Tuesday, April 27, 2010

On market bubbles and contrarian investing

On the REIN forum several posters were looking down on the masses fearing a Canadian Real Estate crash as economists such as David Rosenberg have pointed out in recent days. Here is my take:

The issue is that Canada's housing market has many segments and those segments can be further subdivided into many areas. Nobody is going to be an expert in all of those different local market segments. It sounds to me, and it really is 'sound' because I don't invest in many of these markets, that condominium complexes and other real estate market segments are 'frothy' in areas around Vancouver and Toronto where a large portion of our Canadian population lives. These two (and maybe also include Montreal and Ottawa) comprise a large portion of what we call euphemistically the 'Canadian Real Estate Market'.

But other markets such as luxury condominiums in Canmore are still severely depressed although possibly stabilizing. Calgary's condominium market is also hard hit and may fall even a bit more over the coming months, while in Edmonton things appear to turn around for the better.

Regarding the statement that the masses are always wrong, that is incorrect. Even the masses may see the obvious. The difficulty with contrarian investing is that you don't go against the masses out of principle or by definition. It is more about anticipating the unexpected which may prove to be the most profitable.

Yes, the market may be 'frothy' in the opinion of many, but that does not mean the obvious crash is nearby. The market may go up a bit longer, it may go sideways for a long time instead of crashing or... certain local market segments may crash while others will do fine or even excellent. In fact, as a contrarian you may want to say, "Things will likely be different than the masses expect, the question remains where will the most profitable opportunities occur?" That is something not even the contrarians can answer with certainty.

Reality is that the investor should be aware of trends, because it may help identify opportunities, but the true key point is to buy assets at the right price with enough price cushion and cash flow to get by the rough spots. Something that is again a lot more difficult to do than say.

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