ZEPPELIN

Investors have their own bias, preferences, and habits come investing. Some prefer to go with the crowd while others take a contrarian’s stance. Many prefer to speculate and others invest almost for life. As far as investment timing and timeframe i.e. holding period are concerned, a broad spectrum of tactics and strategies exist.

Out of curiosity, your humble author decided to use the Hong Kong residential indexes from 1981 to 2006, largely those of the government and Centaline Agency, for testing the various market timing and investment period approaches and to see their respective investment performances. Here are the parameters and an index chart:

A) Calculation Method = we adopted a simplified Internal Rate of Return (IRR) approach and treated the year of investment and the year of disposition as a negative and positive value respectively. No account was made for rental income in between the years nor have we made allowances for transaction expenses. The variable affecting the IRR is the number of years in between.

B) Investment Timing = there are 1) pit bottom point [1984, 2003]; 2) about to rise or recover point [1987]; c) near peak point [1994]; and d) peak point [1981, 1997].

C) Investment Period = there are 1) relatively short term of 3 years; 2) medium term of 5 years; and 3) long term of 10 years [only 9 years for 1997 to 2006 period]. In addition, we also looked at the 1 year from 1996 to 1997.

From peak point
10 years	1981-1991 IRR	9.41%
5 years	1981-1986 IRR	0.49%
3 years	1981-1984 IRR	-6.41%
From low point
10 years	1984-1994 IRR	19.42%
5 years	1984-1989 IRR	16.00%
3 years	1984-1987 IRR	10.52%
From rise point
10 years	1987-1997 IRR	19.84%
5 years	1987-1992 IRR	24.88%
3 years	1987-1990 IRR	20.29%
From near peak
10 years	1994-2004 IRR	-4.32%
5 years	1994-1999 IRR	-3.26%
3 years	1994-1997 IRR	11.82%
From peak point
9 years	1997-2006 IRR	-6.24%
5 years	1997-2002 IRR	-15.76%
3 years	1997-2000 IRR	-20.47%
Near peak to peak
1 year	1996-1997 IRR	37.50%
From low point
3 years	2003-2006 IRR	19.28%

1) Irrespective of the length of investment holding period, investment timing appears to be of paramount importance as investments done during pit bottom and about to recover points perform (much) better than investments made during near peak and peak points. Also, between pit bottom and about to recover points, the latter appears to offer better returns. Hence, there seems to be some truth in the statement that “it is better to invest when the market starts to rise (versus when the market bottoms out)”.

2) Irrespective of investment timing entry points, a longer investment holding period appears generally to offer better investment returns, except for the 3 year holding period after the 1994 near peak point and the 5 year holding period after the 1987 about to recover point.

3) Purely from an IRR angle, the 1 year between 1996 and 1997 offers the best return though the profit can only be found within this one year i.e. versus other periods which offer lower return percentages yet allow for a longer profit-making timeframe.

4) From 2003 to 2006, the 3 year IRR return is almost comparable to that of 1987 to 1990 and beats the rest.

In summary, the above does seem to suggest that markets in general favor the timing experts and / or the longer term investors, notwithstanding this may also be a (random) coincidence.

And if one is required to choose between having expertise (or luck) in investment timing and having investment patience (longer investment period), timing expertise or luck reigns.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for 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.

Managing Director

Zeppelin Real Estate Analysis Limited

December 2007