Speculate and Make 24 Times OR Hold Long and Make Just 8

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

July 2010

Every time the real estate market gets hot, there will always be voices for controlling speculation and measures such as increased stamp duties are normally touted as solutions. Indeed, speculation conveys a feeling of trying out ones luck, being lazy (not doing the mathematical homework so to speak), or even not acting like respectable gentlemen and ladies.  In short, it is deemed something (just short of) evil by some.  

However, is this perception always true? Your humble author thinks not. Admittedly, there are many speculators who fit the above description yet there are also others who are quite focused and professional on what they speculate. Some even share their experience and knowledge via writing books, like the well known George Soros who seems to be either admired or loathed.

Why do people speculate? There could be dozens of reasons and trillions of genes to account for it. One vital reason, assuming where and when someone is able to pull the speculation off whether by skill or via luck, is the gains could be X times more handsome than holding onto an investment asset through thick and thin.

While this may not apply to all types of investment in all places and at all times, it does however hold true for the Hong Kong residential real estate market:

A)      Data source: the data has basically been abstracted from the website of the Ratings and Valuation Department of Hong Kong Government and the overall private residential property price index is used. The data starts from 1980 to the present.

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B)      Selected investment scenarios: we compare the investment results of various investor cases such as a) one who holds the property from 1980 to the present through thick and thin; b) one who is always skilled or lucky enough to buy in years of price appreciation and to sell in years of downturn i.e. a very smart (or lucky) investor; c) an unlucky investor who starts from 1997 and holds till now; d) an unluckier still investor who starts from 1997 and sells in 2003; e) an investor who is smart in the beginning but chicken out in 2003; and f) an investor who starts in 1997 but makes decisive and proper decisions.  

Regarding of which scenarios, the investor is deemed to reinvest the amount gained or lost in years in which he does invest and no account has been taken of rental income, management-maintenance fees, taxes, or the like. The starting theoretical investment amount is $100 and the 2010 figure only counts up to the month of May.

Now, refer to the table below.

Year:

a) Invest $100

b) Very Smart

c) Invest $100

d) Sucker or

e) Smart to

f) Sucker

 

in 1980

or Lucky Investor

in 1997

Unlucky Investor

Sucker

but decisive

1980

100.00

 

 

 

 

 

1981

132.61

 

 

 

 

 

1982

117.93

 

 

 

 

 

1983

101.09

 

 

 

 

 

1984

95.65

 

 

 

 

 

1985

100.54

100.00

 

 

100.00

 

1986

111.96

111.35

 

 

111.35

 

1987

142.39

141.62

 

 

141.62

 

1988

167.39

166.49

 

 

166.49

 

1989

221.74

220.54

 

 

220.54

 

1990

237.50

236.22

 

 

236.22

 

1991

304.35

302.70

 

 

302.70

 

1992

471.74

469.19

 

 

469.19

 

1993

515.76

512.97

 

 

512.97

 

1994

630.98

627.57

 

 

627.57

 

1995

588.04

 

 

 

584.86

 

1996

625.00

627.57

 

 

621.62

 

1997

934.78

938.62

100.00

100.00

929.73

100.00

1998

611.41

 

65.41

65.41

608.11

65.41

1999

555.98

 

59.48

59.48

552.97

 

2000

467.39

 

50.00

50.00

464.86

 

2001

439.67

 

47.03

47.03

437.30

 

2002

390.76

 

41.80

41.80

388.65

 

2003

322.28

938.62

34.48

34.48

320.54

65.41

2004

405.98

1,182.38

43.43

 

 

82.39

2005

504.89

1,470.46

54.01

 

 

102.47

2006

501.63

1,470.46

53.66

 

 

101.81

2007

552.17

1,618.62

59.07

 

 

112.06

2008

688.04

2,016.90

73.60

 

 

139.64

2009

658.15

2,016.90

70.41

 

 

133.57

2010

785.33

2,406.62

84.01

 

 

159.38

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C)     Long term hold [a] versus successful speculation [b] = it is an 8 [7.85 to be exact] to 24 ratio, or a 1 to 3, i.e. a knock-out by speculators, successful ones naturally, over long term holders.  

Yes, irrespective of whether one thinks it is due more to skill or more to luck, few speculators are likely to be that successful. Indeed, perhaps the reality is that many speculators lose out to most long term holders.

However, this argument misses the point = the potential of making 3 times more than a long term hold would entice some to try out their skill or luck, or both. The difference is that dumb speculators would not know the reason why they make it or not make it, while the smart ones know the odds.

D)     Having bought in 1997 is not a major problem in itself, how one acts subsequently is more vital = the investor [c] who stuck it through thick and thin since 1997 would now on average recoup around 84% of what he or she had paid for the property and indeed some prominent housing estates have now already more than regained their lost ground.

The not so smart or lucky but decisive investor [f] with stop loss measures plus learnt investment acumen might actually make a gain of 59% after all.

It is the impatient, pessimistic, poor-timing-skill or luck, or foreclosed investor [d] who would lose the most having sold the property for a huge discount of 66% [100% - 34%] from the 1997 peak price level.

E)      The initially smart but chickening out in 2003 investor [e] still stands to gain some 220%  = or achieving 3.20 times of what he or she had invested in 1985 [notice that starting 5 years ahead of 1985  in 1980 makes little difference in terms of a 2010 price appreciation ratio].

Interestingly, and as casual observation, investors who started investing from 2003 would have now made a not so bad profit gain of around 143%. Moreover, those who had bought last year would also gain some 20% on average. Here is a chart of the price index since 1980: 

To conclude, as long as the market harbors such price fluctuations, more than enough liquidity, historically low borrowing rates, and even lower deposit rates, who can blame the speculators? It would be strange if they dont exist under such conditions.

Speculators are not the movers and shakers that some think they are. They are more like reactors to and reflectors of market circumstances.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.    

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