Break all Term Deposits and Invest in Cheap Shares

[Sauce]

An investment in Ryman might meet these investment ideals Sauce. My understanding of the Ryman business model is that as the units roll over to new ownership, the capital gain accrued under the just surrendered ownership accumulate to Ryman on resale of that unit to a new owner. In effect buying Ryman today will lock you into the unrealized property value increases of the last 5-7 years (being the average licence to occupy holding time of a Ryman unit). Provided Ryman is not unfairly priced today, this certainly looks like a greater upside than downside bet. I think the potential downside for Ryman is more general market related than company specific related.

Nice work Snoopy, not exactly what I had in mind, but sound reasoning indeed.

My reasoning is that RYMAN experience a tailwind when house prices are booming as they can increase the prices of their units in-line with rising house prices. Yet the demand for their products has very little to do with the wider residential housing market, and is booming when demand for residential property is at its lowest in a decade. Property prices have arguably dropped by 5 - 15% since the peak yet RYM have not dropped their prices at all, and are not going to. They still have 6 month - 1 year waiting lists at their villages and as good as 100% occupancy. Not only that, they are the lowest cost producer, and have a lot of latent pricing power - something I have confirmed as fact, not speculation. Of course strategically they are making the right move in keeping their prices under what competitors can profitably offer the same product for.

So RYM will get a boost if property prices take off, the odds are great that they will perform very well even if property prices decline, and the return is highly likely to beat term deposit returns either way, market risk aside. And as you originally pointed out ENP understands the business so it seems a perfect match.

Even the dividends alone would give ENP more than half what he can get in the bank, and the other half of the his share of the profits would be reinvested internally at an annual compound rate of 30%. So the underlying asset performs ridiculously better than his term deposits even at prevailing prices.

Cheers

Sauce

[Sauce]

Sorry, I should note that more recently both Auckland and Christchurch are experiencing a resurgence in housing demand, but the point about RYMs demand was true throughout the housing downturn of the last three years, and will be true if it weakens again.

[Snoopy]

This is exactly what I mean. "the greatest risk weighted probability of beating his term deposit returns" is just a succinct way to express it. There is no summary or short-cut in the process itself. That should be obvious? It is implicit that all possible outcomes of all your options are considered as best as you can.

Ironically you have just outlined my point, and I totally agree!

I obviously didn't make my point well enough. What I tried to say was after evaluating all investment possibilities and scenarios and coming up with a strategy that gives the best risk weighted outcome, you may or may not choose that strategy. A good reason for not choosing the so called best strategy is if one of the unlikely outcomes that is nevertheless part of your best risk weighted scenario could come to pass and deliver an unacceptable outcome to your savings plan. I think that is quite a different point to the one that you were making Sauce.

If you didn't go with the so called best risk weighted outcome, you could still choose an inferior risk weighted strategy which doesn't carry the potential sting of your so called optimal strategy.

If ENPs goal is indeed to "avoid the small risk that house prices move so far that in two years time our deposit is insufficient" and he is happy to wear some cost to achieve this, then you are right Snoopy. Hypothetically, linking his returns to property prices would be a fine way to achieve this goal. And, at least when considered against that specific risk, I guess 'hedge' is an appropriate word for the investment. So you win on all fronts there.

Of course I see it differently. This was not the goal, and if it was, it shouldn’t have been. Firstly, ENP never stated it. Secondly, the problem with 'home ownership' as the sole objective, is that it carries a lot of emotional desire that is counter productive to sound financial reasoning.

ENPs goal is home ownership Sauce. He did not ask to be given a lecture on the risks of 'emotional desire' and whether his decision is financially sound. There could be all sorts of reasons why he wants to buy a house that are not financially sound, yet he would not be wrong in proceeding with his house purchase. For example, he might be in a band and need a large double garage to practice in, something that a landlord might not be keen on. He may own two very large dogs that need land to roam on. ENP hasn't told us if he is in a band or owns large dogs and neither should he. He has told us he is saving for a house. It is not up to either you or I to lecture him on the optimal financial merits of his decision!

There are many examples of this but for instance the ‘fear of being priced out’ can cause immense financial folly: During the frenzy of 2006/2007 home buyers were so scared that if they didn't buy a house immediately they would be 'priced out' of the rising market. Many buyers tendered huge prices 'just to get in' to 'hedge' themselves against rising prices and are now sitting on highly leveraged losses and some have lost their homes. This psychological feedback loop played a large part in causing the boom and bust. Those more level headed are in a better financial position.

Perhaps those sitting on heavily leveraged losses have been exposed as sub optimal purchasers. But that does not necessarily mean they were wrong in purchasing their house. If it was their plan to own a property for ten years, and they have negative equity after five, so what? As long as they can afford the payments it is where the market will be in another five years that will determine the wisdom or otherwise of their purchase.

So from my perspective it is more rational to consider the financial implications first and foremost and try your best to suppress or eradicate the emotional desire to own a home above all else. Especially if you are a young first home buyer who is borrowing a lot of money and has little or no other assets in case things go wrong.

Contrary to some opinion banks do not like to foreclose on homeowners, even if things do go wrong. If things are liable to go wrong you can derisk your purchase by paying more than the minimum deposit.

In my opinion your hedging option does provide a degree of comfort (less risk of not getting into the market 'on time') but it is not the best investment/financial advice.

My strategy does not necessarily provide the highest risk weighted return on investment. I agree, and that is deliberate.

SNOOPY

[Sauce]

I wasn't lecturing anyone. My professional view is that first home buyers should consider the potential financial damage that can be caused by acting on the natural strong emotion that comes with purchasing a home - it is at the end of the day a highly leveraged asset as well as a home. That it is sensible advice whether you can see it or not.

There are actually quite a few reasons why I don't like your idea as advice for a first home buyer but the fact that it is born from one of the most financially dangerous emotions - the fear of missing out - is actually a very good reason not to like it. You have a different view, and thats fine.

At least we have finally gotten somewhere Snoopy

Regards,

Sauce

[h2so4]

I wasn't lecturing anyone. My professional view is that first home buyers should consider the potential financial damage that can be caused by acting on the natural strong emotion that comes with purchasing a home - it is at the end of the day a highly leveraged asset as well as a home. That it is sensible advice whether you can see it or not.

There are actually quite a few reasons why I don't like your idea as advice for a first home buyer but the fact that it is born from one of the most financially dangerous emotions - the fear of missing out - is actually a very good reason not to like it. You have a different view, and thats fine.

At least we have finally gotten somewhere Snoopy

Regards,

Sauce

Seems a rather odd point of view.

First home buyers are quite visionary and their decision to buy a house is born from the need for a home and financial scurity. I doubt if fear comes into it. In fact the better it gets the better it gets.

[Sauce]

First home buyers are quite visionary and their decision to buy a house is born from the need for a home and financial scurity. I doubt if fear comes into it. In fact the better it gets the better it gets.

Hi h2, careful it's a slippery thread this one

When property prices were rising at 15%pa and people were missing out on houses they had fallen in love with, they would chase the market up, and pay a lot more on their next attempt. This what we mean by 'fear of missing out' h2. The fear of missing out on the home you have fallen in love with combined with the fear of having to pay a lot more if you don't get into the market soon. As we all know, chasing a rapidly rising market up can be a financially destructive thing to do. The housing market is no different.

So the point is, that Snoopy advising a first home buyer to 'hedge' against the danger of rapidly rising house prices, is the same kind of thinking that causes people to make those mistakes.

Anyway, first home buying aside, Snoopy wisely started to acknowledge my point about the opportunity cost that his strategy would wear. If he thinks about it hard enough he will realise that when the opportunity cost is factored in, owning contact shares to hedge against electricity prices and other so called 'consumer cost hedges' are in actual fact irrational. It might give people the warm fuzzies, but financially, it's not a clever way to think about investments.

Regards,

Sauce

[h2so4]

Hi h2, careful it's a slippery thread this one

When property prices were rising at 15%pa and people were missing out on houses they had fallen in love with, they would chase the market up, and pay a lot more on their next attempt. This what we mean by 'fear of missing out' h2. The fear of missing out on the home you have fallen in love with combined with the fear of having to pay a lot more if you don't get into the market soon. As we all know, chasing a rapidly rising market up can be a financially destructive thing to do. The housing market is no different.

So the point is, that Snoopy advising a first home buyer to 'hedge' against the danger of rapidly rising house prices, is the same kind of thinking that causes people to make those mistakes.

Anyway, first home buying aside, Snoopy wisely started to acknowledge my point about the opportunity cost that his strategy would wear. If he thinks about it hard enough he will realise that when the opportunity cost is factored in, owning contact shares to hedge against electricity prices and other so called 'consumer cost hedges' are in actual fact irrational. They might give people the warm fuzzies, but financially, not so bright.

Regards,

Sauce

Yes but that is an observation of the current market. A first home buyers decision is not born from that.
Ha!, I know snoopy hedges fast food prices by buying RBD shares.

[Sauce]

Yes but that is an observation of the current market. A first home buyers decision is not born from that.
Ha!, I know snoopy hedges fast food prices by buying RBD shares.

My post was in context of Snoopy's hedging idea for first home buyers. It's Snoopy's 'hedge' idea that is born from the 'fear of missing out'. It is literally designed to 'protect' against rapidly rising house prices with a cost attached. It is wiser, financially speaking, to help people eradicate this kind of emotional thinking rather than to devise strategies around it. This is after all an investment forum as Snoopy pointed out.

Personally, from much experience with the home buying process, I don't think its a good thing to promote to first home buyers.

Cheers

Sauce

[Sauce]

Ha!, I know snoopy hedges fast food prices by buying RBD shares.

Haha, if thats true perhaps he should consider some wakefield hospital shares as well.

[h2so4]

My post was in context of Snoopy's hedging idea for first home buyers. It's Snoopy's 'hedge' idea that is born from the 'fear of missing out'. It is literally designed to 'protect' against rapidly rising house prices with a cost attached. It is wiser, financially speaking, to help people eradicate this kind of emotional thinking rather than to devise strategies around it. This is after all an investment forum as Snoopy pointed out.

Well good luck with that.