All Topics / Creative Investing / Investing via Variance – Property Capital Distribution

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  • Profile photo of LRLR
    Member
    @lr
    Join Date: 2007
    Post Count: 9

    Yesterday's Fin Review had an article about a calculus whiz who now works within the stock market. Part of his logic and reasoning for his exceptional returns was the use of variance.

    To have $100 on two different stocks, with one doubling and one halving, you would have a total of $250 ($200 + $50). The variance issue is that even though the overall portfolio gained 25%, the ratio is imbalanced.
    If the variance isn't redistributed and the portfolio repeats the same scenario though swapped, you end up at $200 again. Now, within property cycles and localities, this yo yo principle, could take a some years. A couple of property cycles should iron it out, though could it be improved by considering variance?
    The idea is that had the variance been adjusted, distributing the variance back to half each, the amounts would each be adjusted to $125. The second identical shift though swapped, would now result in a figure of $312.50 ($250 + $62.50). This compares to the earlier mentioned $200. 
    Thisl 56% improvement from the original model may be an indication of the potential that the averaging of capital variances provides.
    Use of the model for property may entail gearing the growth from some to the leverage of others, rather than killing the golden goose in your fav suburb.
    Profile photo of L.A AussieL.A Aussie
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    @l.a-aussie
    Join Date: 2006
    Post Count: 1,488

    I'll have a crack at explaining this in plain English. Correct me if I'm wrong.

    It means; don't buy two properties – one good one and one dud one.
    Instead, buy 2 good ones that both keep going up in value.
    Possibly, buy in different suburbs, or different towns or different states to improve the chances of consistent cap growth, and minimising "all the eggs in one basket" so to speak.

    Of course; this is far easier to do with property than scares (sorry; shares) anyway.

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