Real estate, alternative real assets and other diversions

Cautiously optimistic?

Investor's Notebook

A famous quotation, probably erroneously dedicated to the financier J. P. Morgan, is that, when asked for an outlook on the stock market, he replied, “it will fluctuate”.  The real estate market tends to fluctuate too, between two states: “no brainer” and “cautiously optimistic”.  But now is the beginning of a new year and time for something more nuanced.

Fresh off the back of the festive season, it is now “outlook” season, just as it is at this time, every year.  It is time to feast on global / regional / country / sector / segment real estate outlooks.  The more comprehensive may cut the markets by investment style and cover the quadrants of real estate investing. Some will delve deeper into the outlook for specific cities. The trouble is, when you read or hear them there is, typically, very little outlook in them.

These documents or presentations are full of what has happened (mostly economic data subject to revision or, political happenings) but, there is little out there regarding the future of real estate markets. Rightly so: predicting the future is tricky, though some make a tricky business out of it as what William Sherdon describes as “The Fortune Sellers”.  So why produce “outlooks” that are “future-lite” at all?  In their book, Superforecasting, Philip Tetlock and Dan Gardner float the idea that one view of forecasting is that,

”…the goal of forecasting is not to see what’s coming.  It is to advance the interests of the forecaster and the forecaster’s tribe.”

Well, the tribe is gathering.  At this time of the year, not only can you read “outlooks” but you can attend numerous seminars and presentations on the topic: in January you might manage one a day, maybe more.

Should you attend a presentation, read an outlook or listen to a podcast, try making a list detailing what the outlook is; it will be in amongst the charts of GDP growth, retail sales growth, employment growth, interest rates (aren’t they low), inflation, historic valuation-based indices, etc.. Then, once you have that list, ask yourself what you could do about it;

if the “outlook” was 100% correct (what forecasters call “perfect foresight”) what could you do to take advantage of it?

would you already need to have positioned your portfolio to capitalise on it or is there time to build a position?

do the (certain) costs of getting there outweigh the (uncertain) benefits?

what happens if the forecasts are wrong?

if I do something will everyone else do the same and compete away any advantage I might have by doing it?

should I do anything at all?

are the predictions essentially the same as everyone else’s?  (It is useful to understand what the consensus is thinking.  The purpose of this is to understand what the consensus may have wrong and to take advantage of that.)

So, what is the aim of real estate outlooks?  In part, outlooks serve as an opportunity to communicate with members of the tribe, to bring the members together and to try and influence the members of the tribe to do something (which is of benefit to the communicator).  In these senses, the “outlook” fulfils a number of criteria in Harry Frankfurt’s definition of providing an arena for bullshit.

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