More bubble talk...

[Lorenzo]

some businesses are good, while some are questionable like REN REN.

Bubble or not, some survive, some burst.

 

[snoopy]

Only because the broad money supply has increased, largely fuelled by the increase in lending of banks.

People need to remember the old economic saying by Milton Friedman "inflation is always and everywhere a monetary phenomenon" meaning that inflation is a result of increased money supply.

The problem is when the increase in money supply is based on debt, but these debts inevitably must be paid and when they are you have a contraction in money supply which creates deflation, thus popping the bubble that was being sustained on the premise that "capital gains" would justify the investment in the long run.

The fact is the strategy has worked for most. All the rationalizing in the world won't change that.

 

[Chris.C]

The fact is the strategy has worked for most. All the rationalizing in the world won't change that.

Like most who use short term "anecdotal evidence" to justify their investment, an investment horizon of 5 or even 10 year is way too short to suggest that "the strategy has worked" as the cycle hasn't fully played out yet because most debt that fuelled the growth is still outstanding.

You'll have noticed over the last two years that as credit growth in the housing sector has stagnated, so have prices (they have actually fallen) and your average negatively geared property investors needs a capital appreciation of at least 6% per year otherwise they are making a real loss on their investment and anything less than a 8% gains per year in housing prices for most property investors would (if they were rational) be too small to justify the investment considering the alternatives.

So when housing prices are falling at 2% per year in nominal terms (or 7% a year in real terms), those in the market are bleeding money (though some will be slower than others to work it out). And it's important to note here we are not even talking about a credit contraction yet.

What most don't consider when it comes to long term investments is that "supercycles" normally require a generation to fully play out (think 30+ years). So to those that are bull's on Australian property that haven't been in the game for at least 30 years, I say keep your money where mouth is and hold for another 10 years and we'll speak then.

That's all I'll say on the Australian property market as I'll try to get back to the tech bubble.

The interesting thing about the tech bubble is that people treat companies like normal companies when any of us that have been working online for more than 5 - 10 years will know that a LOT changes in 3 - 5 years. Great websites come and go. So why does anyone ever invest in a tech company on anything longer than a 5 - 10 year time horizon unless they have year on year revenue growth that is double, if not triple figures.

 

[snoopy]

Like most who use short term "anecdotal evidence" to justify their investment, an investment horizon of 5 or even 10 year is way too short to suggest that "the strategy has worked" as the cycle hasn't fully played out yet because most debt that fuelled the growth is still outstanding.

It is simply a fact, the strategy has worked well for most who have used it. It is a bit like telling people it was a bad idea to buy Google stock when they've already doubled their money. The only people you'll convince is people who missed the boat.

 

[Chris.C]

It is simply a fact, the strategy has worked well for most who have used it. It is a bit like telling people it was a bad idea to buy Google stock when they've already doubled their money. The only people you'll convince is people who missed the boat.

But by this logic you could say those that invested in US housing in 1995 and sold in 2005 had a sound investment strategy, when if they held on for the next 5+ years most of their gains would have been wiped out.

Short term investments are speculative gambles whose success is largely based on timing.

On the flip side someone who invested in Amazon in the middle of the 1999 tech bubble for $50 - $100 would still be better off today (even including a crash back to $6) because Amazon is a good quality, profitable company that now trades at around $200 over 10 years later.

 

[snoopy]

But by this logic you could say those that invested in US housing in 1995 and sold in 2005 had a sound investment strategy, when if they held on for the next 5+ years most of their gains would have been wiped out.

Short term investments are speculative gambles whose success is largely based on timing.

On the flip side someone who invested in Amazon in the middle of the 1999 tech bubble for $50 - $100 would still be better off today (even including a crash back to $6) because Amazon is a good quality, profitable company that now trades at around $200 over 10 years later.

That is not the same logic because you are concluding with an outcome that has not happened. I'm talking about what has actually happened in the market we are discussing.....the reality, not "what could happen" or "what someone thinks should happen".

The logic you are using is saying "Hey XXXX market had a huge boom and went bad...therefore the Australian property market....". All the academic arguments are moot as well, that isn't the reality of how things have gone.

So either we can fluff with a whole lot of predictions about the future or we can focus on what has actually happened. Like it or not the people who negative geared into property largely got it right an the naysayers were wrong. Personally I wasn't one of them, wish I was.

 

[Chris.C]

That is not the same logic because you are concluding with an outcome that has not happened. I'm talking about what has actually happened in the market we are discussing.....the reality, not "what could happen" or "what someone thinks should happen".

Fair point.

I'm just so arrogant that I assume that my predictions of the future have already come to pass.



But rest assured they will...

So either we can fluff with a whole lot of predictions about the future or we can focus on what has actually happened.

Looking backwards while moving forwards isn't always wise.

Like it or not the people who negative geared into property largely got it right an the naysayers were wrong. Personally I wasn't one of them, wish I was.

Well luckily for me I was one. I bought into the Brisbane market in 2007 (despite being an economics graduate I was till ignorant of real world economics and thought I had a foolproof strategy to riches via leverage) and sold out in May 2009 (because of my fears about the future after becoming a student of economic history and the GFC).

I bought for $537K and sold for $609K 18 months later and still only ended up with a few thousand dollars in the hand (was a great leason about cashflow, government fees and charges, real estate agents and taxes)...



Took my capital back and moved back into the industry I know that gets a good ROI without all the government and regulations (I know we all piss and moan about AUDA and expensive domains, but AUDA is nothing compared to the actual government and registrars fees are nothing compared to agents fees!).

 

[snoopy]

I bought for $537K and sold for $609K 18 months later and still only ended up with a few thousand dollars in the hand (was a great leason about cashflow, government fees and charges, real estate agents and taxes)...

Can't expect to make money in property over that time frame.

Are you sure a profit was made after all costs? Would be about 20k in stamp duty, 60-70k interest cost, maybe 15k in selling costs, maintenance, management costs + perhaps 30k in rent? Doesn't sound like a profit to me.

Again though the problem is the timeframe, an 18 month timeframe is gambling given the high transaction costs. That kind of strategy would be akin to buying a domain at auction then re-auctioning it in a short timeframe, most of the time this will only make money from the auction house.

 

[Shane]

Yes property investment has worked well for plenty of people, but it's mainly due to the credit boom over the last decade. If we were having the same discussion ten years ago it would be a different story.

Even in a healthy market people can still get it wrong. In my work as a financial adviser I have seen plenty of people do their dough trying to invest in property. For some they have broken even (which is still really a loss given the opportunity cost) but there are others I have seen go bankrupt through getting greedy with investment properties.

Of course plenty have done spectacularly well out of it, but for most "mum and dad" property investors it has been through good luck more than anything else.

But getting back to the subject, I can almost guarantee that people will lose money in the current online boom. I mean, how many group buying sites can really survive profitably? If the sector turns out anything like auctions (ebay), search (google), careers (seek) and any other online niche you can think of, it's apparent that only one or two businesses can survive profitably and the rest will eventually fail.

An alternative to letting the business fail is of course to sell your business when you think the bubble is reaching it's limit, and I think that's what a lot of entrepreneurs are doing right now. If you think you're the leader then you hang on and reap the rewards (facebook, groupon etc) otherwise you sell out to some wealthy investors and lock in that profit.

Financially the world is still in a very fragile state. Things are looking good online and in Australia due to the mining boom, but if you think the GFC is history, you are very wrong.

Just stay safe and keep a few dollars in the bank for a rainy day.

 

[Chris.C]

Can't expect to make money in property over that time frame.

Agreed, but my market analysis changed over the 18 months which justified selling, even at a loss if required (luckily it wasn't required - though it did look like a loss was going to be inevitable for a long time - property was on the market for 9 months).

Are you sure a profit was made after all costs? Would be about 20k in stamp duty, 60-70k interest cost, maybe 15k in selling costs, maintenance, management costs + perhaps 30k in rent? Doesn't sound like a profit to me.

Yeah I'm sure.

The place was positively geared for a good chunk of that 18 months and was only slightly negatively geared for the rest.

That said, whilst it may be an operating profit, it was an economic loss from my perspective because this doesn't factor the opportunity cost of having all my capital tied up in the investment property that wasn't making much of a return when it could have been much more effectively used in my business.

I actually didn't start buying Australian domains until I sold my property (May 2009) because SO MUCH of my equity was tied up in the place and I didn't want to put myself into any more debt (same time as sold my IP).

I missed a lot of good hand reg opportunities over the previous 12 month because I didn't feel financially secure enough to go into anymore debt.

Again though the problem is the timeframe, an 18 month timeframe is gambling given the high transaction costs. That kind of strategy would be akin to buying a domain at auction then re-auctioning it in a short timeframe, most of the time this will only make money from the auction house.

Agreed.

But hey, I appreciated the learning experience and still got to keep my shirt.



Failing cheap is the way to do it.

 

[DomainNames]

http://techcrunch.com/2011/05/18/at...ckerberg-isnt-the-role-model-reid-hoffman-is/

As for the brain-dead commentators wondering if LinkedIn’s IPO represents a bubble, somewhere Hoffman has to be laughing and shaking his head again. What part of spending a decade of building a business with more than 100 million users that no one hyped, that represents one of the few large-scale working examples of a freemium business model screams “BUBBLE” to you people? These are the same people that said Google was wildly overvalued when it priced at under $100 a share.

As most people with common sense have argued, we’re not in an Internet bubble now, because the soaring valuations are mostly contained within the frothy insider ecosystem. Secondary markets are starting to change that, but so far, there are exactly two $1 billion + Web 2.0 exits that I can count: YouTube and LinkedIn. Maybe you count a few more. It depends on your definition of “Web 2.0.” I count it as the wave of consumer Web social media companies started with the Friendster explosion. Some could count Skype (twice,) but I’d argue Skype is more of a sandwich generation company. But even if your definition is more generous, I bet you can count them on one hand. Five or fewer isn’t a bubble.

There’s exactly one aspect of Silicon Valley right now that I will concede does feel like 1999: It’s easy to start a company. Stupidly easy. And entrepreneurs like Hoffman are the antithesis of that archetype not a symptom of it.

 

[Chris.C]

I thought this was an interesting interview:

http://www.abc.net.au/lateline/business/items/201106/s3240338.htm