The Investment Seminar Index v3.
The investment seminar index is a tongue-in-cheek indicator of a market turning point. Readers concerned about elevated real estate valuations need look no further than the heavily advertised Rich Dad real estate seminars as a confirming signal.
What do individual investors think when they turn on their radio only to hear an ad for a real estate seminar that goes something like this: Learn why you might not want to diversify and why you might not want to invest in RRSP’s. Learn why RRSP’s are bad. Learn why savings won’t make you rich. And then the closer … Learn why real estate is the greatest wealth creation tool of all time.
Well, apparently investors think get rich fast because these seminars are sold out.
The Investment Seminar Index.
To review, the Seminar Index flashes a warning when seminar hype overtakes day-to-day reason. It says that after an extended period of strong returns, a trends’ reversal is signalled by a broadly advertised seminar usually aimed at the retail investor. Seminar organizers know that investors can be seduced by strong past returns and that selling past performance works. That’s one of the reasons these seminars are so successful. Past performance is easy to sell.
Understand that the investment seminar index is based on nearly zero empirical data and the correlation seems spurious but it can be no coincidence that just as the party is about to end, the investment seminars get rolled out to the Mom and Pop retail investor audience.
For readers new to the seminar index, here are two prep reads:
This time it’s real estate.
Any real estate chart will show strong recent performance. Plus seminar organizers have weak stock market performance to sell against. It’s true, for many investors, their investments haven’t worked as well as hoped over the last five years. And where do investors hold the bulk of their investments? In their RRSP’s. That’s why the attack on savings, diversification and RRSP’s is so insidious. (We all thought that savings, diversification and RRSP’s were good). Seminar organizers also have low, low interest rates in their favour. So real estate can be bought using borrowed money which costs next to nothing.
Well, selling past performance might work but buying past performance doesn’t.
Back to reality.
The premise of these real estate seminars is the presumption of ever-increasing real estate prices and cheap debt. Without gains in valuation, the model doesn’t work. Income alone isn’t enough. Didn’t we just see this in the U.S.?
BCA Research has said that low interest rates mean leverage and if you’re looking for a bubble … you’ll find it where there is leverage. “The oversupply of cheap money encourages speculation and fuels asset inflation”. Serious investors know that strong recent performance tends to revert to more average results (the easy money has been made) and that rates might not always be this favourable. Leverage and an over-extended real estate market are a bad, bad combination. (Especially for Canadians who already have plenty of debt. See Canadian household debt to income).
Investing in real estate is easy. Making money at it sometimes isn’t.
Perhaps the strongest signal for an overextended real estate market is when people start living in storage lockers. See Vancouver magazine, May 2012, Derek Bedry, My Life in a Vancouver Parking Garage. One recalls meat lockers in San Francisco being rented for $500 a month … in 2007.
_____________________________________________________________________________________Next time? More Risk Management. Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan