Tim McElvaine explains his simple but effective process.
Barron’s Mailbag June 1962: Irving Kahn On False Comparisons
The following letter from Irving Kahn appeared in the June 25, 1962, issue of Barron’s. Irving Kahn wrote to Barron's criticising the publication’s comparison of the 1962 market crash to that of 1929. Irving Kahn points out that based on volume and trading data, the 1962 decline was a drop in the ocean compared to Read More
2016-05_conference_transcript_McElvaine Fund An excellent tutorial on Graham-like investing. Note his simple four-pronged approach. Read more below:
McElvaine Investment Management Ltd. Partners’ conference transcript May 2016
Tiim McElvaine – Real Estate Through a Value Investor’s Lens
Tim McElvaine (Michael Ross’ presentation had just ended, no transcript will be provided for it):
Thank you Michael. I would like to make a couple of comments before lunch and I’ll keep this really quick. Over the years, I have cautioned on valuations a couple of times: technology, income trust and then gold. In all of these cases, bullish sentiment got very enthusiastic. Now funny enough, the only time I’ve ever received hate mail was when I said in 2010 or whenever it was, I thought people who were buying gold were maybe a little bit overenthusiastic. It resulted in people sending me hate mail. So you don’t expect that as an investment guy. Michael, maybe as a spy, but not as an investment guy.
So with some trepidation I approached real estate. But nevertheless, a lot of the stuff you already know. Vancouver, over its history, has been an expensive market and only has gotten more expensive. The numbers here, it’s hard to find real numbers. So this is Vancouver Central that we’re using, and it’s the best that we could get. So the blue is price to rent. The other one is price to income.
Comparing it against other areas, Vancouver is more expensive than Toronto and, of course, Montreal is by far the cheapest, but it has its own kind of issues.
And then if you look at it on a global basis, not surprisingly Vancouver’s not significantly different from Sydney. More expensive than LA. Cheaper than London and New York. So that just gives you kind of a global context. So what does this mean to a value guy? Well, I’ll talk a little bit later about our ABBA approach. Basically, two important parts of it are what’s the accident meaning what’s the behavioural element? And secondly, what’s the bird in hand meaning valuation element?
So I was trying to take that lens and put it on real estate. Not as a prediction of where it goes, but rather kind of a thermometer, a check of where we’re at today. So the proxies I chose, rightly or wrongly, are on the left, sales to listing ratio.
For those of you who have been hounded by a real estate broker, you’ll know a sales to listing ratio of below 35 is what they term a buyer’s market. So basically three and a half or less, say four or less sales for every listing is a buyer’s market. And 55% or higher or roughly 6 out of every 10 sales to listings is what they call a seller’s market. So if you own a house, obviously you want to be in a seller’s market. If you want to buy one, you want to be in a buyer’s market.
How does that work with what we have today? We put Toronto in 2009 here. A little bit difficult to get. In Vancouver in 2009 I think the dot’s hidden, but it’s just over the V in Vancouver. So once again, Vancouver was relatively expensive. Toronto cheaper, but was not as depressed. And this kind of makes sense as well. If you think about the number of [legs] Vancouver sits on versus Toronto, Toronto is much more diversified, a much broader economy. Vancouver is much, much narrower. So you’d expect the swings to be much greater in—for example, in Vancouver, certainly as far as sentiment goes.
So where are we today? Toronto is obviously a seller’s market, and Vancouver, the dots behind the O is the same thing. So we’ve gone from a situation where the enthusiasm has been non-existent to very high. Where does that go from here? As a value investor, it just gave me some kind of context to put the market in today. These situations rarely end well.
Nevertheless, so on that cheery note, between Michael’s comments on Syria, Saudi, Iran and my comments on Vancouver real estate, we’ve left you in a good spot for lunch. We’ll break for about half an hour. Please feel free to talk to Michael. The lunch is over there. It’s kind of self-serve, and then we’ll pick it up in about half an hour or so. Just before we go though I will say two things, and I think she disappeared outside. But my thanks to Shannon. Oh, there she is. My thanks to Shannon at the back for kind of lassoing you all and getting us all here today. And to Kate, my wife up here at the front.
See the full PDF below.