It's Always Fun at the Top

asset allocation cape change financial education financial literacy indicators invest investing May 25, 2024
A story - when I lived in Northern Japan in 2006, I made friends with an Australian couple who realised that the ski fields in Northern Japan were ripe for making money. And they were right. They started with building a single property, then expanded quickly to two (using leverage of course), rapidly expanding until they built an apartment block with 64 units for sale among some other places they held. To say they were killing it was an understatement. They were constantly sought out for advice by other expats and wealthy skiers from Australia and they duly dispensed it. Then, out of nowhere came the GFC. Party over. Because of leverage they were caught with a desperate need to sell the units quickly. But of course, now everyone shut up shop and the market dried up in double quick time. They went bankrupt owing approximately $5 million.
There are several lessons here. Firstly, the more leverage you use, the more fragile you are. Leverage lures you, like a siren into a game where the more you borrow the better the returns. Until it stops. And I can tell you it stops. 
The big money in stocks and property is not the rental or dividend yield. It's the capital gain. And you only get that when you sell. When I hear these property folks telling you to leverage up and buy and hold property, then I can tell you, it's mostly bullshit.
Ask any professional card player/gambler whether they just let it all ride after every winning hand.
If you think the stock or property markets are different from any other form of gambling, then I am here to tell you they aren't. Calling it "investing" just makes it sound respectable. 
The problem with all booms is the timing. You can get lucky going in simply by being in the right place at the right time, but you need skill to get out. You need to know about market cycles and unfortunately, like my friends, they didn't see the need to study as they were too busy making money. In a boom, there are plenty of banks and others who will give you money. The problem is timing the sell. Many fail to pick the right time and consequently get caught holding the bag like my friends did. 
Markets move quickly. 
Because they made money relativity quickly and easily in a booming market, they believed they knew what they were doing. They failed to consider or attribute their success to anything other than their own genius. We got lucky? Nah, not us. We know what we're doing. The longer a boom goes on, the more confident everyone becomes that they know what they are doing. No one considers selling at the top. 
You need to liquidate the asset to capture the capital gain. If you don't then the market cycle will eventually catch up with you. It seems fine when your five investment properties are worth $4 million and you owe $3 million. It's not so much fun when they are suddenly worth $3 million, and you still owe $3 million.  
In bull markets everyone who wants to make money sees stars in their eyes and starts to listen to the gurus, who in most cases, have simply being there at the start of the latest cycle. They too probably don't understand cycles or the need to sell to capture the real gains. You can't pay for things with unrealised gains. 
Every boom whether it is stocks or property is littered with the "retire early" crowd. This is code for get rich quick and fertile grounds for those players who believe they did it and so can anyone else. If it was that easy then we'd all be rich.  
Lastly, be aware of those who say that buy and hold works because all that does is lead to average returns. After all, that is how average returns are calculated. If you don't believe me, go and look at most long term buy and hold investment strategies. Look at the real return not the average return. Study cycles and you will see there are high points and low points. Be sure to know where you are. And finally, be honest and try not to push your luck. 

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