Break all Term Deposits and Invest in Cheap Shares

[Sauce]

While I think the chances of such a financial disaster is low, the consequence of the unlikely happening is very significant - ENP doesn't get his house. That is why I don't buy your maxmise your return philosophy Sauce, in this case.

Actually, I agree with you completely on this point. If he needs the money for something else in 2 years, it would be wise to decide the the market risk is too great with such a short time frame. But that was not my point. You will note what I wrote here:

Posted by Sauce:

In regards to any risk to his future property buying power - that's simply a 'go there' or 'don't go there' decision. Once he decides to 'go there' then he needs the best odds of success, which means making the best choice.

Posted by snoopy:

I have to admit to slightly gritting my teeth as I wrote my last post Sauce.

Yes I know a speculative sharemarket volatility 'marriage' to residential property 'prices' will never quite work. But I think that if there was ever any hope of such a fit, Ryman and residential property is probably about as good a fit as you are ever likely to get. I also know that ENP has studied Ryman before and been an RYM shareholder before. And I know that Ryman is a soundly run company for all sorts of reasons that you are well aware of. So for ENP, investing in Ryman would not be a spur of the moment decision, as he would have a pretty good idea exactly what he was investing in.

Sure. That all makes sense. But the idea of attempting linking returns to the property market is still one based on emotional comfort. But RYM is a good choice for the other reasons.

Personally I am not invested in Ryman, because while I am convinced of long term soundness of the business model, I am not convinced of the relative bargain status of RYM at this time. But then again I would say exactly the same thing about buying property in Auckland. This is another way that my 'match' loosely works.

Your right, it's not a bargain. I sold 20% of my RYM holding last week at 2.59 to buy a couple of 'relative bargains' on the ASX

But its also not as expensive as it will appear to people who don't appreciate the rate of return at which it is able to reinvest shareholders money. 6% cash yield, half paid out as a dividend and half reinvested at 30% return? Your 6% becomes 12% pretty quickly...

Regards,

Sauce

[Sauce]

Getting off topic, but I think you will find things are not as simple as that Sauce. CEN may only generate an ROE of 5% on the book value of their assets. But IIRC, the book value of CEN assets was magically increased a few years ago to better reflect the market value of those generation assets. All of that magical increase in generation asset value has gone indiectly into the pockets of shareholders. If you look at the ROE on the original floated value of those assets, I believe it is far greater than 5%.

SNOOPY

Sure. Same as RYM if you look at ROE its 15%. But this is incorrect if you are working out the return generated on retained earnings because of the IFRS treatment of paper portfolio gains.

But the point still holds. RYM will provide shareholders more future purchasing ability than CEN - for power or any other thing you decide to spend the money on. Company choice lifestyle hedges are irrational.

Cheers

[JBmurc]

In the big scheme of things, this is basically to accumulate my house deposit faster.

My half share for a deposit is 45-50k (me and my long term partner will go 50/50) so should achieve this in 2-2.5 years time with my current savings levels.

If I was to invest in shares (RYM) and achieve say a 30% return after those 2 years, then my 23k will grow to roughly 30k. After tax will leave me with a little under 6k. It takes me about 7-8 months to save that. So I will have my house deposit 7-8 months faster. Likewise, if I keep the same time frame, I will have a larger deposit.

However, if say the shares lose 30% of 23k then I will be left with 16k from my original 23k. That 7k will take me 8-9 months to save additionally, meaning I will have to postpone out house purchase for 8-9 more months.

I intend to sell the shares when I have accumulated enough deposit (45-50k) no matter what has happened to them, if I sell at a loss then so be it.

If your'd brought the like's of SSNO mon-tues on the ASX your be likely up 30% today not bad for a couple days holding(I brought SSNO 7.9c mon)

most of 10/11fy Sharemarket profits paid for 100k towards our house build last year.

[Snoopy]

In the big scheme of things, this is basically to accumulate my house deposit faster.

My half share for a deposit is 45-50k (me and my long term partner will go 50/50) so should achieve this in 2-2.5 years time with my current savings levels.

If I was to invest in shares (RYM) and achieve say a 30% return after those 2 years, then my 23k will grow to roughly 30k. After tax will leave me with a little under 6k. It takes me about 7-8 months to save that. So I will have my house deposit 7-8 months faster. Likewise, if I keep the same time frame, I will have a larger deposit.

However, if say the shares lose 30% of 23k then I will be left with 16k from my original 23k. That 7k will take me 8-9 months to save additionally, meaning I will have to postpone out house purchase for 8-9 more months.

I intend to sell the shares when I have accumulated enough deposit (45-50k) no matter what has happened to them, if I sell at a loss then so be it.

You have done a sensitivity analysis and added up the possible outcomes, both good and bad. This provides a good context on why I suggested that only one quarter ($6k) of your cash should be in the sharemarket as of yesterday.

With one quarter of your cash in the market a 30% sharemarket loss would reduce your capital by $1.8k, down to $21.2k. With 2-3 months saving, and the associated 2-3 month delay in your house purchase you could make that loss up. Everyone must make their own decision on downside risk of course. But in my books that would be acceptable.

I could equally accept the argument that with such a small change to the house purchase plan even if things go right this whole idea of boosting your investments over a relatively short time frame isn't a goer.

Having said all of that RYM has rocketed in price from $2.49 yesterday to $2.64 as I write this. A 30% gain on $2.49 would take RYM to $3.24. A 30% gain on RYM from $2.64 takes RYM to $3.43. It looks like the time for doing this deal was yesterday, although given the volatility around it might also be tomorrow.

SNOOPY

[biology12]

get on some banks, wbc is good, and a great yeild 7.5% for divs in december better return than in a term deposit.just hold till then

[Snoopy]

You will note what I wrote here (Previously Posted by Sauce):

In regards to any risk to his future property buying power - that's simply a 'go there' or 'don't go there' decision. Once he decides to 'go there' then he needs the best odds of success, which means making the best choice.

Not buying a house is a fairly straightforward procedure. Buying a house is less so. Unless you buy a house with 100% cash, I would argue buying a house is not a simple 'go there' decision.

In my way of looking at things it is mainly the bank that owns your first house, notwithstanding the fact that you can decide what colour to paint the walls. You can decrease the relative power of the bank by putting more than the minimum equity required into your purchase, or purchasing a smaller house and maintaining more net cash than you otherwise would. Such a decision may effect how much you can spend on upgrading your house in the near future for a start. That means I would argue that buying a house is anything but the 'go there' binary decision you claim it to be Sauce.

As for chasing the 'best odds of success', I would argue that is subtley different from 'chasing the best odds of success to achieve your goal'. The difference being of course that the goalpost can move. I would argue that if you can couple your investment returns and your investment goals that is likely increase your task of reaching your goal. The downside is you might achieve a worse total return. The upside is that what you thought was going to be your best total return becomes insufficient due to the goalposts moving.

The idea of attempting linking returns to the property market is still one based on emotional comfort. But RYM is a good choice for the other reasons.

You are saying that 'emotional comfort' (whatever that means) is not a good thing?

SNOOPY

[Snoopy]

get on some banks, wbc is good, and a great yield 7.5% for divs in December better return than in a term deposit.just hold till then

I like the cut of your idea bio12. Making money out of them before they start making money out of you appeals to my hedging (there's that word again) instinct. But again your strategy depends on being able to sell your bank shares for more than you paid for them to avoid capital loss. You have to ask the question even if a capital gain seems more likely what happens to your 7.5% return if you can't?

SNOOPY

[Sauce]

Not buying a house is a fairly straightforward procedure. Buying a house is less so. Unless you buy a house with 100% cash, I would argue buying a house is not a simple 'go there' decision.

You've taken my words wrong - I wasn't talking about whether he buys a house or not. The decision I am talking about is whether or not to use some or all of his future house deposit fund to buy shares, in context with the discussion, a binary decision. And I agreed with you that it would be perfectly rational to make the decision not to do it all based on market risk.

However, If he makes the decision to do so, then the most rational thing to do is to invest his funds with the greatest risk weighted odds of achieving the highest return. Attempting to somehow attach a potential return to house price fluctuations is not in the slightest bit helpful to obtaining the greatest odds of having a bigger deposit in two or three years.

You are saying that 'emotional comfort' (whatever that means) is not a good thing?
SNOOPY

In the context of our discussion, No, it is not a good thing at all. It is not rational to forgo a potentially better performing investment, so that you can sleep at night knowing that if the value of your shares go down, you might be alright because you might be able to buy that house cheaper in two years anyway!!! That's is a flawed way to look at investing.

If RYM or CEN are the right investments, it is not because they are linked to my rising or declining personal costs. I have often remarked that there is something strangely satisfying about funding your retirement through owning retirement villages. But that is simply an emotional feeling. If it's a bad investment, then it won't help me retire. If I find a better investment elsewhere then I should invest in that or I wear an opportunity cost - such as what I did with RYM this week for instance. So the investment simply needs to taken on its merits and emotional comfort ignored.

The true hedge against rising costs, is simply to own the best performing investments you can get, regardless of how they make their money.

I have a Wife that I get a lot of emotional comfort from. But that is a different context and discussion

Regards,

Sauce

[Sauce]

As for chasing the 'best odds of success', I would argue that is subtley different from 'chasing the best odds of success to achieve your goal'. The difference being of course that the goalpost can move. I would argue that if you can couple your investment returns and your investment goals that is likely increase your task of reaching your goal. The downside is you might achieve a worse total return. The upside is that what you thought was going to be your best total return becomes insufficient due to the goalposts moving.

This is flawed. If you aim for the greatest risk weighted odds of achieving the highest return your goal is quite simply the best possible hedge if house prices rise. And If house prices fall, then you win on both sides. That is the best way to ensure you stay on the right side of the "goal posts".

Trying to link your returns to the "goal posts" is simply a way of attempting to ensure house price volatility doesn't make you feel bad. This is false security which is highly likely to carry intangible loss (opportunity cost) even if it was possible, which it is not. If ENP required this kind of emotional comfort, I would suggest staying out the share market entirely. But I suspect he has a stronger temperament.

The reality is you can't actually achieve the link between house price movements and individual share prices anyway. So the real "goal post" is to make a better return than your cost of capital (the interest rate + break cost of the initial funds), this will put you in a better deposit situation than if you decided not to break the term deposits. House price movements are in fact completely irrelevant in the context of what investment he should choose. But would become relevant to other decisions such as when to buy the house, when to cash in investments, etc etc.

Regards,

Sauce

[Snoopy]

The decision I am talking about is whether or not to use some or all of his future house deposit fund to buy shares, in context with the discussion, a binary decision.

Sauce, sorry for any previous misunderstanding of your point. But look at what you just wrote. How can deciding the percentage of house deposit funds to invest be a 'binary decision'? There are 100 integer choices, starting from 1% and ending with 100% for a start. And the percentage figure you choose will affect both the upside and the downside risk for the same underlying sharemarket investment.

However, If he makes the decision to do so, then the most rational thing to do is to invest his funds with the greatest risk weighted odds of achieving the highest return. Attempting to somehow attach a potential return to house price fluctuations is not in the slightest bit helpful to obtaining the greatest odds of having a bigger deposit in two or three years.

OK then, which of any equity investments available will provide the best return in two years? If the oil price goes up to $US300 per barrel then one of the best NZX50 investments around is likely to be Contact Energy. Their renewable generation assets have a known fixed operating cost. CEN's profit will be the difference between the marginal cost of generating new baseload power minus the (low) operating costs of their existing baseload renewables generation assets.

OTOH if oil drops to $US50 per barrel all these new geothermal power plants that Contact wants to bring on line are in big trouble. High operating costs will see them mothballed and the holding interest costs will likely destroy Contact's profitability.

So what will the oil price be in two years time: $US50 or $US300? Once you can figure that out whether or not to invest in Contact is a no brainer :-P!

Of course using the product/service hedging investment philosophy, you do not need a crystal ball. You invest and whatever the result in two years time you will wear it. If power costs are high, so are your dividends from Contact. If power costs are low you take a haircut on your Contact investment but your power bills will be offsettingly low.

I have used power as a conceptually simple example of how product/service hedging investing works. But I hope you can see that I could use exactly the same argument for using the product/service (in this case the product is a property) hedging argument for housing.

Whether you can actually find a listed entity that follows house prices the way that Contact follows power bills is another question. But IMO, conceptually, the product/service hedging strategy regarding property is sound.

SNOOPY