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Housing shortage should benefit housing developers


rukawa
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Thinking through the housing shortage in Canada and many cities in US, Australia, Britain and I've come to one conclusion. There isn't a way out that doesn't involve fat and massive profits going to housing developers. We got into this mess because politicians and advocacy groups demonized developers for decades and any policy that eased development was said to be a "give-away" to housing developers. There is only one exit solution...you incentivize housing developers in a huge way all across the country and the world. This means that have to make fat stacks.

 

Obviously this has investment implications. Housing developers over the next 20 years should do very well. Haven't thought it through yet. Anyways this article basically says something similar:

https://www.nytimes.com/2019/07/29/upshot/developer-dirty-word-housing-shortage.html

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Wrote out some thoughts on housing in the link below.  Obviously my extreme examples are just that...examples. They won't ever come close to being implemented, but was helpful for me to show myself just how wasteful many of the current zoning rules are

 

 

 

 

I find YIMBY twitter is almost as good as fintwit

 

another good follow which if you look at his retweets lead you to other good follows:

 

 

 

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Hey rukawa, how come you don't post on individual names anymore? IIRC you used to be big on net-net stuff, right?

 

I don't have any smart thoughts on housing.

 

I probably should do that. Net-net stuff is pretty straightforward. Run the the screen, go through each one at a time. Invest. Mostly in Japan. Part of the reason I don't post is I'm already at capacity for net-nets and it happened pretty fast. I want from zero to fully invested in less than a year. There isn't a lot for me to do there. The rest of my money is in registered Canadian accounts which have restrictions on small foreign stocks and only really allow US or  Canada. In those accounts recently I've been investing in a few low PE, mid to large caps. Its basically the strategy described by originally by Graham and can be found here:

https://www.brokenleginvesting.com/grahams-simple-way/

 

The low PE stocks I like so far are mostly auto-part companies:

Magna

Lear

Linimar

LyondellBasell

 

Part of the reason I don't post much about single names is that I don't really think the analysis provided here is valuable for what I do. I basically invest in cheap stocks...I don't really try to analyze them in detail. I just invest based on financial metrics and diversify. I'm not trying to be a "great" investor. Cheap stocks though are pretty easy to find. Run a metric screen and go through them one by one. Or just go through valuelines one by one. If a stock is cheap and doesn't have any disqualifiers: not a real business, chinese, not truly cheap, massive stock issuance than you can invest in it. For me its pretty much irrelevant what the future prospect of the business are. And I don't try to read between the lines when it comes to accounting. If its difficult for me to figure out I skip it.

 

If you are looking for net-nets though they are here:

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/japanese-basket/

 

And there are some guys I follow:

http://www.nonamestocks.com/

https://www.elementaryvalue.com/

 

I've thought about doing something like what nonamestocks does and searching for dark/illiquid companies. But I've realized I can't really do what he does where he concentrates heavily, use technical analysis. Just doesn't make sense to me. Elementary Value is more my style...he also invests in dark companies but is way more value oriented. I might try it sometime...but I'm not really motivated because there are other thing in my life which are more important right now.

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...

I probably should do that. Net-net stuff is pretty straightforward. Run the the screen, go through each one at a time. Invest. Mostly in Japan. Part of the reason I don't post is I'm already at capacity for net-nets and it happened pretty fast. I want from zero to fully invested in less than a year. There isn't a lot for me to do there. The rest of my money is in registered Canadian accounts which have restrictions on small foreign stocks and only really allow US or  Canada. In those accounts recently I've been investing in a few low PE, mid to large caps. Its basically the strategy described by originally by Graham and can be found here:

https://www.brokenleginvesting.com/grahams-simple-way/

...

That was an interesting post. Thank you.

It would be very interesting to hear Mr. Graham's assessment of today's markets. It is humbling to see how such a deep thinker who embraced complexity and abstraction came to such simplification, later on in life.

Question:

The mechanical 'strategy' as described and other variants have shown (very) poor results (absolute and relative) for the last 10 years. One of Mr. Graham's rules, for a specific stock, was to sell after two years if the investment had not worked out. Would it not be reasonable to abandon such a strategy (or at least question it) after this kind and duration of under-performance?

 

-----)back to the housing shortage and free market solutions

-It seems to me that encouraging or simply allowing the multi-generation model would be a constructive step in the right direction.

-Your wish for less regulations may be countered by the fact that the housing market is already heavily regulated and the typical knee-jerk reaction then is to have even more regulation. Shortage as manifested by low home affordability is a significant issue in many places and will have to be dealt with somehow.

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-----)back to the housing shortage and free market solutions

-It seems to me that encouraging or simply allowing the multi-generation model would be a constructive step in the right direction.

-Your wish for less regulations may be countered by the fact that the housing market is already heavily regulated and the typical knee-jerk reaction then is to have even more regulation. Shortage as manifested by low home affordability is a significant issue in many places and will have to be dealt with somehow.

The mechanical 'strategy' as described and other variants have shown (very) poor results (absolute and relative) for the last 10 years. One of Mr. Graham's rules, for a specific stock, was to sell after two years if the investment had not worked out. Would it not be reasonable to abandon such a strategy (or at least question it) after this kind and duration of under-performance?

 

Fortunately I haven't endured that 10 years. The mechanical strategy is quite new to me. I've been at it for a few months. I'm following it because it makes sense to me. But I'm not completely mechanical....I don't invest in all stocks satisfying Graham's criteria. For instance if a stock has a history of losses and only recently has great earnings I won't touch it. Most stock screens don't look at 10 years of earnings but thanks to valueline I am able to.

 

And a more accurate description might be "loosely based" on the strategy. What I actually do is look at Valuelines one by one. I attempt to guess the price of the stock I'm looking at. If I register surprise at how much lower the price is than my guess ( usually this is when the stock price is 50% of what I guess or something like that) than I will consider it provided is satisfies in addition Graham's PE criterion (<10p/e and preferably less than 7 pe) and equity/assets > 50%. However even if it satisfies all these criteria I may decline if I think the recent earnings are not reflective of its history (e.g. it current year earnings are anomalous or it had losses for many years and than a few good ones). I usually will also verify that the most recent 10K agrees with Valueline. This is something that makes sense to me and I feel comfortable with. If after a while I conclude it doesn't work than I will just start investing in sp500 as I'm doing with all my parents money.

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-----)back to the housing shortage and free market solutions

-It seems to me that encouraging or simply allowing the multi-generation model would be a constructive step in the right direction.

-Your wish for less regulations may be countered by the fact that the housing market is already heavily regulated and the typical knee-jerk reaction then is to have even more regulation. Shortage as manifested by low home affordability is a significant issue in many places and will have to be dealt with somehow.

 

Not completely sure what the multi-generation model is. Anyways right now Doug Ford has already loosened regulations:

https://www.thestar.com/news/city_hall/2019/06/05/province-to-change-development-rules-for-toronto.html

 

There is already advocacy on the left for reforming zoning as a solution (the yellowbelt):

https://www.theglobeandmail.com/opinion/editorials/article-the-secret-to-lower-housing-prices-its-all-in-the-zoning/

https://urbantoronto.ca/news/2019/03/wheres-progressive-coalition-zoning-reform

 

And on the right there is advocacy for getting rid of the greenbelt:

https://business.financialpost.com/opinion/doug-ford-was-right-toronto-housing-wont-be-affordable-unless-we-develop-the-greenbelt

 

What is consistent though from both the Left and the Right is basically advocacy for deregulation. As far as I can see what Doug Ford has literally done is to allow real estate developers to dictate policy:

https://www.theglobeandmail.com/canada/article-we-need-good-ideas-on-housing-even-if-they-come-from-doug-ford/

 

And of course there is the interesting fact that Doug Ford's campaign received significant support from Ontario Proud, a group that was funded by real estate developers.

https://www.canadalandshow.com/ontario-proud-mostly-funded-by-developers/

 

This is getting political which I apologize for. But what I'm trying to convey is the political dynamics currently at play. Housing affordability is now an issue to be addressed and both left and right have to provide solutions. But if you look carefully almost all the solutions end up being give aways to housing developers.

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Hey rukawa, how come you don't post on individual names anymore? IIRC you used to be big on net-net stuff, right?

 

I don't have any smart thoughts on housing.

 

I probably should do that. Net-net stuff is pretty straightforward. Run the the screen, go through each one at a time. Invest. Mostly in Japan. Part of the reason I don't post is I'm already at capacity for net-nets and it happened pretty fast. I want from zero to fully invested in less than a year. There isn't a lot for me to do there. The rest of my money is in registered Canadian accounts which have restrictions on small foreign stocks and only really allow US or  Canada. In those accounts recently I've been investing in a few low PE, mid to large caps. Its basically the strategy described by originally by Graham and can be found here:

https://www.brokenleginvesting.com/grahams-simple-way/

 

The low PE stocks I like so far are mostly auto-part companies:

Magna

Lear

Linimar

LyondellBasell

 

Part of the reason I don't post much about single names is that I don't really think the analysis provided here is valuable for what I do. I basically invest in cheap stocks...I don't really try to analyze them in detail. I just invest based on financial metrics and diversify. I'm not trying to be a "great" investor. Cheap stocks though are pretty easy to find. Run a metric screen and go through them one by one. Or just go through valuelines one by one. If a stock is cheap and doesn't have any disqualifiers: not a real business, chinese, not truly cheap, massive stock issuance than you can invest in it. For me its pretty much irrelevant what the future prospect of the business are. And I don't try to read between the lines when it comes to accounting. If its difficult for me to figure out I skip it.

 

If you are looking for net-nets though they are here:

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/japanese-basket/

 

And there are some guys I follow:

http://www.nonamestocks.com/

https://www.elementaryvalue.com/

 

I've thought about doing something like what nonamestocks does and searching for dark/illiquid companies. But I've realized I can't really do what he does where he concentrates heavily, use technical analysis. Just doesn't make sense to me. Elementary Value is more my style...he also invests in dark companies but is way more value oriented. I might try it sometime...but I'm not really motivated because there are other thing in my life which are more important right now.

 

Thanks, all that makes alot of sense.

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In the US there has been an apartment boom. It looks like it is just going to continue because there is a lack of "affordable" housing being built. I put affordable in quotes because it differs so much across the country. My understanding is margins are much lower in cheaper housing so there isn't as much incentive to be in that space. Lack of supply means upward price pressure. I keep reading that fewer and fewer families can afford housing which is one of the main drivers for the apartment boom. It looks like there is no end in sight for the rental expansion especially when you look at some of the record consumer debt figures (auto, credit card and student loan).

 

It seems like there are always a few people who see these trends coming. In 2011, I read an article in Fortune that struck me. Basically it was about a guy who ran a real estate data firm called Metrostudy. He correctly identified what was to become a national housing shortage eight years ago. The article struck me enough that I saved it in a word doc which I'll attach here.

 

Fortune_Its_Time_to_Buy_Again_04.2011.docx

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