Being Right vs Making Money
Investing often has very little to do with being right. You can be correct in your analysis, but irrational markets can make you look incorrect in certain (short) timeframes.
I have so far been incorrect on Australian property prices. I didn’t foresee the market rising to the levels it’s currently at. Am I going to be permanently incorrect? I don’t think so, but only time will tell.
At Valor Private Wealth, we analyse investments over far longer time horizons than most. On almost every metric, Australian property is as expensive as it has ever been and comparatively very expensive in global terms. From this point, we think there may be greater than a decade of no real capital growth in Australian property prices. This leads us to being “allergic” to this asset class and dependent industries such as the Aussie banks.
We far prefer to buy assets when very few others are. This had led us to large capitalisation global companies over the last few years. We have bought significant amounts of companies trading at high single digit cash flow yields. Whilst we won’t be right on all of them, there is significant margin of safety in the price we have paid, such that it is highly unlikely that we won’t do well for our clients.
Buying property at very low single digit yields is highly unlikely to be a successful strategy. Unfortunately there are far fewer wonderful companies trading at a fair price than a few years ago. Investments are less obvious today than in 2012.
At Valor, we have done all we can to avoid Chinese exposure. For the last few years, we have been acutely aware of the unsustainable nature of the Chinese economy and have avoided anything directly dependent on it. China has continued to grow. According to some, this means our views on China are wrong. In the short term this certainly appears to be the case, however we have still returned significantly more than most for our clients. It is not about being right all the time. It is about knowing that when your analysis is correct on specific companies you make rational investments.
Will we be right on the macroeconomics of China and Australia? I don’t know for sure. I think we are more likely to be right than wrong, but macroeconomics is not an exact science. Avoiding credit bubbles like that in China can require a very long time horizon and a willingness to look wrong for some time.
This year is shaping up to be an interesting one for those that are non believers in the Chinese growth model of borrowing $3 for $1 of economic growth.
China can keep the credit taps on for a little longer, but it only makes the day of reckoning more acute. The flow-on effects to the Australian economy are less clear, but we are more than happy to avoid overpriced assets dependant on fairy tale credit growth.