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{ in·deed·a·bly }

adverb: to competently express interest, surprise, disbelief, or contempt

Evolution

Evolution is an interesting process. The theory goes that over time the optimal outcome will emerge.

Billions of years after Georges Lemaître’s “big bang” kick-started evolution, the species occupying the Earth today represent the current pinnacle of that evolutionary process.

The axolotl. Platypus. Zombie cicada.

Donald Trump. Q-Anon conspiracy theories. Reddit trolls.

Actions without consequence. Internet memes that move markets. Truth as a subjective choice.

Survivorship tells us what worked. Who was sufficiently fast? Lucky? Smart? Or ruthless?

The Natural History Museum, law courts, and unemployment office keeps score of what did not.

Machine Learning is an interesting process. The theory goes that if we feed a computer enough answers to a problem, eventually artificial intelligence will be able to tell us the best way to solve it.

First, ingesting vast quantities of training data. Then, iteratively evolving a solution to a problem. Sometimes the same problem that the data “scientist” was attempting to solve!

Microsoft once force-fed an AI chatbot millions of social media messages so it could become more adept at speaking like a millennial. It quickly evolved into a sarcastic feminist hating nazi.

Amazon built an AI to shortlist job applicants, using a blended picture of the perfect hire created by ingesting the CVs of thousands of successful tech bros. The algorithm determined that few engineers had captained a women’s sporting team nor attended an all-female school, so it proceeded to screen out those candidates who had.

A cancer detection algorithm decided the most efficient way to identify cancerous spots from photos was to look for the presence of a ruler, after all the training images supplied by oncologists contained one.

Faith, hope, trust, and blind repetition underpin many of our beliefs and actions. Yet if we fail to critically access their effectiveness, we simply emulate those errant evolutionary algorithms that resulted in the camel, Brexit, and generations of amateur investors who believe those expensive actively managed investments their broker recommends will outperform the market.

Choices

Everything we do involves choices. Choices made. Choices avoided.

Taking action requires choice. Doing nothing is also a choice, though not always a conscious one.

Every significant financial event in your life can be traced back to just a small handful of choices. Their effect and impact compounding over time. All leading to the point at which you find yourself today.

The blogger Finumus recently made £1,000,000 in just four short months, by taking a punt on bitcoin. Many would write off the windfall as a fluke. Stars aligning. The investing gods smiling upon him.

However, I challenge that conclusion.

True, Finumus got lucky when the herd briefly attached their desires to the latest shiny object, a token of digital imaginings without any intrinsic value of its own, shortly after he had bought his stake.

True, Finumus lucked in again when he cashed out of his position, shortly before the herd became bored with bitcoin and rushed off to join the WallStreetBets driven Gamestop pump and dump scam.

Yet let’s take a moment to reflect on how Finumus was able to make that million.

His bitcoin investment generated a 10x return, not a million-to-one lottery win.

That means he consciously decided to invest £100,000 of his hard-earned money into bitcoin.

Which means he had a spare £100,000 available to invest, nearly 4x average annual earnings.

Which (hopefully) means he had a £100,000 that he could afford to lose.

Which (probably) means that £100,000 was not a material portion of his net worth.

Which (likely) means that he breathes the rarified air of the top 1%. Able to take bigger financial risks. Survive greater financial losses. Enjoy larger financial rewards.

Which suggests that before the point he decided to invest, Finumus had already done pretty well for himself. Perhaps he was an entrepreneur, high-income earner, inheritance beneficiary, married into money, successful investor, or a trust fund baby.

Whatever the source of his wealth, Finumus had made a series of choices throughout his life. Choices that compounded until they made it possible for him to place that fortuitous bitcoin buy order.

His punt was not for the faint of heart. It wasn’t one that I would have made. Each of our choices had consequences. In this case, Finumus made a million quid and I did not. Credit where credit is due.

It would be easy to read about his success and think “he’s so lucky” or “why does nothing like that ever happen to me” or “it’s not fair!”.

What those who do so forget is that Finumus had put in the work. Identified the opportunity. Done the thinking. Borne the risk. Taken action. Put himself in the position to then experience that good fortune.

Made a series of choices that evolved and compounded.

Once we start to look for them, we see examples of these compounding decisions everywhere we look.

Fire and Wide retired early to a life of globetrotting.

Cashflow Cop wants to buy a forever home by the sea.

Banker on FIRE ponders the tax implications of a six-figure bonus.

They’re so lucky!”. Except these would all have been impossible dreams, had those individuals not consciously chosen long ago to prioritise wealth generation. A side hustle as an amateur property developer. A buy-to-let property empire. A career as a high-flying master of the universe.

Some folks chose to sit on the couch, and enjoy a “Netflix and chill” moment each evening. Others put in the work to create value, negotiate property deals, unblock toilets, and slay corporate dragons.

Each of those choices had consequences. The bloggers will enjoy a sustainable financially independent existence, while the couch potatoes will not. Credit where credit is due.

Overvalued

We have seen some examples of the evolutionary compounding of choices. In some cases for the good, successfully executing a plan to create a leisurely life of slow travel or climb the greasy pole. In others, the not so good, like the innocent AIs that learned to replicate humanity’s own worst instincts.

Now let’s consider another example of evolutionary compounding, specifically when applied to the common lament: “London property prices are overvalued”.

If you ask London millionaires how they made their money, the majority of them would tell you that a decade or two ago they had purchased a crappy overpriced house in an up-and-coming neighbourhood. Then they simply kept up with the mortgage, and rising property prices did the rest.

The perception back then was that prices were overvalued.

The perception today is prices are overvalued still.

Those millionaires chose to buy a property anyway. Many others did not, deciding to wait for a market correction. Each of those choices had consequences. Today the home buyers are millionaires, while those who waited on the sidelines are probably not.

Which isn’t to say that owning property in London led to automatic riches. Nor that prices always went up. Nor that what has occurred in the past will occur again in the future.

No, my point here is that our perceptions of what represents fair value are often faulty, remaining tethered to the past.

We fail to update those perceptions for simple things like inflation, which erodes our purchasing power over time.

For example, in my current neighbourhood, houses today sell for the same amounts they did nearly a decade ago. Identically expensive in nominal terms, but representing a 15% fall in value over that period when inflation is taken into account.

The properties still feel ridiculously overpriced it is true, but they are now comparatively less overpriced in purchasing power or earning multiple terms. The widely quoted headline national and regional figures tell a different story, of record-high prices and a stamp duty holiday induced property boom, demonstrating once again that high-level averages mask a multitude of different stories within.

However, perceptions of aspiring buyers in my neighbourhood failed to correctly evolve. They were anchored to the wrong piece of information: nominal prices. Every year would-be buyers waited impatiently for nominal house prices to fall. Every year they compounded the error of their faulty thinking.

The absence of klaxons sounding, flashing warning lights, and media doomsayers shouting that the sky is falling meant the pullback in real prices that they should have been waiting for had happened while they weren’t paying attention.

Instead of recognising their mistake, re-evaluating their perceptions, and evolving they instead look enviously at their neighbours, “you’re so lucky!”. “Buying the dip” can be a wonderful strategy when it pays off, but the opportunity cost of waiting too long can be vast and in some cases irrecoverable.

We often fail to evolve our perceptions for externalities that alter the balance between supply and demand in a given locale. Examples might include net migration rates, fertility rates, zoning changes impacting population density, development approvals, infrastructure improvements, and the ever-changing employment prospects of local residents.

Do these changes make a location more or less desirable to live in?

Will they harm or help the prospects for future capital growth?

Such changes should cause us to reassess our perceptions of what would constitute fair value. Yet how many of us consciously adjust our expectations accordingly?

Media reports recently announced that London’s population had fallen by 8% during 2020. An estimated 700,000 overseas-born former residents had packed their bags and headed home. The pandemic cruelling their jobs in tourism and hospitality, driving them away. High barriers to entry for migrants wishing to move to post-Brexit Britain prevents their return.

What does such an exodus mean for property prices? A material demand shock in the short term.

Asking prices start to look very aspirational, as fewer prospective buyers compete to bid them up.

Property listings have surged, as a generation of existing homeowners sense a market peak, and hope to cash out before the music stops. Meanwhile, lenders share these concerns, as evidenced by the high numbers of prospective buyers who are failing to secure financing for properties at their current asking prices with high loan-to-value multiples.

Long term, there is the possibility of some more permanent structural changes at work.

If Britain’s recent penchant for nationalism results in the migration drawbridge remaining raised, then that “new normal” level of demand will become a permanent feature rather than a temporary bug.

Widespread adoption of remote working has shown it is technically possible to work from anywhere that offers a reliable broadband connection. Should remote working practices persist beyond the days of social distancing, then prospects for London’s expensive real estate would appear less than rosy.

Will buyers paying today’s “overvalued” prices face a similar negative equity trap to that endured by folks who paid too much for properties back in the late 80s/early 90s? Or will the populist government make good on their promises of that “sunlit uplands” for post-Brexit Britain?

I have no idea how things will play out in practice. Nobody does.

Evolution

I do know that those who critically assess the effectiveness of their thinking, then evolve their perceptions to make decisions based upon evidence rather than faith and opinion, will produce more successful outcomes than those who blindly cling to belief and hope alone.

The impact of this evolution in thinking compounds over time.

Getting it right leads to successful careers, sustainable passive income streams, and maybe even million pound investment wins.

Without this discipline, errors creep in. Compounding over time. Resulting in the nazi chatbot, the sexist AI, and the envious couch potatoes who complain about how lucky others were to have achieved their goals.


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26 Comments

  1. GentlemansFamilyFinances 5 February 2021

    For what it’s worth, in the same time period that there have been hundreds of thousands of property millionaires made in London, my own experience from Aberdeen is that people making the same choices to buy somewhere to live in end up trapped in a house that is worth less than they paid for it and in a career that is facing extinction.

    Not something that impacted me but I managed to dodge it through circumstance, HPC dogma.

    • {in·deed·a·bly} 5 February 2021 — Post author

      Thanks GFF. That is a great example of where critically assessing our perceptions and evolving our thinking is important. What may have once made sense no longer does so.

      In that example, the writing has been on the wall for the oil and gas sector for years. People who were paying attention might have wondered where the jobs to drive population growth would come from, and then later where the jobs to sustain the population would remain. Parents start to steer their children into careers that takes them away from home and towards employment opportunities elsewhere.

      The very same questions played out amongst mining communities, farming communities, and so on over the last few generations. Often with the same unfortunate answers. Eventually those who were paying attention moved away, while those who didn’t now remain trapped owning houses they can’t afford to sell, located in towns where there are very limited opportunities in their line of work.

      • GentlemansFamilyFinances 5 February 2021

        I had a good run for 15 years.
        That should be enough time to grab the money and run.
        The problem is that few industries truly evolve, they go extinct but your observation that those who were paying attention moved away is very astute: I worked for a company that had a long list of notable alumni who went on to bigger and better things. Those that stayed are now on the dole.
        Opportunity is always there for people but it’s probably better to move on before your.are pushed out.

    • Mike 24 February 2021

      Where do you live that prices are flat since 2010? I’m struggling to find anywhere in the UK that meets that criteria.

      • GentlemansFamilyFinances 24 February 2021

        Provincial Scotland, small city.
        Prices have gone up a bit over the last few years but in real terms it’s Nothing to write home about.

      • {in·deed·a·bly} 24 February 2021 — Post author

        Not sure if you were asking GFF or me, Mike?

        The location I wrote about is a small and tightly held conservation area. Prices were run up in the late naughties by new employment opportunities nearby and the local schools improving, but have flatlined since then as the surrounding market has gradually caught up.

  2. The Accumulator 6 February 2021

    For sure, history is written by the winners.

    But… #survivorship bias.

    Bad luck can overwhelm a good decision-making process. All decisions are made without knowing the future. If the decision-making process was sound then that’s replicable. Luck can change. Errors can be corrected.

    I know London property millionaires who just wanted to buy a house. They didn’t even think about whether the market was overvalued. I know some who missed the boat because they knew ‘too much’. They knew the market was overvalued but couldn’t predict the forces that continued to drive it up regardless. They did their due diligence but weren’t clairvoyant. Hindsight is a wonderful thing.

    • {in·deed·a·bly} 6 February 2021 — Post author

      Thanks TA.

      I think most London property millionaires were probably just looking for someone to house their family, as residential housing is rarely viewed through the lens of an investment.

      I used the London property market as an example to illustrate how some investors get hung up on ideology, missing opportunities that are present because they are blinded by beliefs that proved to be repeatedly errant or invalid. TI had been guilty of this, as have I.

      London property also provides a topical example of how changing circumstances should cause investors to re-examine their assumptions and perceptions, so they can make an informed judgement about the future prospects of the wealth they have concentrated within that million pound house. The default option would be to stay put and continue holding, the same choice made by those unfortunate folks in Aberdeen that GFF describes. There is another option they may not have considered: realising their gain, selling up, diversifying and re-balancing their asset allocations, while possibly relocating somewhere offering more promising future prospects. It is a judgement call, a decision, that will have consequences for them either way.

      To be clear, I’m not predicting that post-Brexit London will become a vast urban post-apocalyptic wasteland inhabited by legions of homeless unemployed ex-investment bankers and former insurance brokers. As I said in the post, I have no idea what will happen. All any of us can do is make our own judgements about what we believe is likely to happen, and invest accordingly.

      Another example I could chosen is value investors. The meme goes that they have spent 20+ years waiting for the reappearance of Benjamin Graham’s unloved “cigar butt” opportunities. However, over those years technological automation, disclosure rules, and near universal information access has largely done away with the arbitrage opportunity that Graham once enjoyed by doing the work of reading annual reports and attending shareholder meetings.

      The opportunity presented by “value” companies still exists, hiding in plain sight. They just aren’t found on the stock market, a narrow stream where millions of amateur investors and professional firms alike all continuously pan for gold side by side.

      Today’s “cigar butt” companies are more likely to be found in the long grass, away from the prying eyes of all those eager prospectors. Small and medium sized family run businesses. Startups. Unlisted firms. The sort of plays some of the better private equity firms seek out. Brent Beshore’s Permanent Equity is a great example of a firm that specialises in finding opportunities where few others are looking, the “cigar butts” of old by another name.

      • The Accumulator 6 February 2021

        Perhaps you and TI were just unlucky. Perhaps your ‘overvalued’ analysis was as good a guess as any, given available data. But you couldn’t predict the wall of capital heading for the London property market because, essentially, nobody could. In another universe, with a different regulatory or interest rate regime, or without QE, you may have been right.

        Forgive me, I’m not trying to be awkward. I think this is an interesting debate.

        Much of what is deemed success is just trend following. Things look to be going a certain way, we jump on the bandwagon, project continuation of the trend… Oops, regime change! About turn!

        The current underperformance of Value is a great example. A long period of poor performance plus plausible narrative = Value is dead.

        Except that the period of underperformance is not particularly exceptional. The current trend is not irreversible. Perhaps a few anti-trust suits and law changes in favour of workers take the glow off the growth sector. Boom – value is back and we write a new narrative.

        It’s so hard not to overreact when a decision looks wrong. ‘OK, we got caught out by X last time. Right, that must mean we must do Y this time. And whatever you do, don’t do X!’

        It could be that value is dead. Or, it could be that there’s never been a better time to be in value. How many examples can we cite of over-performance following a period when an asset class is written off?

        The Death of Equities Businessweek cover comes to mind.

        I think the best we can do is admit our cognitive flaws and hedge our bets.

        I’m minded of car company executives 15-years ago who didn’t know which way the market was going to go. Fuel efficient, electric, hybrid, hydrogen?

        Musk is famous because he went all-in on what looks like the winning bet *right now*. But perhaps the smartest execs were those that bet on them all. Regardless of when you look at the race, they’re in position – perhaps not to win it, but they won’t be wiped out either.

        • {in·deed·a·bly} 6 February 2021 — Post author

          You make a fair point, winning is only the perception at the time of measurement.

          Where are the darlings of the last boom, the Yahoos and Ciscos and Dells and Worldcoms and Enrons today?

          Are the homeowners in Istanbul and Rome and Vienna still feeling like they own prime property located at the centre of the empire?

          All were winners once. Without a strategic reevaluation those investors quite happily rode their luck to the peak, then rode it back down the other side again. Reversion to the mean, inevitable as gravity given a long enough timescale.

  3. FIRE v London 6 February 2021

    Excellent post that resonates with me at several levels.

    I fairly frequently have a rather unworthy image in my mind, of the ‘guys on the back row of the school bus’. The jeering bullies, who teased nerds like me, and never knuckled down. Those guys at my (boys only) school haven’t, so far as I know, achieved very much with their lives, with one or two pop star exceptions.

    I feel like the Brexit referendum was revenge of the ‘back row boys’. The poorly educated voted disproportionately for Brexit. In frustration at not doing better.

    In contrast, I was a ‘front row of bus’ type of person. I resent that their democratic weight of numbers has taken the UK ‘away from the front row’. I had, roughly, the same opportunities as everybody else at my school, but I have done better than most.

    I got good, well paid, CV-building jobs in my summer holidays from the age of 15. The only member of my family to do that, and one of the few at my school.

    I left home at 18 and moved to London. The only member of my family to do that, and one of only a couple from school. London was obviously where the opportunity was, and I was ambitious.

    I spent a good part of my time at university researching jobs/careers. I spent days in job application processes, trips to London, interviews, writing applications etc. The only member of my family, of my generation/below, to do that.

    I got a good graduate job, with a ‘big 4’ firm. The perfect training, an obvious career track, etc.

    I then took a gamble, barely a few months later, which involved my salary/income dropping by more than half. My family/mates/former colleagues thought I wad mad (“oh, I wish I was as brave as you”/similar). Later, that paid off in spades, thankfully.

    In the meantime, I stretched myself hard to buy my first home. In London, at ‘record high prices’.

    Luckily, the spades payoff gave me a wonderful windfall. I bought my first car, a nice VW, for £30k. My investment banker schoolmate couldn’t believe I wasn’t buying an Aston Martin/Ferrari/similar, as he did. I invested my windfall for the long term, and it has more than doubled since. The Aston Martins are now gone, and aside from his pension my banker mate now has a negative net worth.

    Was there luck involved? Yes. But was there also hard work, taking of risk, a long term approach and an inbuilt resistance to temptation? Yes.

    • {in·deed·a·bly} 6 February 2021 — Post author

      Thanks FvL, your story is a great case study of compounding decision making leading to a set of fantastic outcomes.

      Sounds like the beginnings of a financial origin story to me! 😉

    • Damian (aka Banker On FIRE) 9 February 2021

      Love your story FvL.

      I oscillated between the back and front of the bus, certainly in behaviour if not in academics. And while I am proud of never having bullied anyone, I look around my circle of friends from the teenage days and see a similar picture to what you describe above (albeit in a different country).

      A dose of luck involved along the way, keeping me out of trouble and letting me pursue the professional career in finance. Equally, an even bigger dose of hard work and risk.

      I second indeedably’s suggestion on the financial origin story!

  4. Q-FI 6 February 2021

    That is a great line, “winning is only the perception at the time of measurement.”

    Another great post Indeedably and I can relate to this a lot, because I’m going through it right now. I agree that a lot of people don’t understand nominal prices and inflation.

    Making choices and determining what is overvalued is a tough one. I’ve already had to adjust my strategy from 3 months ago because real estate prices have risen so much and so quickly in our house search in LA. My sister bought a property 4 months ago and got it at asking (she got lucky and randomly bought right before the surge). Now because supply is so low, most properties are going for $50-$80K over asking. At first, I thought it was ridiculous, but now after a few months (Nov to Feb), it looks like this might be the new normal. So the question becomes, what is the real value? How much do you need to own a home? How do you adapt and pick your spots in a hot market?

    And I don’t have the answers. After loosing out on my fifth bidding war so far, it’s been quite the learning experience for how high people are willing to go. But I keep my own limit on what I feel the internal value is and keep at it. One of these days… hahaha.

    • {in·deed·a·bly} 6 February 2021 — Post author

      Thanks Q-FI. It sounds like buying property is LA is quite the challenge. Can you go off script a little and seek out off-market sales, for example deceased estates or bankruptcies? Is perhaps a bit ghoulish taking advantage of the misfortune of others, but if you can find a way to hear of upcoming listings before they hit the open market you may be able to skip the queue and the subsequent bidding war. Just a thought.

      For mine, a lot of residential real estate pricing is about what the greater fool is willing to pay. It differs from commercial property in part because of the emotion charged hopes and dreams associated with “home” tend to trump the cold hard numbers. That makes value subjective and hard to quantify.

      Happy hunting!

      • Q-FI 7 February 2021

        I haven’t tried super hard for off-market sales, but that’s a good point. One of the side effects of COVID legislation is it has delayed foreclosures in the US, which will probably be extended for the rest of 2021 or at least on the CA State level. So you have that artificially boosting home prices with the inventory crunch. And you’re spot on, “residential real estate is about what the greater fool is willing to play.” Hahaha. That’s another great line. And that emotional part of it has made this process so bizarre to me. You can’t even really apply logic to what people are willing to pay. But, so goes the game.

  5. David Andrews 8 February 2021

    What with Mr Musk buying $1.5bn of Bitcoin maybe finumus will be reevaluating selling out of ARB. To be honest I too would have sold out after a 1000% return.

    Alas, I was too busy catching up on 8 series of Spiral on Iplayer to consider making a similar investment.

    As always, DYOR.

    • {in·deed·a·bly} 8 February 2021 — Post author

      Thanks David. Second guessing past decisions doesn’t help, but learning from them and how we could achieve better outcomes certainly does.

      Bitcoin is certainly a wild ride. Tonight my lady wife was demanding to know why I hadn’t dived in head first 5 years ago. We would be rich today! Easy money.

  6. Damian (aka Banker On FIRE) 9 February 2021

    Thanks for the shout-out Indeedably. Great post as always.

    The problem is that the choices you describe take a very long time to compound, and for results to become visible. This is where most people lose motivation.

    At the end of the day, you need to make those choices because they reflect your identity, not because you are looking to be successful.

    Even if you get unlucky (which many smart, disciplined, hard working people do), you can at least say you lived true to your values.

    • {in·deed·a·bly} 9 February 2021 — Post author

      Thanks Damian.

      The lengthy duration is a feature, rather than a bug. That is how compounding works, the snowball effect.

      For example, a kid gets some pocket money and either spends it or saves it. The lessons learned at that young age may compound over time, helping them avoid consumer debt later in life. Their savings may grow, perhaps one day helping them with a house deposit or allowing them to assist their own children with tuition fees. It all starts somewhere.

      I think choosing to be successful, or not, based on the choices we make is a fundamental part of our identity.

      While we can’t guarantee that our goal will ultimately be achieved, we can make damn sure that it won’t. Self sabotage is a conscious choice, with impatience, corner cutting, or a baseless sense of entitlement all providing common examples of behaviours that undermine what we say we wish to accomplish.

      I agree that luck plays a big part in the outcome, but so too do our own behaviours.

  7. John Smith 13 February 2021

    Nice post. Not realy interested in London house prices.
    But I like the blue mountain as giraffe background (no punt intended), near identical with that from web-page of my favourite linux distribution (Alpine Linux)

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