COMMENTARY - MARCH 2017

There is an old market saying that is worth remembering today.  When trading in traditional free markets that are commonly traded (stocks, bonds, real estate, commodities, and currencies are good examples) and which have been rising (a bull market), the probability that the market you are in will fall increases every day that market continues to rise.  Exactly the same can be said of the same markets when they are falling (a bear market).  

This is not profound.  It is a simple reminder that free markets do not go up or down forever.  This is especially important to remember with bull markets as history has taught us that it can take a long time for people to trust a bear market that has turned up, but very little time for them to leave a bull market that turns down.

It is obvious.  It is common sense.  And yet, investors frequently forget it.  I find that they replace it with another approach that I call the "track record" approach.  This is a huge mistake.  Let me explain.

We have all watched this happen on at least two very famous occasions.  The first was the "high tech" stock markets of the late 90s and the very early years of the 21st century in the US and many other nations.  It happened again soon after the collapse of the stock markets, but in the US housing market that seemed to have nowhere to go but up until it crashed in 2008 and 09, followed by similar drops in some European markets..  Both "crashes" hurt tens of millions of people, the housing crash leaving behind a mountain of unpaid mortgage debt.

The potential for both disasters was clearly and analytically outlined by one man known for his work on markets and their extremes - Dr. Robert Shiller of Yale University.  The first edition of his book in 2000, Irrational Exuberance, warned that the stock market was a bubble waiting to collapse, as it did in the following two years.  His second edition of Irrational Exuberance published in 2005 warned of a bubble beginning to form in the US real estate market.  This time he gave us plenty of warning, and he was right again.   Both versions were widely-read, widely-reviewed, widely-praised, and just as widely ignored.

I spoke to dozens of investors in both markets during both periods.  Although quite a few had read Shiller, they had a different view.  They would tell me that the market (either one) had been going up for a few years.  It had a “track record”.  They could not see either market crashing when each had such a great track record!

In their minds, every day their market went up or stayed up in value, it was proof that they were in the right market.  They kept reminding me of their market’s “track record”.  The longer it went up and stayed up, the safer it was for their money. Their argument was precisely the opposite of that old market saying based on centuries of experience.  I have to say that I am not always impressed with the people who win Nobel Prizes, but when Bob Shiller received his in 2013 for his work on markets, it was richly deserved.  Unfortunately and with sympathy, I have to say that many of the losses experienced in those markers were also deserved.  Free markets do not offer guarantees, but they do offer opportunities.

Now, what does this have to do with investing in Panama?  Time for a map.

Here we see the ten provinces of Panama, the three provincial-level Comarcas (areas set aside for the indigenous people where land is not for sale), and the two district-level Comarcas (in stripes and also not for sale).  Forgive my amateur art work, but the section outlined in red is what I call The Box of Panama.  It runs from Panama City in the east and along the Pacific Coast to the west.  Within that box lives the majority of Panama's population, it represents about 80% of retail sales in the nation, and offers the great majority of upper-middle-income and upper-income housing.  Most of it outside the city lies along the coast, but some is found in or near mountain communities like those near Sora or El Valle de Anton.

Everyone in Panama knows The Box, even if they do not call it that.  They know it has grown exponentially in the last 15 years.  When I first arrived 13 years ago in 2004, there were a few developments along the coast and in the mountains, now there are more than I can count.  At one location, where there once was one shopping mall, today there are four! A decade ago, people who lived there has to come into the city for the best supermarkets, restaurants, and hotels.  Today, many have opened branches along The Box.  The traffic can be truly terrible, especially on weekends and any holiday or vacation time.   As a result, the beaches are crowded.    Everything is crowded.

The city has come to The Box.  Urbanization is as much a problem in The Box as it is in the city.  Much of the natural environment has been replaced with asphalt, concrete, and second-hand copies of southern Florida.  "Panama" is still there, but it gets harder to find each year.

I have friends who live in The Box and I have had many pleasant visits in the past to that area, but I would not invest there now.  I certainly do not want to hurt the feelings of my friends in any way, but although no one is eager to present real statistics, prices of real estate that were booming seven or eight years ago are not booming today.  Homes and condos are not selling well and more and more resales have to reduce their asking prices, or settle for a price that barely covers inflation.  Undeveloped land on the beach can easily cost US$150 to US$300 a square meter (roughly US$600,000 to US$1,200,000 per acre), even $800 a square meter (more than US$3 million an acre) is offered and we are happy to send you a link to an example, if you ask.

The Box is becoming more dependent on seasonal visitors and less on people coming to live, as was true of North American retirees in years past.  Most retirees cannot afford The Box any more, or if they can, they prefer to go further west to an area that hasn't been over-developed.  But the majority of residents, Panamanian and expatriate, cannot go too far from the city.  They are not retirees.  They have jobs and families with kids in school, and the best of both are found in the Panama City metro area, not in The Box and definitely not further west of The Box.   

If there is one area of Panama that offers the least likelihood of an impressive return on real estate investment, it is The Box.  Further development only increases competition and there is too much of that already.  Further road improvements do not decrease congestion, they just bring more drivers and more congestion, but not more buyers.

Yet developers continue to focus on The Box.  Why?  If you are familiar with game theory, this is effectively a "Nash equilibrium".  If game theory is not familiar, it is an example of everyone playing the same game over and over, regardless of the falling investment returns, out of habit and because they fear being the first to leave the game.  This is a recipe for failure from the investment viewpoint.  The Box may continue to grow, but I would not put a penny of investment money in The Box.

At Panama Wave, we believe an investor with substantial resources who wants a decent, even spectacular, return on investment must think outside The Box.  

When an investor comes to us, interested in putting his or her money into The Box, we send them to one of the many firms happy to help them spend their money.

We do not advise investing in Panama's past, but in its future.  We look east, not west.  We prefer the cheap land, beautiful landscape, and tranquil waters of Lake Bayano to the grossly over-priced land, crowded beaches, and congested highways west of Panama City.  I have written about this before and I will continue to do it.  Yes, we do represent a property on the Lake, the only one for sale with paved road access and other amenities, but that is a very special case and a unique opportunity.  Beyond that special case, we will continue to help investors find what they need to find, profitable investments, east of Panama City.  The Lake is the "pearl", but there is more to the east than that.

Panama has a very, very bright future.  It is genuinely unique.  We know that expats just looking at Latin America for the first time think we must be very similar to Costa Rica, for example.  They are completely mistaken.  No, Panama is unique in all of Latin America and that is easier to demonstrate than outsiders might think, but they must get beyond Google to really understand it.   That is part of our service.  But this does not mean that every area in Panama is equal to every other area.  Quite the contrary.

At Panama Wave, we plan for the Panama of 2020 and beyond, not the Panama of the recent past.  If you have substantial investment resources, Panamanian or expatriate, and if you are able to think outside The Box, let us know.