Monday, August 13, 2007

Buy Low, Sell High

Well I am quite refreshed after a week away from the office and the day to day grind. The markets also look quite cleansed after the TSX lost just over 8% of its value since its July high(14,600+ high to Friday's opening of just about 13,300). The S&P 500 also lost over 6% of its value from its July highs.

For the long term investor trying to find some strong companies with depressed stock prices the past week has been a great opportunity and in general it is a good time to have some cash ready to invest in some good deals if they come around. Right now is also a great time to rebalance a portfolio as your asset allocation is likely amiss after the recent volatility.

On the topic of buying low and selling high, my wife and I have sold our home and will be moving. This represents a great move for us personally as we will be moving closer to my work and I will have more time to spend at home. Financially, we will come out smelling like roses with no more mortgage payments and a very large amount of money in the bank from the 'insane' appreciation we have experienced plus a healthy mortgage paydown since we purchased out place 3.5 years ago.

In the effort of being prudent financial managers, we are choosing to not purchase a residence for a time until we find a place that meets our buying criteria.

Mohican's buying criteria:
- 10 minutes or less drive to work
- walking distance to grocery shopping
- monthly mortgage interest + strata + maintenance + property taxes <= equivalent monthly rent
We feel very relieved to be free of our mortgage and the risks that go along with homeownership.


Unknown said...

With my overall concern about the markets, I put the bulk of my money into a money market fund, and am wondering if that is the best place for it. Any suggestions?

M- said...

Mohican, congratulations on the sale of your place-- IMHO, it's an excellent time to have gotten out of the market right now.

I hope your transition to renting is very smooth. I like the logic that you're looking for in your next place to buy. I'm waiting for the same metrics before I buy back into the market.

Uncertain Buyer said...

Good Luck, I lasted a month renting before I bought back in. I planned on renting for a couple of years and catching the market on a low point. Unfortunately, I don't have the stomach for it and bought back in after finding a great house in a good location.

RE takes a lot longer than a couple of years to correct and so far it is still appreciating. It's going to be interesting to see how much Canada, especially BC is effected by what is happening in the US right now.

Patiently Waiting said...

Selling your primary residence to cash-in at the perceived peak is one bearish behaviour I generally disagree with. If I owned a place that I loved living in and could well afford, there is no way I would let it go unless I had to. Not to mention that moving sucks.

mohican said...

jason - short term GICs and money market funds are great vehicles for short term investing.

M - thanks - I am looking forward to living closer to work and fortunately my wife and I are fairly minimalist so we don't have a lot to move. It will be a challenge to find a rental at this time of year though.

uncertain - I am not a 'perma-bear' on housing and as soon as I find something suitable that meets my criteria, I will buy. I don't care for trying to time the market but we will be wise with our money and won't be conned into overpaying.

Uncertain Buyer said...

It sounds like you are doing the right thing, take your time and when the perfect place comes up go for it.

Patiently Waiting said...

mohican, I hope you find good value for your money in a rental. There are still deals out there - I found one - but looking can be frustrating. I found I had to give on location to find something suitable. Best of luck.

Paul said...

I feel the same way. No one wants to buy at or near the top which is where I think we are. If I could find a great home on a large lot in one of my areas of choice I would consider buying. The thing is where I live this takes about 1 mill and I am not that flush just yet :0. Also this is for an older house that needs work. I would expect a correction and would only buy a home with potential to stay over 10 years. Renting for like 2-4 years when you can buy sucks. Of course if the "correction" is substantial( over 15%)I would kick my self. At least I would be aware of the risks which many are not.

Unknown said...

Congrats on selling at the peak.

Your third criteria suggests that you're waiting for a significant correction, but I think events in the US portend that we'll see the beginnings of one soon. An '82 style recession could hammer prices down quite quickly, 3 yrs from peak to trough.

For the long term investor trying to find some strong companies with depressed stock prices the past week has been a great opportunity

Mo, mon ami, I can't agree. I think the market has a ways to go down. Dip buyers now may yet discover they bought far too high.

Tony Danza said...

jason / Mohican -

Make sure that your money market funds don't hold any MBS's in their portfolio. Some money market funds in the US and EU have had substantial losses (>20%) in the past week and some are suspending redemptions! A safe MM should hold government paper.

Tony Danza said...

See Ben Jones' Housing Bubble Blog for more info on MM funds...

mohican said...

beta - regarding the stock market - I also agree that we may have a way to go on the downside still but that doesn't stop me from buying underpriced securities once they meet my valuation criteria. I also think that having cash on the sidelines throughout this downturn is prudent as the best deals may not have come around yet.

I purchased my current home with the criteria I outlined in my post and I fully expect prices to revert to the mean at some point and indeed prices may even overshoot to the downside - as has been the case in the past.

Unknown said...

tony danza,

The MM fund is a sunlife fund that holds ~90% cash and 10% fixed income. The bulk of the FI is government bonds (BC, ALTA, and Cda) as well as some corporate bonds (GE, Encana, McCain).

I thnink it is a safe bet. Any advice?

Warren said...

I don't want to sound like a bull but I don't know if you'll ever buy based on your rent vs. expenses requirement. There's always a bit of a premium on ownership. If you loosened your guidelines to rent + 10-20% you might see some reasonable properties to buy in the next downturn. Of course if you're looking at a "fixer upper" you'll probably see some RE that meets those numbers, but will require additional investment.


Your fund sounds good. 90% cash is pretty solid, along with Cdn. bonds. The governments you list are all in positive territory, and can afford to pay their debts for the foreseeable future.

Unknown said...

Mohican -- make sure you get a good home inspector before you buy!

Not much different than reading (and understanding) financials ...

patriotz said...

There's always a bit of a premium on ownership.

No there isn't. In fact, there is usually a discount on ownership.

The reason is simple. If an ownership premium existed over the long run, anyone who owned a house and rented it out would lose money. Such a situation cannot last in the long run, as landlords would sell out and the rental pool would shrink, driving prices down and rents up until being a landlord was profitable again.

There sure isn't an "ownership premium" on anything else, like cars, is there?

BTW, during the Great Depression the monthly ownership costs for buying a house were about 1/2 the cost of renting. How's that for an "ownership premium".

Patiently Waiting said...

In Halifax, with lots of students, military etc., it is often more expensive to rent than own. Even now.

Before anyone says it is different from Vancouver, I would say it is much more similar than Manhattan or London.

Halifax is about the same size as Victoria, and very similar economically. Lots of students and military there too. And both have government.