Strategies

The following pertains only to CG strategies/negatively geared investments.

First assume : positive expectancy (ie an upward trending RE price in the LT with cyclical ups and downs). cf negative expectancy in a casino where the odds are against you in the long run. In this environment you want to make small gains over a long period. In a casino you want to make big gains early, this is the only way you can win as the LT odds favour the house (excuse the pun).

The interesting thing is that despite + expectancy, a significant proportion of people seem to to lose. Anecdotally, less so in real estate than individual shares. I assume this is due to their strategy. I can only think of 2 :

Option 1 : scaling out : sell a third when gaining 20% (or whatever %) then sell another third when gaining 40% and then let the rest run as long as it can…
obviously this is not optimal in the LT since you are totally invested on losers and you have only a third on winners that are big winners…This seems to work best if you are a reasonable market timer (losers lose less than 1/3 winners).

Option 2 : dollar cost average or scaling : you put in a small investment at the beginning and then increase your position size as it moves in your direction. This gels better with + expectancy but will take a long time. It is not consistent with a large initial position size. Also if your initial investment underperforms then your investment strategy maybe delayed for a long period.

I wonder how many people confuse strategy 1 and 2 (*). If you are a market timer then it makes sense to have a large positional bet. If you are a DCA, and rely on the long term fundamentals of the RE market then it does not make sense to do this. If you are relying on LT + expectancy in RE then I would have thought dollar cost averaging over a long time period is necessary. RE investments being as lumpy as they are, I am wondering whether people who have ponied up more than 2 IP’s in the last 3 years have subscribed to 2 but instead become (unwitting) market timers. Positive expectancy does not ensure a positive return in this situation.

In the sharemarket 95% of daytraders lose most of their money, 90% of traders make a loss in the first 3 years (with average losses 30% year 1, 15% year 2, breakeven year 3), 80% of people who invest in individual shares underperform passive index tracking funds in the long term. I wonder what the statistic is for individual property investors.

If you are underperforming in your real estate investing I am sure you are not alone. People only talk about their winners or like they are winners. If you view it as a business, it would be an exceptional business if it was a long term viable proposition and profitable in the first 3 years. If you are profitable in the first 3 years then congratulations, you may have a winning strategy or you may just be lucky.

(*) I’m a market timer. As such I don’t really care how many people confuse 1 and 2. In fact the more the better.

Disclaimer : I am not an financial advisor. This is not financial advice. Speak to someone qualified in investment advising before making any financial decisions.