Be a Lion, Not a Sheep

Posted by Daniel Joseph

‘I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful’ – the oracle of Omaha; the third richest man in the world; the one and only Warren Buffet.

Put another way; don’t be a sheep, invest counter cyclically and avoid the lure of popular opinion.

Anyone who has been to a Blue Wealth seminar (and if you haven’t, what are you waiting for?) will know that the optimal time to invest is at the point of opportunity on the property cycle.

Sounds easy, right? The problem is that opportunity coincides with the bottom of a market; sentiment is low, fear abounds and very few people look to invest. Anecdotally, this makes sense, but how does it translate in reality? The figure below tracks price growth vs sales for the Sydney housing market in the ten years to December 2014, the approximate time between property market cycles, and as can be seen below enough time for the various phases of the cycle to manifest.

You can see from the figure that when price growth is stagnant or dampening, sales volumes decline. Between January 2009 and December 2012, average yearly sales volumes declined 5 per cent. Why? Sentiment was low and, as Buffett implied, people were fearful. When the innovators begin their march the sheep follow, sales volumes increase and demand side pressure spurs price growth, as occurred between December 2012 and December 2014. During this time, sales volumes increased 45 per cent and prices increased by 30 per cent.

The moral: being fearful and following the crowd inevitably leads to poor investment decisions. By investing at the wrong time, all you’re doing is paying for someone else’s capital gain. Invest the time in getting educated and surround yourself with the right people. Be the lion; there are already too many sheep.

Posted by Daniel Joseph, on 30th Jun 2015