Bears for Newbies

As a non-accountant I would like to know what is a reasonable parameter to use when evaluating shares in a Bear Market?
Nowadays NTA is only useful for the non tech companies. Does DCF still provide a good guidance as to underlying value?

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Originally Posted by Jerry

As a non-accountant I would like to know what is a reasonable parameter to use when evaluating shares in a Bear Market?
Nowadays NTA is only useful for the non tech companies. Does DCF still provide a good guidance as to underlying value?

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NTA in my opinion is never a good parameter to evaluate shares. I do believe DCF is the best method, however it comes with the most assumptions and you need to be able to predict cashflows into the future which is near impossible to do accurately.

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Originally Posted by blackcap

NTA in my opinion is never a good parameter to evaluate shares. I do believe DCF is the best method, however it comes with the most assumptions and you need to be able to predict cashflows into the future which is near impossible to do accurately.

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Not to mention coming up with some good guesses about future interest rates!

:confused:

I appreciate without knowing my financial position this question is a little pointless but thought it might help me to put it in writing and get others views.

Stockmarkets at all time high valuations, NZ residential real estate also at nose bleed levels. I have no debt, some cash and some shares. I was considering selling all my shares and buying a property with some debt (probably not a lot in this day and age). I am getting nervous around my gold miners who have done OK and shares like Mercury at current valuations provide only a 3% yield. The house would provide a 3% net yield as well but with debt I could take advantage of monetary policy instead of being frustrated by it and the house might be a better inflation hedge and even if prices plunge it won't be flashing on a board on a daily basis so I could ride it out better emotionally, if there was a crash.

Both markets are overvalued in my opinion but a house might give me more peace of mind. My share gains could be cut in half in a matter of weeks or months. If I cash out now I lock in those gains and sleep easy.

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Originally Posted by Aaron

I appreciate without knowing my financial position this question is a little pointless but thought it might help me to put it in writing and get others views.

Stockmarkets at all time high valuations, NZ residential real estate also at nose bleed levels. I have no debt, some cash and some shares. I was considering selling all my shares and buying a property with some debt (probably not a lot in this day and age). I am getting nervous around my gold miners who have done OK and shares like Mercury at current valuations provide only a 3% yield. The house would provide a 3% net yield as well but with debt I could take advantage of monetary policy instead of being frustrated by it and the house might be a better inflation hedge and even if prices plunge it won't be flashing on a board on a daily basis so I could ride it out better emotionally, if there was a crash.

Both markets are overvalued in my opinion but a house might give me more peace of mind. My share gains could be cut in half in a matter of weeks or months. If I cash out now I lock in those gains and sleep easy.

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The question is, Is it 'better' to ride out the upcoming 'bear market' in shares or in property. 'Better' is used in a broad sense of not just 'financial value' but 'mental health'.

The financial value bit is easiest to answer. A property is unlikely to fall in value as quickly as shares. But it is also unlikely to 'bounce back' as quickly. Part of that is because the value of your house is not quoted in the media each day, as you surmise Aaron.

The other point is that not all shares go down in a bear market. Shares in gold mining companies tend to go up in times of trouble. So to some extent, you holding gold shares is a hedge against any upcoming bear. I guess what I am saying is that you can construct a portfolio of 'essential services' that do not go down in a bear market. But again Aaron, I am not telling you anything you don't know, because your disclosed holdings in gold miners and Mercury Energy suggest you have done this already.

Rising interest rates are likely to hit such a defensive yield portfolio though, just as they will hit house prices. So now we have to address the question of what you are worried about.

I can't give a definitive answer to the second bit of the question. Because people have different worries that must be addressed in different ways. In my case I have a series of bank term deposits arranged such that one matures each month that would meet foreseeable emergency needs. I also live in a fully paid off house which adds to my feeling of security. This means I am not too concerned about short term changes in my share portfolio. Crises happen suddenly and unexpectedly and, in sharemarket terms, tend to resolve in a matter of months. In NZX terms I mobilised some cash to do quite well out of Covid-19.

My nightmare would be owning a rental property where the tenant lost their income and started to smash the place up in frustration. Also tenants are much more difficult to deal with than just pushing a sharemarket buy or sell button. Plus maintenance on my sharemarket portfolio is much lower. I accept there are many out there who do not feel this way. So worry is really a question of 'horses for courses'. And I have never ridden your horse on your course.

SNOOPY

Thanks Snoopy
I appreciate my question would be difficult to answer for someone else without knowing my situation better.

Good points for and against for property vs shares.

I could buy a house with a lot of debt and hold all my shares, a riskier strategy but if you assume the RBNZ can keep house prices climbing ahead of wages and general inflation lets take the 20 year average of 7% and I can get a fixed term mortgage at 2.99% for 5 years that debt becomes an asset all else being equal. If inflation really takes off as some are suggesting then even better for property as some companies will struggle in a high inflation environment.

As you note most of my NZX holdings would be considered conservative and would most likely not disappear in a downturn. My goldminers to me are a speculation as the price of gold is faith based and they might do badly in a downturn. But they are also my big gamble that if things turn to custard they could do really well but that is pure speculation. Like a lotto ticket but with a chance to get something back.

If we have a downturn and deflation, as always losses will be amplified by debt. Inflation or deflation? maybe I should just go with the trend and not with what I think makes more sense long term. I just need to grow a pair and commit one way or another and live with the consequences, my constant procrastinating is tiring me out.

So as a conservative investor who has given up on yield maybe if I keep my NZX shares, sell my goldies and take on a bit more debt with a house purchase yielding a ridiculous 2.94% and rely on Adrian Orr and govt (national or labour) to continue with the madness and ensure I am better off than the generations following me.

I guess I am assuming a benign inflationary environment with no rise in interest rates as monetary policy tries to deal with too much debt while encouraging more debt at the same time boosting asset prices and keeping interest rates low. Central banks fighting a trend of deflation caused by more retirees spending less, pandemics and computers and AI also causing deflation as some businesses become more efficient and cheaper. A rise in interest rates will drop all asset prices, property and shares but is it likely to happen.

As unsure as ever, I guess I will look at houses this weekend, doing something always feels better than waiting for something to happen.

IMO, it's not likely a bear market will come in 2021. I hope i'm wrong but world gov'ts are steering this ship so it never sinks. Record low interest rates will continue to boost equities as there are simply no real other alternative (apart from real estate ; but to the those that already have real estate...?)

New legislation on tenancy makes it difficult to eject tenants if they can't find a new place.. overall the idea of rental properties is a risky venture if you're doing it solo. Property rental managers take over 10% of the rental - which leaves lower returns. The more scary concern is meeting the 5 year bright line test will mean nothing when there's a possibility of CGT. The processes of buying / selling a house today requires full disclosure to IRD. Something like 'buying for an investment' can easily mean CGT as 'intent to profit'.

Real Estate has govt backing and immigration and demand for real estate will boom once the lock down is lifted under the current govt or any of the alternative govts for that matter.

https://www.stuff.co.nz/business/opi...ices-this-time