On the About page I explained that I earnt my first professional income after I submitted my PhD thesis at the age of 26 and I retired from my career as a research scientist at 34 – so you already know my worst financial investment! (Let’s not mention the opportunity cost of this professionally-engaged but mostly no to low income period of my adult life as house prices in Brisbane doubled in the last 3 years of my career!)
Let’s call the period from 1996 to 2004 (when I retired) the beginning of my financial education period, and what follows below is a synopsis of my management of our family finances post-2004.
If you are uninterested in property-related material, skip forward to a discussion of my history of managing our Retirement Savings.
Firstly I will discuss other financial/investment decisions outside of superannuation, predominantly property-related.
What I must say about the “pre-retirement” period is that we left the country intending to be overseas for around 10 years as I cemented my position in the field and presumably laid a foundation for a financially secure return to Australia, preferably Brisbane.
Before leaving from a position with Biosecurity Australia in Canberra in late 2000 I showed my wife a graph of the ABS house price series for Brisbane which had flatlined for almost 10 years and I explicitly said that I hope that the trend continued but I wish that there were options (financial instruments) that we could purchase to hedge for that. How prophetic!
Before we left the country, admittedly after selling our car, we could have bought a median-priced home in Brisbane with a 50% deposit. But we did not want an investment property on the other side of the world providing tax complications and stress when we knew that we were going to face enough challenges, and with considerable uncertainty ahead we felt it was preferable to keep our financial resources liquid.
Just over 2 years later in early 2003 we returned to Australia, directly to Brisbane. I had lined up a great postdoc opportunity in the US. However, the isolation that particularly my wife had experienced while in France and then Germany had taken a toll.
Buying our First and Forever Home
By the time I retired in late 2004, our first child on the way, struggling to recover from a breakdown, my wife struggling to establish a career in Brisbane (with recruiters telling her that her expectations were unrealistic in this “conservative” market), our savings seriously depleted, house prices surging with investors from southern states extracting “equity” from their already bubbly prices to leverage into the Brisbane housing market (in this period it was not uncommon to see taxis pull up at houses and Sydney-based investors “speed inspecting” for a hasty purchase), well we knew we weren’t credit-worthy borrowers even if the banks would have begged to disagree.
We worked hard to get ourselves settled into life in Brisbane as new parents and by 2007 we were ready to come back out and take a look at the market to buy a home for our family. Of course this coincided with the second leg of the Brisbane house price runup, very much co-incident with the emergence of WA investor activity following the strong runup in prices there. In this period it was not uncommon to go to open houses with 50 groups inspecting.
We were offered significant sums by banks very willing to lend to us, but we had no interest in getting into bidding wars with investors who foolishly felt they could not lose even if they paid above then market value.
Instead we were patient and continued to work hard at compounding our deposit – in the face of surging rent which ridiculously included a 30% increase over one 12 month period – while we were expecting our second child (thus not easily able to shift to more reasonably priced accommodation). As the market fell very quiet in 2011 we pounced.
We bought an older home on a large block with a nice suburban view within 10 km of the CBD because I understood that the real value is in the land not the depreciating house. We inspected the home on 3 occasions and on only one of those occasions was there another potential buyer.
We were able to negotiate a price which most likely was below then market value, probably around the trough level when the market bottomed 6 months later, and at a price very close to then marketable land value. Essentially the home on the land was “free”. The rateable value of the land was greater than our purchase price within 8 years.
I still maintain that we bought at a price above long-term fair value (relative to household incomes) but the quality of the block will ensure that future land value when our sons sell will prove that it was a reasonable, if not brilliant, financial investment.
Of course purchasing a family home is much, much more than a financial decision. However, having been raised in a home where the stress associated with a chronic belief that the bank might foreclose at any time proved to me that even very emotional decisions must have a strong financial basis, too. I will discuss this in more depth in a post, but suffice to say that when the emotional gain from a decision is outweighed by the resultant emotional cost from financial stress, then it is a poor decision all round or at the very least a decision that should be revisited.
Having said that, it is not what has happened to the value of our home post-purchase that has made our family so happy. I openly wept for joy in front of the realestate agent when, after a tough negotiation, we broke and made up most of the remaining financial gap in the negotiation to secure the vendors’ signatures. Our entire family enjoys the large yard and the full amenity it provides.
I realise that I have spent some time on this but it is my best financial decision beyond a doubt. And it displays all of the skills to make sound financial decisions.
My financial sense and analysis led me to feel certain that Australia had been in the grips of a house price bubble which commenced in the largest southern capitals in the late 90s (see my submission to the Henry Tax review on the Prior Public Contributions page). The second leg up in the bubble in Brisbane convinced me even more and I felt very confident if left to its own devices it would do as all bubbles ultimately do (see also my letter to Kevin Rudd 2007 ).
I also understood that successive Governments were conflicted and had an interest in strong to very strong housing markets meaning that they had an inclination to “juice” markets, adding even more incentives beyond negative gearing and other egregious tax concessions (damn the moral hazard!).
However, once bubbles inflate to a very large size they become inherently unstable and unpredictable, and I thought that, like with the US property bubble, the Australian financial bureaucrats would not be able to prevent its bursting. I thought in 2007 that it was an inevitability.
I honestly don’t think that anyone can empirically determine in real time just how bubbly a particular market has gotten, not even Robert Shiller! There are qualitative characters which analysts often mention – such as the taxi driver investment recommendations – but nothing is even close to being empirical. How can anybody determine when the fools will decide to not be even more foolish, and it’s certainly not when a measure of over-valuation reaches some magical line in the sand eg. the ratio of the median house price to household income reaches 9.35! Shiller’s argument that bubbles have typically burst when there is a confluence of narratives (in media and pervading society) that enough people begin to question the certainty of gains seems about right to me.
I now believe that the Global Financial Crisis was the best thing that happened to Australia. The root cause – the bursting of the US housing bubble – proved to Australian financial bureaucrats and to the Rudd Government just what a dangerous debt-fuelled house-bubble-economy they had to manage. Rudd being a Queenslander, and the timing of the runup in prices in Brisbane, thus being most susceptible at the time to having a crash, meant that he intuitively knew he needed to act and fast to save the bubble and prevent a crash that would have affected all capital property markets and most regional ones.
Being about as far from the seat of power as anyone can be, I was totally unaware of the rumors at the time, but in recent years it has become public knowledge that there was real concern that an Australian bank was very close to collapse and the two most likely are Queensland-centred banks.
To further support my argument I would suggest that the reader compare the house price movements in Brisbane relative to other capitals in the period from early 2007 to 2010 – you will notice that prices rose very swiftly upwards immediately pre the GFC, began to fall sharply and then bounced back with the Rudd Government’s measures, but critically, unlike most other capitals, prices did not make a new high as a consequence of those measures. In fact I would suggest that the Brisbane market continued to digest the consequences of that second runup in prices for a number of years after the GFC, and it is the reason why it was not until 2017 that real (inflation adjusted) prices for houses in Brisbane showed any growth from that period, and for apartments they still have not as of 2019 (although that is also due to overbuilding in that sector).
Around 2007 even properties in my small home town of Innisfail, where homes often take a year or two to sell, were selling to “southern investors” site-unseen within hours of listing on the internet!
So while we did suffer some economic effects from the GFC affecting other countries, the benefit of having the political cover to put a floor under house prices – by all sorts of measures such as doubling the first home owners’ grant to encourage the most naive of buyers into the market – saved the country from a house price crash which most likely would have otherwise occurred if the global economy remained healthy.
I leave it to people to decide whether the Rudd Government did the right thing, and whether their response was proportional.
However, for my family it meant that I needed to recalibrate my views. Regardless of whether I liked it, I needed to accept that the Government had indeed managed to keep prices “unnaturally” high.
I needed to be flexible and dismiss a view that had not only become embedded strongly in my psyche but one which in many ways partly defined me in my personal life (amongst friends and family) and in the persona I had developed online through my blogging activities.
A supple mind is perhaps the most important characteristic that an investor requires to be successful. I won’t pretend to be as good at it as the wonderful Charlie Munger – Warren Buffett’s long-time business partner – who says he aims to frequently lose a long cherished viewpoint and pats himself on the back each time he does.
Nonetheless I have managed to do likewise on a number of occasions now, including in the purchase of two investment properties.
Buying Investment Properties
In 2013, knowing that the Gold Coast was one of the few Australian property markets adversely affected by the GFC, due to it’s exposure to many and diverse international investors, and with Louis Christopher (of SQM Research) on television talking about the record number of for sale listings in this market, I recognised an opportunity.
With some preliminary research I was confident that we could secure investment property for at least 40% reduction in real terms from peak prices.
However, I had an even great obstacle to overcome to invest. I had staked a great deal of my own personal credibility on an objection to property investment by small scale investors, and I argued in submissions to Governments for a restructuring of the market to encourage investment by large scale commercial investors, such as superannuation funds, and a concomitant reduction in perks for small scale investors to reduce price and rent volatility in property markets.
In my submission to PM Rudd’s 2020 summit my “big idea” was to have houses return to being homes to Australians rather than speculative assets akin to casino chips. I was strongly opposed to (and remain so) to negative gearing and capital gains tax concessions (50% after just 12 months!), and was very critical of PM Howard and Treasurer Costello allowing gearing into property within Self Managed Super Funds (SMSFs).
Now I was contemplating using all of those strategies, or at least they would be a consequence of what I had in mind; purchasing two apartments, one inside of a SMSF and one outside.
What’s more, being the man I am, I felt I needed to be upfront and public about the decision, and I did so on Bubblepedia (which comically drew a response from an old online sparring foe on a pro-property blogsite suggesting that maybe the property market would now really collapse seeing as a permabear had capitulated).
The reasons why I satisfied myself that I was being consistent with my principles and ethics were these:
– If there is one Australian market essentially created for property speculators, it is the Gold Coast apartment market.
– Most of the apartments that I was considering for purchase were constructed for holiday units and/or investment; that some were being rented out to residents in a lull in visitor rates was a bonus and an addition to supply (and we ultimately had long term tenants in both apartments, one of which was shuttered and only used by the previous owner on holidays).
– The market was very weak and investment purchasers were only stabilising the market at very low levels, not pushing prices higher, so residents who wanted to live very near to the beach were enjoying a level of affordability that had not been present in the market for a long time.
– The opportunity to claim tax advantage was not the reason for investing, it was the possibility to invest in an undervalued asset that attracted me.
– I had invested a great deal of time and energy into understanding property markets, and I had done my best to use that knowledge to help people to be better informed, so I felt it was reasonable that I use those skills to the advantage of my family.
At the time there was a lot of uncertainty in the global economy with Europe then the centre of concern. The most significant factor was that I knew there was an opportunity to purchase assets at a significant discount to their recent peak pricing which gave me confidence that the market was not likely to fall a lot more under all but the most extreme of possible events in the global and domestic economies. Moreover, I felt that the high level of the Australian dollar would not last and that would bring back more tourists.
I had no idea when prices might bounce back but it seemed like the market presented an excellent risk-reward profile with low risk of further price falls and a high probability of capital appreciation in the medium term. Moreover, the net rental yield of near on 5% – even with comparatively high holding costs – was attractive compared to other markets in Australia.
We purchased both properties in late 2013 – a cheap one bedroom apartment 50m from the beach held outside of our SMSF, and a 2 bedroom apartment in a large resort held within our SMSF – at around 50% reduction to the peak in real (inflation adjusted) terms.
Unexpectedly, not long after we purchased, property price increases began to be registered. In 2017 we decided to test the market for the property held outside of our SMSF. Admittedly we had not enjoyed dealing with on-site management (who had bought in at the peak and clearly felt the need to game the system to make up for their folly) as well as other letting issues, and there was an immediate and easy profit to be made. Our excellent agent secured a sale price of 33% greater than we paid.
The success of that sale, together with an understanding that as we progressively paid down the debt our return on equity would decrease, and given that we expected price rises to slow with more new supply coming on stream, we decided to sell the property held in our SMSF in the lead up to the 2018 Commonwealth Games. Again our agent did a great job and we managed a capital gain of 35% and, given the low level of equity we had in the apartment, this had a very positive affect on our SMSF returns.
I remain reasonably positive about Gold Coast property and feel that it will remain more robust than many other markets going forward. Simply the capital gain occurred more quickly than we anticipated, and our returns would likely decrease as we paid off the debt, so I considered it more advantageous to become liquid once again within our SMSF to take advantage of corrections in other markets that were getting progressively more frothy and susceptible to falls.
As it turned out, these apartments were not to be our last property purchases, and our home was not destined to be the only “forever” home which we would purchase.
Purchasing a Holiday Home in Abruzzo, Italy
The profits from our investment in the apartment which we held outside of our SMSF presented on opportunity to enhance our wellbeing by either paying down mortgage debt or using it enhance our lived experience. It provided an excellent opportunity to revisit our financial plans and take stock of how we wanted to use our financial resources in this period of our lives with our sons growing older, the final 20 years or so of my wife’s career, and then joint retirement.
We considered using the money to build a deck on our home which is the rather obvious thing to do at our place to add to the leisure amenity of our home while taking advantage of the views. However, we quickly realised a few important things: 1) I have already done a lot of work on the outdoors of our home and there is already ample leisure amenity (a lovely mediterranean terrace, a pizza oven with nearby bench seating, a Finnish sauna, a bocce pitch come basketball court, a chicken coup and lots of fruit trees) – in which to relax so a deck was not going to make that much difference; 2) we knew that it would be a depreciating asset requiring regular upkeep that would not add additional value to the home beyond its amortised replacement cost (the potential to build it is obvious and included in the value of the home in any case); and 3) it would increase the financial concentration of our resources for if we did find ourselves in financial difficulty then we can’t just sell the deck.
Living in Europe was a challenging period of our life because we failed to make adequate personal connections into community to make us feel secure. The isolation was intense, especially in France. On the other hand, the weekends and vacations were wonderful as my wife and I travelled and observed and enjoyed the culture to the fullest. That experienced enriched our lives and in many ways changed who we were. We always spoke about sharing that with our children which we feel is now especially important in this world where populist politicians seek to make people concentrate on the few differences between our cultures, and therefore fearful of each other, for their own political advantage, rather than us understanding and appreciated our many more similarities.
We intended to take a long European holiday of at least half a year when the boys were old enough to take it all in. However, we realised that it was difficult to achieve given that we are dependent on my wife’s career, and let’s face it, a female from an ethnic minority faces enough challenges in career progression without giving anyone an excuse to hold them back. And we realised it was probably better for our sons’ formal education to not remove them from school for such a prolonged period.
Above all other European countries that we have visited, my wife and I love Italy for the people, food, wine, culture, and diverse scenery.
Learning from property shows on television that village homes in Italy seemed incredibly affordable to Australians who were used to sky high property prices, we decided to do some more research. After combing the pages of several agents we were of the belief that we could purchase on old but liveable village house in Abruzzo, Italy, for under $60,000 all in.
In June 2018, with much of our profit from the sale of the Gold Coast apartment already in Euros at a rate of around 70c to AUD$1, we set out and inspected around 40 properties in our budget over a period of 11 days. We bought the best house that we inspected – 4 bedroom on 3 floors with an amazing panoramic view over the Trigno River and extending to the Adriatic – in a beautiful small village at around 25 mins to the coast and 1 hr to ski fields. On our first return to our holiday home we were filmed by House Hunters International.
Again, this is not simply a financial decision for our decision to allocate financial resources towards buying a holiday home was done for a lot of personal reasons and in the understanding that there is some risk that the desired life enrichment associated with the decision will not be achieved.
Importantly, for me money is not numbers on a bank statement or a spreadsheet of net wealth – it is a symbol of resources at my disposal to enhance my life (as such, together with my family because that is where I gain my greatest pleasure in life) until it ends.
Early indications are, mainly because of the wonderful people in our village, that our decision to buy a holiday home in Italy may be the next best financial decision of our lives behind the purchase of our family home, and it was largely funded by the sale of our investment property.
The pool of savings represented herein is our superannuation funds, currently our SMSF and prior to that the accounts that were rolled into it. Obviously for privacy I am not going to mention amounts.
Given the account of my employment history and our period outside of Australia the reader will be well aware that on returning to Australia the balance of these funds was small.
I consider myself a contrarian investor who thinks ahead of the curve, is risk-averse to large capital losses, and largely invests on a value basis.
The following Table shows the financial year returns net of costs for our retirement savings funds commencing the 2007 financial year. We have never suffered a year when returns were negative and through to the 2019 financial year the compound rate of return has been 8.77% pa so that $10,000 invested in June 2006 had grown to $29,830. Allocations at the end of each financial year are also listed.
|Jun-06||$ 10,000.00||Equities 0%, Cash-Currency-FI 100%|
|Jun-07||6.40%||$ 10,640.45||Equities 1%, Cash-Currency-FI 99%|
|Jun-08||6.04%||$ 11,282.79||Equities 20%, Cash-Currency-FI 80%|
|Jun-09||2.15%||$ 11,525.15||Equities 85%, Cash-Currency-FI 15%|
|Jun-10||13.07%||$ 13,031.18||Equities 1%, Cash-Currency-FI 99%|
|Jun-11||7.10%||$ 13,956.98||Equities 15%, Cash-Currency-FI 85%|
|Jun-12||3.25%||$ 14,410.60||Equities 38%, Cash-Currency-FI 62%|
|Jun-13||6.62%||$ 15,364.39||Equities 0%, Cash-Currency-FI 41%, Property 59%|
|Jun-14||12.72%||$ 17,319.13||Equities 0%, Cash-Currency-FI 40%, Property 60%|
|Jun-15||17.44%||$ 20,338.73||Equities 21%, Cash-Currency-FI 9%, Property 70%|
|Jun-16||11.81%||$ 22,741.36||Equities 15%, Cash-Currency-FI 18%, Property 66%|
|Jun-17||10.82%||$ 25,201.41||Equities 20%, Cash-Currency-FI 12%, Property 68%|
|Jun-18||12.78%||$ 28,421.60||Equities 10%, Cash-Currency-FI 90%|
|Jun-19||4.96%||$ 29,830.14||Equities 35%, Cash-Currency-FI 65%|
In achieving this consistent return I have made some big calls – which resulted in major portfolio reallocation – which will be described below.
Pre-Global Financial Crisis
In late 2005 we saw a financial advisor, a service provided by my wife’s then employer, who disagreed with my views that Australian and US stock markets were becoming overvalued as central banks had intervened and prevented a proper work through of the excesses that accumulated into the popping of the tech bubble. I took on board his opinion and compromised in my strategy allocating 50% of balance and future fund flows to equities which as things turned out was a good thing. Nonetheless this was the last time I consulted an advisor.
In late 2006 we decided to amalgamate accounts into an industry fund to save on fees. As the market was showing clear signs of froth I expected a correction to occur before long, so we maintained zero exposure to equities.
Investing through the GFC
The amalgamated fund commenced in Sept 2006 and the full rollover and new additions (SGC amounts) were held in cash. In mid 2007, with the first slight tremors, new additions were allocated mostly to cash and fixed interest, but with some unlisted property fund and equity exposure. I reallocated some cash to equity exposure in the early tremor, and than after the weak progressively reallocated to equity exposure with larger and larger re-allocations near the trough (See Graph below). Until August 2009, this fund only allowed 1 re-allocation per month enacted on the first day of the month, so data are presented on a monthly basis. I reached my full equity allocation of 84% 1st of March 2009 which, completely by good fortune, was around when the market bounced.
As the stock market rebounded, the ASX200 close to 5,000, I locked in profits by trading back to significantly lower equity exposure. With the market range-bound for the four years to 2013 I gently increased equity exposure at lows of the range, and reduced again near the top of the range.
Investing within our Self Managed Super Fund
In 2014 the global economy again appeared very uncertain. I had reasonably successfully traded in and out of the sharemarket as it range traded but I had little conviction that investing broadly in the sharemarket was likely to be rewarding, and having some understanding of the post-1929 sharemarket activity, I considered it a higher risk than normal.
The US economy had begun to rebound albeit slowly. Australia had largely escaped the GFC and as I explained above, if anything benefited from it by producing the political cover to stop the housing market bubble from bursting as well as enjoying the benefits of China’s stimulus. However, Europe was showing signs of crisis with the peripheral countries in trouble, especially Greece, which threatened to take the global economy down again.
We decided to establish a SMSF primarily to invest in the asset that I identified as having the greatest risk-reward profile at the time – an investment apartment on the Gold Coast which we managed to buy at around 50% discount in inflation-adjusted terms to the peak.
As discussed above, with a capital gain transpiring unexpectedly quickly, while leverage was still high, we opted to lock in those gains.
We did make one equity investment in that time. In late 2014 I established a two phase strategy to buy into Berkshire Hathaway class B (BRK.B) shares by purchasing half of our allocation immediately (in September) and putting the other half of the allocation into USD (the Betashares USD exchange traded fund) to lock in the beneficially high exchange rate while waiting for a potential pull back which occurred in September the following year when I sold the USD and bought BRK.B.
We held the stock until October 2017 when we conducted a two phase sale strategy of selling the stock and placing it into USD as I did not want to lose the currency exposure aspect of the trade.
The reason why I sold to lock in the profit was a sad admission I had to make to myself.
I have no doubt that Berkshire will remain a very strong company well into the future on the basis of what Buffett and Munger have done, and I am as certain as one can be that they have the skill to ensure that their chosen successors will be talented individuals as good as any available in the corporate world.
In fact, one of the main reasons why I invested originally is they have been rare in recent years in actually investing in building businesses (plant, machinery, etc) when almost all other managements are drunk on the elixir of cheap money and “making lazy balance sheets work harder” meaning that short-sighted managers, with an eye on their remuneration linked to shareprice increases, have been borrowing to conduct “capital management strategies” otherwise know as increased dividend payments or more commonly share buybacks.
The benefits of Munger and Buffett’s disdain for the usual wall street shenanigans will reward shareholders well into the future.
As it turns out, by chance, in the two years since we sold our BRK.B shares it has range-traded and has only for a very brief period been more than 5% (in USD terms) above our exit price. This is largely due to the eschewing of value investing by the market.
I now expect to invest again in BRK.B in the future. However, the sad admission was that there almost certainly will be an opportunity to buy in during a very significant price correction in the future. In fact I wonder whether that is why they, themselves, in part are stockpiling cash as in recent years they have instituted a share buyback program to take advantage of prices below intrinsic value and which is stated to not be used to support the share price.
It’s undeniable that Berkshire is seen as a “critical personnel” company/stock – perhaps the greatest ever – even though one of their greatest strengths has always been in spotting and surrounding themselves with quality people. So when Charlie (now 95) and Warren (soon turning 90) stop defying the life table averages, as sad a day as that will be for me and many others, I will be looking to pay the ultimate respect and buy into their legacy with a great deal of conviction. Even if I don’t expect the same extraordinary returns obtained “under present management” I am confident “they” will comfortably outperform the broad US share market indices well into the future so in this regard I will not be taking their advice and allocating to a passive strategy, well not for those funds anyhow.
By mid-2018 we were totally in cash and currency (USD and Euro ETFs) and hoping for a pull back in global shares. While global share markets ultimately performed well in the period 2014-2018 on the back of unprecedented experimental monetary policies, I consider that our strategy of investing in beaten-down Gold Coast property was the better risk-reward opportunity and it allowed for leverage which boosted returns.
In mid-2018 we began some initial investments in the managed funds of people in the industry for whom I have a very high regard – Roger Montgomery and Steve Johnson – because of, above all else, their personal ethics and integrity as human beings. As I have said to each of them, if presented with a binary choice, I would rather go broke with a good person doing their best than get rich with a snake. Fortunately each is extremely intelligent and skilled in picking stocks with superior prospects undervalued by the market – a skill that still largely eludes me – so I am confident that I will not go broke with their teams having joined our team.
As detailed in my earlier posts I used the market correction at the end of 2018 to buy into equities, including increased purchases of managed funds and direct Australian and global equities, and especially Chinese technology companies and emerging markets. I rapidly reached around 80% allocation to equities and would have reached effectively 100% equity allocation if on Boxing Day the US market continued to fall because I had buy orders in for a number of US technology stocks including Alphabet (Google), Apple and Microsoft as well as some other quality global industrial stocks.
As I detailed in that post, I sold out of all of my Chinese shares and emerging market equity positions in early 2019.
Roger and Steve’s teams will each ultimately manage around a quarter of our portfolio, allocated by me into their various funds, while I will manage half of the portfolio with my macro overlay. I will be considering a broad range of investment opportunities – from rural property through to precious metals to direct shares and equity funds, especially exchange-traded funds, and I will update my portfolio movements on this site in the Current Positioning page.
© Copyright Brett Edgerton 2019