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Glory days

DOUG  By Guest Blogger Doug Rowat


“Old age is like a plane flying through a storm. Once you’re aboard there’s nothing you can do.”  – Golda Meir

My father once joked that young people think old age is a club that they can opt out of. Well, of course, there’s no opting out. We all age, and inevitably decline both physically and mentally. And, if we’re not careful, our finances may decline as well.

A client approached me recently concerned about his 75-year-old father’s erratic investment decisions and subsequent declining portfolio. I sat down with his father and we reviewed his self-directed investment accounts. As I feared, it was an incoherent mix of poorly performing securities. Despite an underlying bull market, the portfolio had meaningfully fallen over the previous five years. Regrettably, failed portfolios managed by elderly investors are something I see frequently.

Successful investing is largely ability-based. Luck, of course, sometimes plays a role, but investors who effectively process market variables and conduct thorough analysis, generally speaking, get results. In other words, if you have skill, you’ll do better. But, unfortunately, our investment skill declines as we age and declines very rapidly when we’re in our 70s and 80s.

I’ve touched on this subject before when I highlighted the work of David Laibson, an economics professor at Harvard University, who starkly illustrates how cognitive impairment, on average, begins at about age 52 and then rapidly accelerates from there:

“If the chance of getting a disease is 10%, how many people out of 1,000 would be expected to get the disease?”

Source: David Laibson, Harvard University, 2009

But his research is not unique. In the latest The Atlantic, journalist and academic Arthur C. Brooks highlights the work of Benjamin Jones, a professor at Northwestern University’s Kellogg School of Management. Jones examined major inventors and Nobel winners over the past 100 years and noted that the most common age for producing a magnum opus was in the late 30s. However, “the likelihood of producing a major innovation at age 70 is approximately what it was at age 20—almost nonexistent.”

Brooks goes on to highlight the work of others who have also studied age and declining ability:

Scholars at Boston College’s Center for Retirement Research studied a wide variety of jobs and found considerable susceptibility to age-related decline in fields ranging from policing to nursing. Other research has found that the best-performing home-plate umpires in Major League Baseball have 18 years less experience and are 23 years younger than the worst-performing umpires (who are 56.1 years old, on average). Among air traffic controllers, the age-related decline is so sharp—and the potential consequences of decline-related errors so dire—that the mandatory retirement age is 56.

In sum, if your profession requires mental processing speed or significant analytic capabilities…noticeable decline is probably going to set in earlier than you imagine.

Now, you might argue that you’re simply a private investor, not a major league umpire or an air traffic controller. But the decline in performance with age is similar. George Korniotis, a former financial economist at the Federal Reserve in Washington DC, and Alok Kumar, a finance department chair at the University of Miami, examined investment performance versus aging in a landmark 2007 study. They focused on the investment behaviour and performance of more than 62,000 investors who traded common stocks. While older investors do many things right, namely trade less frequently, they are ultimately hampered by their declining abilities. Korniotis and Kumar’s conclusions were blunt:

But consistent with the cognitive aging hypothesis, we also find that older investors have worse investment skill, where skill deteriorates sharply around the age of 70. Examining the economic costs of aging, we find that older investors earn about 3–5% lower returns annually on a risk-adjusted basis. Collectively, our evidence indicates that older investors’ portfolio choices reflect great knowledge about investing but their investment skill deteriorates with age due to the adverse effects of cognitive aging.

Their research results are shown graphically below. Note how closely the basic pattern and the rapid rate of decline mirrors David Laibson’s chart above.

Investing performance declines sharply as we age

Source: George Korniotis and Alok Kumar. Performance differential is the change in the performance between the last two and the first two years of the sample period. The individual investor data are from a large US discount brokerage house from 1991 to 1996. In other words, the differential is showing that the performance of older investors has rapidly gotten worse in a short period of time.

In short, cognitive decline is inevitable. No one is immune. It also probably happens much sooner and accelerates much faster than many expected. So, as we age, there’s absolutely nothing wrong with asking for help with our investments.

It can be tough to accept, but your best investment decision may be recognizing that you can no longer make good investment decisions.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.


‘The day it died’


In 2008, GTA realtor Ross Kay invented an ‘engagement index’ to statistically chart house horniness. For five years he’s been diligently amassing data, filtering and weighting it, and watching in fascination as 60 to 90 days later changes in his index appeared as official published real estate data.

His track record (he says): 100%.

ross kay  Hours ago he released what he considers ‘drastic’ results, in a warning to his clients. “Over the course of the last 9 weeks, our index has revealed a downward spiraling real estate marketplace, with results that will not reveal themselves in MLS sales data until finally reported by Organized Real Estate Associations,” he wrote on his site.

In a note to me, he adds:

“On May 19th, 2013 we recorded the lowest value of Canadian consumer engagement in real estate since 2010.  What is scary here is that on April 8th 2012, we reached an all time high engagement value.  The May 19th numbers for 2013 represent about a 72% decline over that peak number.   This massive decline raises grave concerns not being reported in newspapers across the country.

“So we project 60 to 90 days from May 19th that MLS sales will be reported that will reveal the market died on May 19th. Our numbers have not been wrong since 2008. So as it turns out the peak of the real estate market in Canada was April 8th 2012, as posted here on Greater Fool.  Peak pricing was established and as recorded MLS sales prices now show, anyone who bought in competition around that date paid too much.”

Is this credible? Obviously we’ll find out in a couple of months, but it’s consistent with the market news reported here daily. Fewer buyers are chasing fewer houses, rendering average prices almost irrelevant – certainly eliminating them as a leading indicator. The overwhelming advice to potential buyers: don’t.

Meanwhile, here’s Claude. He moved back to Canada after living in China for several years. He landed in Vancouver, and was struck by this big slowdown in the real estate market, but not a corresponding drop in prices.

Real estate’s sticky. Once prices in a hood go up, everybody living there figures the new valuation ceiling is suddenly the floor. An instant permanent benchmark is established and homeowners great creamy thinking about their windfall net worth. But when markets turn ugly and sales slide away, human nature says the reversal’s temporary. Listings fall as owners wait for bull conditions to return, and those people selling stick to their pricing, because ‘that’s what it’s really worth.’

This can go on for a long time. Six months. A year. But once it becomes obvious the market may continue to weaken, rather than recover, prices tumble and listings swell. Have no fear. This pattern will repeat.

But Claude’s eyes bring another valuable epiphany. He writes me:

I also observed upon my arrival in this city that even though small bungalows were searching a million or so, Vancouver was the home of many ‘dollar’ stores and food discount stores. I had lived in China for several years prior to coming back to Canada and the city where I lived there was crowded with Benzes, Audis, BMW, a young man who lives in my building even owns a yellow Ferrari. Also that City ( Guangzhou) is the host of  many luxurious shopping malls occupied by very expensive stores, such as Hermes, Dior, Chanel, Louis Vuitton to name but a few.

My observations in Vancouver were that the majority of cars were, Hyundai, Chevrolet, Nissan, nice but ordinary cars. This didn’t add up in my eyes. How can a city with so many expensive houses  be inhabited by people driving ordinary cars and shopping in discount stores? Vancouver doesn’t in my opinion project an image of wealth there.

Could it be that people here kept buying each other’s houses, creating an artificial demand for properties? If this is so, then someone is without any doubts going to be left holding the bag. Could you comment on this?

He’s right. Many a time has this pathetic blog compared and contrasted the average household income in Van ($83,300) with the cost of the average SFH ($1,100,000). The latest RBC home unaffordability survey shows it takes close to 90% of pre-tax family income to buy a bungalow in that city. And BC has had a negative savings rate ever since the median detached house passed the seven-figure mark. Currently folks in the province spend an average of 108% of income, and are so invested in real estate that it’s turned into a Kia and Wal-Mart paradise.

Making things worse is the urban myth that foreign money’s been responsible for jacking Van prices. Now every time eight Chinese-Canadian couples born in Richmond line up for a new condo opening, we get a “HAM alert”, suggesting an Airbus full of horny industrialist millionaires from Guangzhou has landed at YVR. But while some Mainland Chinese dudes have scooped higher-end properties around the city, there’s zero evidence it’s been enough of an impetus to boost market values. Claude’s correct. This is a Van-on-Van creation (as is the case in Victoria), aided and abetted by the country’s most gullible and bush-league media.

How will it end?

That’s easy. Prices will indeed fall considerably, and stay low a lot longer than many owners will stay solvent. People will look back at 2010 and 2011 – when speculation was rampant, realtors cried ‘buy now or buy never’ and a yellow peril was invented to whip the locals into a buying frenzy – in awe. This was right out of the Phoenix playbook, circa 2004.

There’s simply not the income in Vancouver (or Toronto) to support current prices. Homes have climbed a wall of debt. Without a giant leap in household earning, it’s a mirage.

May 19th. Write it down.