My friends have been discussing an article about smashed avocados. Bernard Salt, a journalist for The Australian, complained that if the youth of today stopped eating $22 smashed avocados at hipster cafes….then they would be able to afford to buy houses.
This has understandably annoyed my friends. The median price of a house in Sydney is $1m.
That is: 45,000 smashed avocados buys you one house in Sydney at the moment. If you are prepared to defer consumption and forgo 1 smashed avocado a week, in 874 years, you will have saved enough money to buy a house. I’m not sure that even an economist would suggest delaying gratification for 874 years to buy a house is “rational”.
Of course, I’m not counting the interest compounding over the centuries as I save for my house. But interest rates are very low, over $13 trillion of debt is trading at negative yields.
So why are houses unaffordable to people in their 20s?
And why are interest rates so low?
I think both questions have the same answer.
The answer, I think, is demographics. The conventional wisdom in economics was that working age people save, and retired people spend. But this assumption, like many others in economics, is far too simple. If retirement age people want their retirement to last 30-40 years, they have to be long term savers too. The “who?” is older cohorts of populations, and the “why?” is because they don’t want to work in future decades, so they must continue to save today.
At a CFA conference in London I went to a month ago, the consensus among 4 very diverse speakers was that there is too much saving, chasing too little return. And this has been going on over a generation. Long term interest rates have been declining for 35 years. This is the opposite of the “smashed avocado”, young people aren’t saving enough, theory. Instead, ALL assets (bonds, equities, houses) are expensive relative to history because more and more wealth is being concentrated in the hands of older people.
One of the saddest things is that the older generation don’t appear to appreciate their good fortune and that they have benefited from a changing world. And their benefit has been at the expense of the young. Instead they lecture those younger and wiser than them, suggesting they should be saving money when interest rates are so low.
So what’s the solution?
The obvious solution, is that if saving for the future is likely to result in disappointment, spending more money today (on things like smashed avocado, craft beer and coffee) is entirely reasonable. Hipster Pride!
But if I want to buy a house, what do I do?
Someone at the CFA conference suggested that “if everything is expensive”, the best strategy is to “hold cash in the bank, and wait for assets to become cheap again.” I like this approach.
Then again, “holding cash in the bank” and waiting for the bust doesn’t always work. 10 years ago I thought that house prices in Central London were wildly overpriced. Perhaps they were, but if so then 10 years later, they are 3x more overpriced.
So having “sat on cash” and the bust didn’t happen, I’m trying a new approach which is a little different. My approach relies on the fact that “new things happen in the world.”
It is also important to notice that the average is not really informative when it comes to future returns. Like Hollywood films – most of which lose money, but a very few are enormous blockbusters – I’m focusing on the extremes.
I’m focusing on the extremes.
But not the negative extremes “the black swan” disasters, I’m looking at the positive extremes. I’m spending my time understanding “baggers”. A 2 “bagger” has doubled in value. A 10 “bagger” has increased in value 10x. I am gradually reading through the Annual Reports of companies that have really done well in the past, and look for common themes.
At first glance, it doesn’t seem like ASOS or Rightmove have much in common. But they have both performed very well, both more than 20 baggers since January 2009. Perhaps this is just “survivor bias”. They operate in different sectors (selling clothes and advertising houses). But on deeper examination (and I am just starting this project) they seem to benefit from technology, without being really classed as a “technology company”.
That is, they are taking the traditional way of doing things, and making it more productive. But they also benefit from the changing world. This might be luck. It might be judgement. But if I can identify what’s happening, then I can profit from it. The baggers that I’m looking for are not particularly high profile, like for example Tesla. They are not trying to cure cancer or invent nuclear fusion. But neither are they so obscure no one knows them. I myself knew and visited the websites of ASOS and Rightmove before they became “baggers” – but lacked the imagination to see their full potential.
Now it all seems obvious. They benefited from a gradually changing world. ASOS benefited from the development of broadband, which made their website faster. The same goes for Rightmove. They benefited from property advertising going online. This was negative for local newspapers, where estate agents previously paid to advertise houses for sale, but good news for Rightmove shareholders. In both cases, they made customers’ lives more convenient. The Rightmove share price went from 160p in January 2009 to around £37 today. A 24 bagger. ASOS was a 21 bagger over the same time frame.
These are not recommendations. The big money has been made already. Instead I’m looking for the next “new thing happening in the world.”
Perhaps it is merely a truism to say that successful investments benefit from new things happening in the world. Easier said than done. The other side of “new things happen in the world” is that “old things go out of fashion.” Companies that you think ought to benefit from technology sometimes suffer from it. An example might be Pearson, which publishes text books. Pearson tried to benefit from digitisation of online learning, but instead seems to be struggling at the moment. I also note that Bernard Salt writes for a newspaper. I would put newspapers in the category of “old things that go out of fashion.”
is there is a technology that can be applied to this problem?
So this is what I’m spending my time doing at the moment. I’m also wondering if there is a technology that can be applied to this problem of “identifying baggers.” So if you have a background in Machine Learning/Algo’s/Natural Language Processing or whatever might be useful: let’s collaborate. Let’s benefit from the changing world.