The problem with "averaging in"

A popular approach to buying shares is set "buy" thresholds.  It's a fairly simple approach - when the share prices falls to reach the threshold price, you buy some shares.  Often, there are multiple buy point thresholds, such that as the share price falls through each of the threshold, you buy more shares.  The theory is that if you thought that the share price was cheap at say $5, then when it hits $4.50, it must be even better value, and so a better buying opportunity.

The theory is not wrong, it is just not optimal.

The Term Deposit Investing Model

It's been a while, so here's another thought experiment.

Suppose that a bank occasionally offered term deposit accounts at extraordinarily good interest rates - say 20% (for ever).  Suppose also, that they only did so very rarely - once every 5-10 years.  The catch is of course that it's very difficult to get money into this term deposit, as they only accept small denominations, so you have to manually keep filling out application forms so that you can get as much money in as possible, and you have to do so for the limited time that the bank will accept the applications.

Getting left behind

Another dinner party on the weekend, and so another chance to make some observations about people's beliefs about the Australian property market.

One guy made the (somewhat typical) following comments:

• If you don't buy now, you're going to get left behind.
• If not now, then when?  Prices are only going to go up.

Price to Book ratio and Return on Equity

Following on from my look at the Price to Earnings ratio, and in a similar vein to my post on subsequent rates of return, I'd now like to take a look at P/B ratios and ROE.  The mechanics of the numbers are fairly straight forward.

The Price to Book ratio is the price that you pay for the book value of the company - the book value being the net (booked) value of their assets - or in really simplistic terms - how much money they have in the bank, assuming no liabilities.  So, if they have $100,000 in assets and you pay $200,000 for the company, you are paying a price to book value of 2:1. 

The Return on Equity is simply how efficient the company is at making a profit.  If they use the $100,000 to generate $15,000 profit, they have an ROE of 15%.  Not bad.

These two metrics are linked though the P/E ratio.

Australian Housing Bubble - Change in Debt

Here is a link to Steve Keen's recent presentation to a debate re the Australian Property Market

Some essential points from the video (with data to back them up):

• It's not population growth or sluggish construction that drives house prices.
• Money pressure and booming credit drives house prices.
• Stagnant credit causes house prices to go down.
• Accelerating mortgage debt leads house prices by 2-4 months.
• Australia has a bigger housing bubble than the US had.
• Australian banks are not responsible lenders than the American banks, nor are they more financially sound.

Some cool quotes:

• "It's not people that buy houses, it's people with mortgages that buy houses."
• "Rising house prices require accelerating debt."
• "The first home vendor's boost, when the government gave $7,000 to first home buyers, who then leveraged it up at the bank, and bid $100,000 extra dollars more, and handed it over to the vendors."
• "We are in the biggest, debt financed, asset bubble in human history, and I'm afraid, I think you'll ignore it at your peril." 

Invest in your health

I'm drawing a long bow today with relevance to investing, however, for me personally, the whole point of investing is about having the time and resources to enjoy life with your family and friends.  It goes without saying that to be able to really enjoy life, you need to be healthy.

Hat tip to Schedule Flow for point me to this video.  I highly recommend that you watch it.

Super Fees

I've been meaning to write about fund management fees for a while now, however these articles covered most of what I had to say, so I didn't bother - until now.  Just yesterday, I saw an ad on TV that talked about how having multiple superannuation accounts can lead to excess fees, and it reminded me of one of the biggest problems that I have with fund managers.

It's not the breadth of your accounts that leads to excess fees - it's the depth.  Let me explain..

FOFOA

Short post today.  I've only just discovered FOFOA.  There are some really interesting articles there.  They are, however, really, really long - really.  So, it's taking me quite a while to get through them.

I highly recommend you check it out.  Try these posts for starters:

• The return to honest money
• Deflation or hyperinflation
• Debtors and savers