Buy low, sell high. Its sounds so simple that even a child could understand, but turning the principle into action is a difficult matter. That’s why many investors are standing on the sidelines right now – paralyzed by indecision and waiting for a clear buy sign. Unfortunately for many of us, the clear sign that we’re waiting for will be that prices have returned to their former high levels and that another buying opportunity is well and truly gone.
The ugly fact is that Buy High, Sell Low is what really comes natural to human beings. We like security and clarity and dislike loss and confusion. When all the experts have weighed in and everyone else has already bought something it tends to confirm the value to us and make us feel safe following suit. Unfortunately, that’s just when prices are at their all-time highs – pushed up by the wave of optimism and security that most investors crave. Selling high is also uncomfortable, because you are alone again – bucking the trend and breaking the happy, complacent mood.
If you doubt me just look at the global real estate crisis that is affecting investment around the world. The same assets that cost $1 million last year are now selling at substantial discounts. But most people aren’t jumping on the sale-prices – they’re too nervous that what has already happened will keep happening, or happen again, or that something new and even more terrible will happen. So we all wait for the buying signs – those signals that make us feel that the situation is safe enough to move forward. (Note: When your neighbor tells you about the killing he just made, that usually means the tide has already switched from undervalued opportunity to overpriced and unprofitable.)
Two Kinds of Price Moves
There are two kinds of price changes that we need to understand: cyclical and structural.
Structural price shifts: When the intrinsic, underlying value of an asset is permanently changed (i.e.: a result of new regulations or a new technology) then we can expect to see a permanent price change. This is part of the structure of the industry or economy. One clear illustration is how the price for computers has fallen as companies got better at making them and designs improved.Another example is how property prices in China and Eastern Europe moved up after their governments opened to the international economy. We don’t expect structural price trends to reverse as part of the natural process – unless something new happens these trends will continue.
Cyclical price changes are part of the normal (but disorderly) up-and-down process that asset prices go through. Stock markets are the clearest example – but the ‘boom-bust’ nature of the global economy means that general price levels are always in flux. The underlying assets are just the same as they always were, but our valuation of them is different. Cyclical changes aren’t started by changes in the intrinsic value of the asset, so market forces will quickly act to find an equilibrium price.
Which one are we witnessing now? For any given market, investors have to determine which forces are driving prices – structural or cyclical. But don’t be too quick to decide on a conclusion, because both structural and cyclical drivers may be present. Emerging markets are in a long term uptrend that will see new value created for decades to come. But they are also being affected by cyclical forces, such as inflation, stock market corrections and global economic growth rates.
Investment decisions.
As an investor, you have 3 decisions to make.
1) Is the price change for a given asset either a Structural change or a Cyclical change?
2) If structural, then are the forces driving the change long term or short term; positive or negative?
3) If cyclical, then where are we in the cycle?
Investment Rationale:
Long term structural changes are sometimes hard to spot. But if you think you have uncovered such a change in the early stages, then your next challenge is to find a way to capitalize on it. For long term up-trends finding asset-pricing trends is pretty straight-forward. Property or equity investments will both do well AS AN ASSET CLASS. You next big hurdle is to find a reliable way of
What’s the clearest buy sign of them all?
Cyclical downturn at the start of an upward Structural re-adjustment.
If an investor could write his own “dream scenario” he would imagine a structural change that has just begun to lift an assets true, long-term value. (Imagine turning back the clock to 1950 and shopping for real estate in Florida or the Long Island section of NY). Then he would write in a cyclical down-turn that puts the markets on ‘pause’ for a few minutes and scares off the herds of passive investors. A little bit of panic will clear out the ‘fast money’ and drive prices down a bit. If he chooses correctly, his investment’s asset value will benefit from two significant trends at the same time – a structural upswing coupled with a bull-market recovery in the cyclical market. This best-of-both-worlds scenario doesn’t come along too often – but we may be witness just such a case in the world of emerging market real estate development.