up mansions in London, but this is a much broader phenomenon. A torrent of capital from wealthy people in emerging markets-from China, above all, but also from Latin America, Russia, and the Middle East-has flowed into the real-estate markets of big cities in other countries, driving up prices and causing a luxury-construction boom. A recent report by Sotheby’s International Realty Canada examined more than twelve hundred luxury-home sales in Vancouver in the first half of 2013 and found that foreign buyers accounted for nearly half of sales. In Miami, a huge influx of money from Latin America has enabled the city’s housing market to recover from the bursting of the housing bubble, and has set off a condo-construction spree. Australia has become a prime market for Chinese investors, who Credit Suisse estimates will buy forty-four billion dollars’ worth of real estate there in the next seven years.

What’s so special about the places that attract all this foreign money? The economists Joseph Gyourko, Christopher Mayer, and Todd Sinai have developed a theory about what they call “superstar cities.” Looking at data from 1950 to 2000, they found a small number of cities where housing prices rose steeply, and concluded that high earners tended to cluster together over time, with the result that rich cities tend to get richer.

Vancouver isn’t an obvious superstar. It’s not home to a major industry-as New York and London are to finance, or San Francisco to tech-and it doesn’t have the cultural cachet of Paris or Milan. Instead, Vancouver’s appeal consists of comfort and security, making it what Andy Yan calls a “hedge city.” “What hedge cities offer is social and political stability, and, in the case of Vancouver, it also offers long-term protection against climate change,” he said. “There are now rich people around the world who are looking for places where they can park some of their cash and feel safe about it.” A recent paper by two Oxford economists bears this out, showing a tight correlation between London house prices and turmoil in southern and Eastern Europe. The real-estate boom in Miami has been magnified by political unrest in Venezuela. And Vancouver, which has a large Chinese population, easy access to the Pacific Rim, and nice weather, has become a magnet for Chinese investors looking for insurance against uncertainty. A Conference Board of Canada report found that Vancouver’s real-estate market is tightly connected to what happens in the Chinese economy.

The globalization of real estate upends some of our basic assumptions about housing prices. We expect them to reflect local fundamentals-above all, how much people earn. In a truly global market, that may not be the case. If there are enough rich people in China who want property in Vancouver, prices can float out of reach of the people who actually live and work there. So just because prices look out of whack doesn’t necessarily mean there’s a bubble. Instead, wealthy foreigners are rationally overpaying, in order to protect themselves against risk at home. And the possibility of losing a little money if prices subside won’t deter them. Yan says, “If the choice is between losing ten to twenty per cent in Vancouver versus potentially losing a hundred per cent in Beijing or Tehran, then people are still going to be buying in Vancouver.”

The challenge for Vancouver and cities like it is that foreign investment isn’t an unalloyed good. It’s great for existing homeowners, who see the value of their homes rise, and for the city’s tax revenues. But it also makes owning a home impossible for much of the city’s population. And the tendency of foreign buyers not to inhabit investment properties raises the spectre of what Yan has called “zombie neighborhoods.” A recent study he did found that a quarter of the condos in a luxury neighborhood called Coal Harbour were vacant on census day.

One option would be to severely restrict foreign ownership, but that’s politically difficult, and not great for a city’s economy. It might make more sense if the Vancouvers of the world simply charged foreign buyers a premium for the privilege of owning there. “We’re one of the places where people seem to want to park their cash, and there aren’t that many of those places,” Yan says. “So let’s raise the parking fees.” As for the rest of us, we’d better get used to being tenants. 

More about watches. Writes two authorities:

+ Watches are like most investments and are full of snares for the unwary.  The good news is that unless you are going after really rare stuff you can spot the fakery with surprisingly little expertise.  If you specialize, as I do, you can become much better informed than most auction house experts.

I stay away from extreme complications.  They are very expensive to maintain and its really easy to do something wrong and damage them.

Mechanical perpetual calendars are a particularly attractive nuisance. The problem is that unless you run them all the time you have to set them up for the day date month and year.  If you do something wrong in the set up you can do expensive damage.  For perpetual calendars quartz makes a lot more sense.  There are some very elegant mechanical perpetual calendars  but they cost too much for me and I can’t maintain them.  On the other hand, it’s a great way to show you are uber rich.  That is not something I’d want to show even if it were true.

Used Rolexes are another trap.  First, there are about 100,000,000 Rolex certified chronometers.  That is about equal to the total output of the American watch industry.  Add to that the number of fairly well done fakes.  Also if any repair shop has used non Rolex OEM parts they consider the watch done, finished, and will neither repair nor restore it.  Rolex service is better than the complainers make it seem but it is expensive and they do make occasional errors.

There is a great book on fakery “The Rolex Report”  When it came out the author got a “Cease and Desist” order from Rolex legal.  Somehow he got in touch with them and asked why they objected to his telling people how to avoid counterfeits.  They told him “oops never mind”.

From reader Barry Merchant:

+ The irony regarding watches is that the fake ones keep better time than the real McCoys because they have quartz movements instead of jeweled ones. Call me old fashioned, but I like a watch that keeps time. Originally the Swiss bragged about the accuracy of their jeweled chronometers. Then Bulova came out with the tuning fork watch that bested them by a wide margin. After that came the quartz movements that cost 75 cents and were even more accurate. I had a Rolex because I liked the way it looked. My wife had a gold/stainless one which she “lost” and we replaced with a gold one (Later she “found” it.) None of them kept decent time and they were forever needing cleaning and maintenance which was a fortune. Now we have cheap quartz watches. My Casio is solar powered (never needs a battery) and resets itself to the atomic clock in Colorado every night (it’s always precise to the second). I’ve asked jewelers how come Rolex, Patek Philippe, Breitling et al are so expensive but can’t keep decent time. Their answer is that they’re beautiful pieces of jewelry. I’m okay with that except that they have a face on them with numbers and hands that move and they call them “watches.” Once you you do that……..I think they should be able to keep accurate time. But that’s just me.

 
Harry Newton whose patience level is shorter than a nat. I’m working on it. I should learn to “believe” in good companies and stick with them longer, e.g. ADSK, CAT and BX.