Stanford Brown TW3 – Property, Pendulums and Pumpkins

Market Wrap

Global markets rebounded strongly this week, as opportunistic buyers and indications of progress in the US-China trade war boosted investor sentiment. Reports of strong jobs and wage growth in America coincided with better than expected corporate earnings, which settled investor nerves. The rebound continued overnight after Trump tweeted that trade discussions with China were “moving along nicely”. It would seem that investors don’t care that Trump has a rich history on flip flopping on policies depending on what side of the bed he woke up on, whether or not his toast was burnt, or our proximity to the vernal equinox.


In local news, the Australian Dollar surged after reports that our trade surplus (the value of our exports minus the value of our imports) was almost twice as high as forecasted. The result bodes well for the prospects of a surprise budget surplus next year, however inflation and wage growth remain anaemic. CBA added a new chapter in Australia’s rich history of corporate blunders, selling Colonial First State for $3.7b after purchasing it for $8b in 2000!

Finance 101 – Contrarian Investing

One of the drawbacks of a university education in finance is that the majority of financial theories are taught with the underlying assumption that investors act rationally. This leaves graduates ill equipped to operate in the real world, where investors introduce their innately human imperfections and irrationalities into the mix.

The legendary investor Howard Marks likens investor psychology to a pendulum swinging along an axis. The average point in the trajectory of a pendulum is at the middle of the axis, even though it spends very little time there. Likewise, investor sentiment is rarely at an even balance between greed and fear, spending more time swinging from one extreme to the other.

The S&P 500 tracks the movements of the 500 largest companies in America, and since 1929 has averaged just over 6% p.a. after inflation. Remarkably, only 9 of those 89 years experienced returns within 2% of the historical average. Wild fluctuations of the pendulum are the norm!


There are many reasons for this impressive volatility, however an underappreciated factor is investor psychology. When times are good, the pendulum of investor psychology swings towards greed, credulousness and risk-tolerance. Investors assume that the good times will continue on forever, because “this time it’s different”, and pay prices that assume blue skies forever because they can’t remember the last time it was a rainy day.

Inevitably, storm clouds appear, and the pendulum swings towards fear, incredulity and risk-aversion. Investors rush for the exit, caring more about cutting their losses than taking advantage of the hysteria of the market. Investors sell at prices that assume that we’ll never see a blue sky again, and previously overpriced investments become bargains.

Warren Buffett once wrote that investors should be fearful when other are greedy and greedy when others are fearful. This does not come naturally to us, as our evolutionary psychology was formed in an environment where conformity and unity was necessary for survival, making contrarian behaviour uncomfortable. However, contrarian investing is the best way to buy low and sell high, whilst following the herd is an express lane to buying high and selling low.

Dr Don Dices Doomsayers

The current gloom surrounding the property market is a perfect example of how investor sentiment swings between euphoria and depression. Less than two years ago, property was the hottest thing in town. Now, it seems every newspaper is forecasting Property Market Armageddon. Although the current correction is overdue and will ultimately increase the stability of the economy, it’s important to remember that there is such thing as too much scepticism and risk-aversion.

Our very own Dr Don Stammer (he sits on SB’s Investment Committee) wrote an excellent article in the Australian this week, providing a much needed dose of objectivity in an environment saturated by doomsayers. Dr Stammer rebutted the notion that since there are high levels of household debt and mortgage debt, there must be a housing crash imminent. These ratios don’t take into consideration offset accounts, redraw facilities and prepayments, and thus are likely to exaggerate the indebtedness of homeowners. Dr Stammer also torched the media for contributing to the plunge in sentiment, noting that a recent 60 Minutes report named “Bricks and Slaughter” misrepresented the views of the experts being interviewed.

Don, an economist by trade, believes property will decline by a further 5% – 10% and then flatline for an elongated period. The price of an asset is a product of supply and demand. They’re not making any more land, and Sydney is projected to have a population of up to 8 million by 2050. This is a good proposition for investors who can tune out the noise and focus on the long term.

Correction Continues

House prices continued to trend lower in October, with Sydney’s prices down 7.4% over the past year. The past year has been Sydney’s weakest 12mth performance since 1990, when Bob Hawke was still in power and interest rates were at 17%. Tighter lending practices, fears of Labor banning negative gearing from July 2019 and the perception of Sydney becoming a buyer’s market are the primary culprits behind the slump.


Kiwis Say Kia Ora to Commerce

It appears that New Zealand’s dominance of Australia extends from the rugby pitch to the boardroom, as the World Bank dubbed the land of the long white cloud as the best place in the world to do business.


Australia ranked 18th in this year’s report, which is unsurprising considering that since 2007 our prime ministers have been too busy worrying about being stabbed in the back to enact any meaningful economic reform. The current prosperity Australia is experiencing is the result of timely economic reform (floating the dollar, GST, etc), and we are unlikely to become a modern economy when our business laws are ancient.

SB Seminar – Almost Sold-Out!

If you are planning to attend our Xmas Seminar, Health, Wealth & Sex in Retirement, with guest speakers Bettina Arndt and Noel Whittaker, please let us know as soon as you can. We are almost full! Full details here.

Who Am I?

Congratulations to Bryan and Linda for spotting a young Bill Gates in last week’s TW3 instalment!


But who am I?


Pic of the Week

This airline pilot gets our vote for Halloween costume of the year!


Video of the Week – Only in America

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