Price is a Liar – Avoid The #1 Mistake Amateurs Make

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The fake persona of price and its impact on dumb investment decisions

Most people make the assessment of whether the market is going up or down, based on the price volatility of the underlying assets. In case of the housing market, if house prices are going up, the general assumption is that the housing market is going up. The stupidity behind this assumption is beyond words to explain so I’ll just call it for what it is – its dumb.

Price is a LIAR. It is a great driver for ads on the TV and generally good for the economic commentators – gives them plenty to talk about.


Price volatility does not present the real picture of what’s happening. Here’s why I say so and that too with so much passion and vehemence.

Price inflation is a direct output of speculation. Speculation comes from those that either already hold the asset or those that have the power to secure the asset – in other words, the “haves” or the “can haves”. They are the ones that are playing the speculation game and as a result, prices rise. Those that are in the “wish I had” or “want to have” category, simply don’t have any meaningful participation in the subject to influence the movement in either direction.

Still not with me? Ok, lets try another angle.

Interest rates drop. Quantitative Easing measures kick in. More cash is pushed into the liquidity pool. Avoid the assumption that this new money comes into the hands of the moms and pops out there. It never does. This new money supply is given to the banks, whose job is to lend it out to fulfil the premise upon which, the central banks chose to initiate QE – to kick start a fledgling economy by increasing the velocity of cash.

Oh you don’t know what velocity of cash is… ok… let me explain…

Velocity of cash (Also called Velocity of Money) measures the number of hops your $ circulates around the domestic market and how many times it changes hands before coming back full circle. Special emphasis on “hops” – meaning, there must be multiple transactions with the same dollar and “domestic” – it must be within the country where the dollar was produced.

The wider the circle, the greater the velocity. The smaller the circle, the lower the velocity. High velocity indicates a booming economy and vice versa.

QE is meant to see the velocity of cash expressed over the widest circle possible – meaning.. the entire nation… So rewind back to the last 30 seconds… and read this again:

Interest rates drop. Quantitative Easing measures kick in. More cash is pushed into the liquidity pool. Avoid the assumption that this new money comes into the hands of the moms and pops out there. It never does. This new money supply is given to the banks, whose job is to lend it out to fulfill the premise upon which, the central banks chose to initiate QE – to kick start a fledgling economy by increasing the velocity of cash.

But ask this question. How much of this “new”, “cheaper”, “free” money gets into the hands of small to medium enterprises so genuine innovation can take place or to low income earners so they can afford to buy a property?

Just because money is cheap, banks don’t have to lend it out cheaply and freely.


After-all, they have to follow certain “responsible lending standards”, which, funnily enough, are set forth by the same jokers who came up with the Ponzi scheme that is the printing of fiat currency backed by NOTHING.

So its a self-sustained loop started by the central banks whereby the free cash is kept in a tight knit group, with cash circulating inside a teeny tiny circle – the result, the fat cats get fatter and thus the ancient adage that the rich will get richer and the poor will get poorer is fulfilled. 5-7 years down the line, the internal contradictions of a semi-capitalist model will create the need to repeat this all over again.

Now, the baby boomers aren’t financially literate enough to understand this. The millennials, especially the digitally native dudes and dudettes are catching onto this Ponzi scheme and you can see that through the boiling point of the civil unrest across at least 10 major economies at this present time. Google it. Make an effort will ya?

Now back to Price being a LIAR.

Free money in the market, speculation leads to price inflation.

Prices go up… and you think… Holy Pete… the market is rising. Things are getting better. Well done Mr. Prime Minister or Madam Prime Minister (eek!) – you’re making it work for us common folk. I’ve got to get onto the property ladder now… who knows when if not now. Right?

But have you stopped to consider the underlying fundamentals behind this artificial price inflation?

How much has your personal income grown (after accounting for inflation) in the last 5 years? How many small to medium enterprises have failed in the last 3 years (common wisdom is that this number is circa 87%)?

Oh but Manas, new jobs are being created… look, our unemployment rate is at an all time low. Of course, new jobs are created. When new money comes in, and the banks lend it out to pristine projects the construction sector creates new jobs which get reported in the employment numbers. This is true.

However, this is a very very very short term view of a fundamental picture. On both sides of the Tasman, both central bank governors have already indicated that they have an appetite for negative interest rates. Do you even know what that means for you and your neighbour? Negative interest rates are akin to government confiscation of public funds. You will have to pay the banks, to maintain a savings account. So instead of earning an interest on your deposit, you could be charged a “fee” to keep the account open. Are you thinking mattresses? A safe in the wall? A barrel in the ground? I don’t blame you. I’ve thought about it too… but of course I’m not going to tell you which option I took to secure my cash!

When your mind starts telling you that you need to get onto the property ladder, begin with the wisdom of understanding the fundamentals of what you’re about to undertake. But people being people… they don’t listen. They do what they want to do anyway. So I’m probably, quite likely barking up the wrong tree if I was to generalise. But you… you’re here because you’re a listener. Better still, if you’re read this far into this rant, then you’re probably already starting to think… maybe Manas has a point… ?

Understanding market movement, making sense of those economic indicators, learning how to pick out the right stats to measure – they’ve made it pretty darn hard for most people to still have the brainpower to comprehend all this let alone analyse and make objective decisions from it.

The busy-ness most people are caught up in… you never stop to think what is your ROI on time. Not over time. I’m not talking about your return on investment in an asset. I’m referring to identifying the return on investment on the 24 hours of time you have in life every day.

If you were to translate that onto a balance sheet, are you net positive or net negative? Are you making more time than spending time? How’s the accounts receivable column of your time balance sheet? What about the “shareholder current account” – how’s that looking on your time balance sheet?

I say, as a SMART investor, you’ve got to change your approach and instead of seeking financial gains, seek “time” gains. How?

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If I was a super busy, working individual… and don’t have the bandwidth for handling multiple moving parts and extremely time poor then I would be looking for properties that generate me cashflow with at least 4.5% CAGR based on 10 year moving average. I would buy it when the Q-CAGR (Quarterly CAGR) is in the negative and the Y-CAGR (Yearly CAGR) is also in the negative. This isn’t all, there’s more to analyse but that’s all I’ll mention for now. If you wanna know the ins and outs of how to pick out the right market movers – then the BASICs course is a great starting point.

If you have 15 of these, over 7 years, you’ll quite possible clear around $200K in annual cashflow. Livable.

If I was a well organised individual with a deal-makers mindset, then I’d stop the jibber jabber and learn how to use property options to create money from property without ever owning the asset.

With the right conditions, $30K per deal, 4 deals a year, do that for 2 years and then forget everything and focus on channeling the $200K ($40K spent on self) into a Rapid Action Plan – that’s what I’d be doing in the current market.

Anyway…

If you take one thing out of this rant and apply to your investing strategies, then it should be this.

Fundamentals always… ALWAYS outperform price volatility that is both artificial and short-sighted.

The rest… you can figure out yourself.

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