Investors frequently ask the following two questions:
Which investment ought to I acquire?
Is it appropriate to purchase it now?
The majority of people believe that the key to successful investing is knowing how to identify the right investment at the right time. That is far from the truth, I can assure you: Even if you could correctly answer those questions, you would only have a 50% chance of making a profit on your investment. Let me elaborate.
Any investment’s success or failure can be influenced by two main factors:
External variables: These are the markets and the performance of investments as a whole. For instance:
the probable long-term performance of that particular investment;
whether that market will rise or fall, and when it will move in either direction.
Factors at home: These are the investor’s personal preferences, abilities, and prior experience. For instance:
which investment has a proven track record of profitable growth and is more appealing to you;
how much ability do you have to keep an investment in bad times?
What tax breaks do you have that can help you control your cash flow?
how much risk you are willing to take without making hasty decisions?
When deciding what to invest in and when to invest, we can’t just look at charts or research reports; we have to look at ourselves and figure out what works best for us individually.
Let’s examine a few examples to illustrate my point of view. Because they are an analysis of external factors, these can demonstrate why investment theories frequently fail in practice, and investors typically have the power to make or break these theories due to their individual differences (i.e. internal factors).
One example: Choose the investment that is best at the moment.
The majority of investment advisors I’ve encountered assume that any investor can profit handsomely from an investment if it performs well. In other words, the return is solely determined by external factors.
But I disagree. Take, for example, these:
Have you ever heard of a case in which two real estate investors simultaneously purchased identical properties on the same street? With a good tenant, one can sell their property for a good profit later; The other one sells it later at a loss with much lower rent and a bad tenant. They might be consulting the same investment advisor, working with the same selling agent, financing through the same bank, and using the same property management agent.
You might also have seen investors in shares who bought the same shares at the same time. One of them ends up selling them for a loss because of personal circumstances, while the other sells them for a profit later.
I’ve even seen the same builder construct five identical houses for five investors side by side. One was constructed six months later than the other four, and he was forced to sell it at the wrong time due to personal cash flow constraints, whereas the others are faring much better financially.
What is the only difference between the preceding scenarios? The investors as individuals (i.e., the internal factors).
I have personally reviewed the financial positions of a few thousand investors over the course of my career. When someone asks me what kind of investment they should get into at any given time, they expect me to compare shares, properties, and other asset classes to help them decide how to spend their money.
In response, I always request that they review their track record first. I’d ask them to make a list of every investment they’ve ever made: shares, cash, options, futures, properties, development, renovation, and other types of property and request that they tell me which one brought in the most money for them and which one did not. Then, I tell them to keep the winners and eliminate the losers. To put it another way, I tell them to increase their investments in those that have proven to be profitable in the past and decrease their investments in those that have not proven to be profitable in the past (assuming that their money will earn a return of 5% annually while it is sitting in the bank, they must at least beat that when comparing the two).
If you take the time to do that for yourself, you will quickly find your favorite investment, allowing you to focus on getting the best return rather than giving any of your resources to losers.
You may inquire as to why I chose these investments rather than considering portfolio management or diversification theories as the majority of others do. Simply put, I believe that many things that are beyond our scientific comprehension are governed by nature’s law; Additionally, breaking nature’s laws is not smart.
Take, for instance, the fact that sardines swim together in the ocean. The sharks do the same thing. Similar trees grow together in a natural forest. This is the idea that things that are alike attract each other because they share an affinity.
You can see the people you know around you. Most likely, the people you spend more time with are in some ways similar to you.
It would appear that a law of affinity is at play, which states that similar things produce similar things; whether they are rocks, animals, humans, or trees. What would make an investor and their investments different, in your opinion?
Therefore, in my opinion, the issue is not always which investment performs best. Instead, it comes down to which investment is best for you.
You are more likely to be attracted to properties if you have an affinity for them. Shares are likely to be drawn to you if you have a love for them. Good cash flow is likely to be drawn to you if you have an affinity for it. Good capital growth is likely to attract you if you like good capital gain (but not necessarily good cash flow).
Spending more time and effort on something can improve your affinity to some extent, but there are some things with which you have a natural affinity. You should go with these because they come easily to you. Can you imagine how much work it would take for a shark to change into a sardine or vice versa?
We have spent a lot of time lately working on our clients’ cash flow management because it is unlikely that our clients will have good cash flow from their investment properties if they have low affinity for their own family cash flow. Keep in mind that it is a natural law that like things lead to like things. Poor cash flow management at home typically leads investors to invest in businesses or investments with poor cash flow.
Have you ever pondered the reason why some of the world’s most successful investors, such as Warren Buffett, only invest in a select few highly concentrated areas with which they have a strong affinity? He has more money than most of us, so he could afford to try a lot of different things. However, he sticks to the few that have worked for him in the past and cuts out the ones that didn’t work, like the airline business.
What happens if you have never invested and have no track record? In this instance, I would advise looking first at your parents’ investment track record. Even if you don’t like to admit it, you probably share some traits with your parents. Examine whether your parents’ family home has performed well if you believe they have never successfully invested in anything. Alternately, you’ll have to conduct your own experiments to figure out what works best for you.
There will undoubtedly be exceptions to this rule. In the end, only your results will determine which investment is right for you.
2nd Example: investing at the market’s lowest point.
Many investors automatically enter a “waiting mode” whenever negative market news breaks. What are they anticipating? The market is about to crash! This is because they think investing is as simple as buying low and selling high. But why do the majority of people fail to even do that?
Several reasons exist:
It’s possible that a market hasn’t reached its bottom yet, so investors choose to wait when they have the funds to safely invest in it. When the market reaches its lowest point; Since money rarely stands still, it has already been used for other things. If it isn’t going to an investment, it will usually be spent on unnecessary things like repairs, get-rich-quick schemes, and other “life dramas.”
Investors who are accustomed to waiting until a market downturn before taking action typically do so out of either a fear of losing money or a desire to gain more. Let’s examine how each one affects things:
They are less likely to enter the market when it reaches rock bottom because of the negative news if their behavior was motivated by fear of losing money. How can you expect them to have the courage to act when the news is really bad if they couldn’t when it was less bad? As a result, they usually miss out on the bottom.
They are more likely to find other “get-rich-quick schemes” to put their money in before the market hits the bottom, as their money won’t be around to invest by the time the market hits the bottom if their behavior was driven by greed in the hope of making more money on the way up when it reaches the bottom. As a result, you will notice that get-rich-quick schemes are typically heavily promoted during times of negative market sentiment due to their ease of capturing investor funds.
A lot of the time, something bad leads to other bad things. The majority of their time will be spent looking at all of the bad news to support their decision, as people who are afraid to enter the market when their capacity permits it will do so. Because they view any upward movement in the market as preparation for a subsequent, larger dive the following day, they will not only miss the bottom but also the opportunities on the way up.
As a result, I’ve noticed that most people who are too greedy or afraid to enter a market when it’s slow have rarely been able to make money waiting. When there is very little negative news left, they typically end up getting into the market after it has had its bull run for far too long. However, this is frequently the time when things are overvalued, allowing them to enter the market and then being slaughtered on their way down.
So, my advice to our customers is to start with your own internal factors, check your own track records, and determine whether or not you can afford to invest. Determine whether you can safely invest regardless of the market or other external factors:
If the answer is yes, then you should go to the market and look for the best price available at that moment;
Wait if the answer is no.
Sadly, the majority of investors act in the opposite direction. They end up wasting time and resources within their capacity as a result of their tendency to let the market—an external factor—decide what they should do.
I hope that you can see from the two examples above that investing is more about choosing the investment that works for you and sticking to your own investment timetable within your capacity rather than just selecting the right investment and the right market timing.
A fresh approach to property investing During a recent consultation with a client who has been with us for six years, I suddenly realized that they had no idea about our Property Advisory Service, which has been in operation since April 2010. I figured I’d better fix this mistake and explain what it is, why it’s different from anything else in Australia, and why it’s so rare.
But before I do that, I’d like to share some information with you that you won’t find in investment books or seminars so you can understand where I’m coming from.
Since starting a mortgage company for property investors ten years ago:
With approximately 60 different lenders, we have completed more than 7,000 individual investment mortgages;
The financial positions of approximately 6,000 individual property developers and investors have been examined by myself and our mortgage team;
I have had exclusive access to important information from our large client base, including the original purchase price, value of property improvements, and current valuations for close to 30,000 individual investment properties across Australia.
When you conduct research and make observations using such a large sample size, you are almost certain to discover something that the majority of people are unaware of.
I’ve learned a lot that might surprise you as much as they did me, some of which defy conventional wisdom:
You might benefit financially if you pay more tax.
It took me a long time to accept this, but I can’t deny the facts. Clients who have achieved positive cashflow have paid a significant amount of tax, whether in the form of capital gains tax, income tax, or stamp duty, and they will continue to do so. As long as they continue to make more money for themselves, they have no problem with the taxman making some money! They reduce their debt and regularly cash in the profits from their properties, but they always invest and park their money where the best return is available. In fact, I could almost say that the only people who benefit from positive cashflow from their investment properties are those who treat taxes as a cost of doing business and are unconcerned about paying them.
Almost every property strategy is effective. It’s all about who does it, how it’s done, when it’s done, and where.
When I first started investing, I went to numerous property investment books and seminars to learn more. I was utterly perplexed by the fact that almost all of them were convincing. Someone would show up in one of my client consultations and demonstrate that a particular property strategy worked for them just as I was about to form an opinion against it!
After putting many of these strategies to the test myself, I realized that the issue is not the strategy itself—which is just a tool—but rather how well the tool is used by the person at the right time, in the right place, and in the right way.
There is never a single suburb that is consistently the best place to invest.
If you choose a property in what you believe to be the best suburb at random over a 30-year period, you will find that there are times when it will outperform the market average and times when it will underperform the market average.
At the end of the period when it is outperforming the average, many property investors jump into historically high-growth suburbs and stay there for 5-7 years during the underperforming period. Naturally, this could alter their perception of property investing as a whole!
There will never be a suburb that is the worst place to invest.
If you choose a property in the worst neighborhood you can think of from 40 years ago and compare it to a property in the best neighborhood you can think of over the same time, you’ll find that they both increased over the long term at an average of 7-9 percent per year.
As a result, the average house price in Melbourne and Sydney in the 1960s was $10,000. The worst property at the time may have cost 30% of the median price, which at the time was, say, $3000. In these cities, the median home price today is approximately $600,000. The worst suburb is still about 30% of that, or about $200,000 for a house. Show me where you can still find a house in these cities that is still worth approximately $3,500 if you believe that a bad suburb will never grow.
Growth in the median price is very misleading.
When choosing a suburb, many novice property investors use median price growth as a guide. Concerning the median price, a few points should be mentioned:
Based on the number of sales during a given period, we comprehend how the median price is calculated as the middle price point. We can discuss the median price for a specific suburb on a specific day, week, month, year, or even for a longer period of time. As a result, the median price can be severely distorted by an influx of new stocks or low sales volume.
Median price growth is frequently overstated in an older suburb. This is due to the fact that it does not take into account the substantial sums of money that people spend renovating their homes or the subdivision of large blocks of land into multiple dwellings, both of which can account for a significant portion of the entire suburb.
Median price growth tends to be lower than it actually is in newer suburbs. This is due to the fact that it fails to account for the fact that both the land and the buildings are getting smaller. For instance, in 2006, you could purchase a 650-square-meter block of land in a newer suburb of Melbourne for $120,000; five years later, however, the same amount of land—325 square meters—will cost you $260,000. That equates to a staggering 34% annual growth rate over the course of five years; however, since median prices are currently based on much smaller properties, this growth in median prices will never be reflected.
People stop looking at the cost of carrying the property when the median price rises. You are out of pocket by 5% annually when you have a net rental yield of 2-4 percent and interest rates of 7-8 percent. This does not include the money you need to periodically maintain and fix your property.
You won’t get the best returns on your money if you buy and keep the same property forever.