The world moves in cycles. We have cycles of time — days, weeks, months, years. We have different seasons…a nitrogen cycle, carbon cycle, photosynthesis and the water cycle. I’m a big believer in markets and investments also following this natural occurrence and moving in cycles because at the end of the day, markets are driven by human beings and our natural habitat.
I view every investment decision I make in the context of a cycle.
Now the hard part is picking cycles. It’s very difficult to predict where we are in a cycle. For example, the residential real estate cycle in Sydney has generally fluctuated between 7-10 years, when you have a boom at the top and pullback at the bottom. Timing is difficult because sometimes booms or pullbacks last longer or shorter than expected.
The same can be said for stock markets and movements in the price of gold, silver and other metals.
Some investors like predicting cycles, using technical measurements like Fibonacci charts etc. I’m not completely sold. As an investor, I like to keep things simple. I don’t really care about timing, I’m more focused on getting things right.
Where are we in the current cycle?
I recently came across a great note from an experienced commercial real estate investor who pointed out that post-war commercial real estate returns have averaged around 8%, so any asset which has grown by more than 8% in the past decade will probably see a sub 8% compound rate of growth in the next decade as markets revert back to their historical average.
This is really important.
The Law of Large numbers in statistics stipulates that as you add more numbers to a certain sequence, eventually the trends will revert to the average. If we look at real estate prices over many years, you will see that eventually we move to a certain average when predicting the future. Same with stocks.
The situation is a bit harder with crypto because we don’t have a long time series to measure. It’s a new technology and what we know from history is new technologies can usually generate exponential returns in their early years before things settle down and trend towards the rest of the world. We saw this when the internet first emerged.
What booms next?
I don’t know, but I do know that something will, so I make sure my portfolio is open to different possibilities. I want to make sure I have enough diversification and insurance to benefit from something breaking out and booming.
Focus is important. Having too many investments can be a distraction. But having too few investments and limited diversification means you can and probably will miss the next exponential growth opportunities.
It’s better to have 1% in 100 things, across different asset classes, than 50% in 2 single exposures unless you are certain that you’re making the right investment decision. Dead certain.
I’ve seen too many friends enter the crypto market by making large bets on single exposures. The rationale goes something like this — Bitcoin has already boomed, so they feel like they need to find the next boom. This line of reasoning isn’t bad. It’s the execution that lets them down.
Going all in on X or Y coin and hoping that you strike it big is a complete gamble which usually doesn’t pay off. Buying a collection of 10-20 exposures and having a “I don’t know which is best attitude” is prudent and sensible. Time in the market is more important than timing the market. This is the same principal that venture capital investors take to their portfolio.
It’s also the same with stocks. The best investors are spread over many companies, across various markets. The Law of Large numbers means the more you add, the more likely you are to get average returns which over a long period of time is probably enough to meet your investment goals (see my previous note on compounding).
Spreading risk in residential real estate is a bit harder. But if investors stick to main cities, great locations, then risk is minimised because these cities have diversification themselves. A suburb in Sydney is likely to have more diversity in employment, infrastructure, population, education etc than a remote location in central NSW.
As the real estate portfolio grows, investors need to expose themselves to various areas just incase a certain state moves adverse tax laws, industry trends change or something else emerges outside of the unknown.
The bottom line: Think in cycles
Around 2500 years ago and according to rabbinic tradition, King Solomon wrote “…there is a time for everything, and a season for every activity under the heavens…” (Ecclesiastes 3). Many of the proverbs borrow from Persian and Greek writing styles, so scholars believe the work could be dated even further in history.
The Talmud also suggests an asset allocation of 1/3 cash (reserves), 1/3 business (stocks), 1/3 land (real estate) "Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep by him in reserve"
Human wisdom dating back to the ancient world acknowledged cyclicality and the importance of timing in decision making. I’m personally looking at adding some out of season investments to my portfolio, in small increments, such as gold, silver and more crypto assets in the form of a wide basket.
I’m also considering a wider diversity in my residential real estate exposure, particularly Australian metro apartments which are now trading at their biggest discount relative to house prices for some time...
Make sure you subscribe to get my weekly updates as they’re published. I’ll show you what I’m buying, where I’m buying and areas of caution which I’m avoiding. My decision to add some Peloton stock to the portfolio last week (see my note and reasoning here) is so far paying off, with the stock up nicely over the past few days. I’ll be holding on for the long term.
Have a great week and God bless.