I pointed him to this graph:
Somewhere, I have seen a graph of the Tulipmania bubble, but I was unable to find it. From memory, it was a lot steeper on both sides of the peak than the bubble above. I also recall that bubbles seem to be a bit more symmetrical that the above (hypothetical) graph suggests.
So, why is the study of bubbles important?
There is an underlying assumption in my long term analysis of companies - that the previous 10 years performance of a company is indicative of the next 10 years performance of that company.
As an aside, don't listen to anyone that tells you "Not to assume" or "Don't make assumptions". You can't live without making assumptions. It's how the brain works in the absence of complete information. The key is to acknowledge the assumptions and if possible, validate them.
So, in analysing a company, I have to validate my assumption, and explicitly ask - "Is the last 10 years performance indicative of the next 10 years performance". This is essentially the same concept of the "moat" that Buffett talks about. A quality company with a durable competitive advantage has a large moat protecting it from competitors and other things that would reduce it's performance, and so it holds that the last 10 years is (usually) indicative of the next 10 years.
Back to bubbles. The Australian property market has been in a bubble for the last 10 years, and it is popping as I type (Today, Melbourne median house prices is down 6% over the last quarter). So, when I ask myself "Is the last 10 years performance of this company indicative of the next 10 years performance", for a company whose performance is linked to the Australian property market, eg, MOC, the answer is "no".
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Is this the start or just a bounce and what is the timeframe for say the 30% - 50% correction to occur. So when is the time to start looking to buy a house.
ReplyDeleteWithout further intervention by the Government, it looks very much to me like the crash has begun. There may still by the "return to normal" (see graph above) this year, but it will be short lived.
ReplyDeleteGovernment intervention looks unlikely at the Federal level, given that Gillard removed the Minister of Housing position, leaving the RE industry short of someone to lobby to, sothey are currently lobbying the state governments to "address affordability" by removing the stamp duty. I don't think that they will be successful.
In both the UK, and the US, unemployment started to rise 6-12 months after prices began to fall, so I wouldn't be surprised to see that towards the end of 2011 in Australia.
This would suggest that further falls will occur in 2012 and 2013. By this stage, all of the "negative gearers" will concede and head for the exits, leading to falls in 2014 also.
I am guessing that 2015 will be a good year to buy a house, although, by then, there certainly won't be any rush.
Then again, some say that I'm delusional.