I found myself nodding while reading Property Soul’s book – No B.S. Guide to Property Investment.
I see many similarities between her opinions about the property market and my views about the stock market. I will quote parts of the book and elaborate on these similarities.
#1 – Greed
“Property showrooms play up emotions. sales charts are marked with red dots. populate the sales gallery. hustling and bustling.”
“If everyone is buying, it must be the right thing to buy. If I am not taking action now, I am likely to lose out.”
“You may have just sold a property with a handsome profit that pushes you to repeat the same success.”
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Regardless what kind of assets; tulips, stocks, properties, bitcoin; as long as it can be speculated, can be driven up in price due to greed from the participants. Booms and busts are results of human’s greed and fear, ever persistent, and impossible to eliminate until humans can be completely taken out from making decisions in the market. Awareness and acceptance of this phenomenon is the first step to successful investing. Overcoming our own greed and fear is the next step. Easy to say, hard to do. We are all wired to follow the herd and seek comfort in numbers.
#2 – The Inflation Lie
“If you put money in the bank, you might lose a single digit of percentage by inflation. But if you buy at the peak of the property market, you are likely to suffer a double digit loss.”
I used to think it is important to beat inflation year on year. But I adopted a different mindset. The financial markets move in spurts. They do not move up linearly every year and expect to beat inflation consistently. That is why patience and faith are required. Some years, the stock market may be negative. Some years, the returns are excessive. This excessive returns can be multifold and more than make up those ‘lost years’ of waiting. For example, a stock may have no returns for 4 years, but made 100% return in the fifth year. The average annual return would be close to 15%, more than beating the inflation rate. Hence, it is not about expecting a steady return, few things in life move in linear fashion. Instead of aiming to beat inflation every year, aim to beat inflation over a period of years, the longer the better as compounding effect will work for you. Do not be in a hurry to invest your cash if the price of an asset is not attractive enough. Do not fall into the lie that inflation is eroding your cash. These are lies to evoke fear and get you to part your money for a lousy investment. Getting in at a right price is very important.
#3 – Do not Trust the Media
“In 1995, prior to the collapse of property prices, the media was still upbeat about the market. It is understandable as property developers are the main advertisers of the media. How can they be too honest and publish articles with a pessimistic view on the property market next to the property ads.”
Sometimes, the media meant no harm and are just reporting what has happened. They rarely take a stand for something in fear that they may appear bias. Even if they think the market is overheated, they cannot take an obvious stand. They have to support with facts and at the peak of an economy, most facts are rosy. And when market is low, most facts are depressing. They are always a step behind with their reports to be considered useful investment information.
#4 – Best time to sell
“[W]hen you see that amateurs are starting to speculate in where you put your money; when you hear people who know little about properties boast about their good buys; and when you see headlines about property prices setting new highs again, you know it’s time to get out.”
Needless to say, sell when everyone is greedy. The question is, when are others greedy? It is not a science but an art to determine it. It is hard to get out at the top of the market. Do not try. As long as you can feel the irrational bullishness of an asset, you can take profit. It is okay if you got out early and missed some profits.
#5 – Prices do not go up forever
“The US sub-prime crisis and the Spanish housing bubble are the best proof of the theory.”
“Between the second quarter of 2011 and the second quarter of 2012, in just one year’s time, property prices in Spain had fallen 11.5 percent. Barcelona alone saw property prices drop 40 percent since the sub-prime crisis. Prices had actually gone back to the 2003 level.”
I always cringed when someone says that property prices in Singapore can only go up. What a dangerous assumption. These people have not checked the history. There was a 10-year period where property prices in Singapore was heading south and in recovery state. Try buying high and hold on to paper losses for ten years. Getty Goh did a research in 2011, where he found more than 80 percent of the properties purchased in 1996 were sold for a loss at $1,466 psf. How would you feel? Similarly, it is very comfortable to buy stocks in 2007. Those who bought in that year are still hanging onto losses in 2014.
#6 – Fear
“The people who sell their overvalued properties in a panic at whatever price to cut loss are often the ones who push up prices during the peak of the market.”
If someone bought at the high refuses to sell in panic, the loss would not be realised. Granted, it will take maybe 10 years to see the prices recover, but at least he has the chance to make it back and even profit from the dear investment he made. Each stock market peak has surpassed the previous peak historically. Hence, even if an investor bought at the peak, he can profit from the next bull run. But it comes with a cost – the wait is never ending, the future is uncertain and he gets tormented psychologically every time he got reminded of the investment. Because unseasoned investors lack emotional wisdom, they succumb to avoid this pain and sell during a panic, committing the buy high, sell low mistake.
#7 – Property Launches and Initial Public Offerings
The grandpa of Property Soul’s friend said,
“All things are sold at their highest when they are new in the market. If you have the patience to wait, you can see their true value later.”
She discourages buying at property launches because you pay the same price as everyone and you are lucky to get 1 to 2 percent discount.
Similarly, I do not like to invest in IPOs. The agenda from the issuer and the investor are at odds. The issuer wants to raise as much money as possible. The investors want to put up as little capital as possible. However, the power is tipped to the side of the issuer. They have investment bankers, marketing department and sales to increase the perceived value and prospect of the company, in hope to sell at a higher price. Issuers are price setters and investors are price takers.
#8 – Yields are never constant
Property Soul had a one-bedroom high end condo unit near the CBD area. In 2004, the rent was $2,500. In 2007, it was $5,000. In 2013, it was $4,000.
Some stock investors are enticed by high dividend yields. But yields are not consistent, especially if it is paid out of exceptional income for that year. It would be risky to make investment decisions on yields alone, and no one can predict the future yields accurately to bank your hard earned money on them.
#9 – Good Location and Good Business does not Guarantee Profits
“[B]uying a good location doesn’t guarantee a profit. You can buy the best location but still lose your shirt. Conversely, you can buy a property out of nowhere but still make a profit, provided that you buy at a low cost and sell at a higher price.”
“A good location might not be good forever and vice versa. Its reputation can change over time depending on many factors, such as government redevelopment, popularity among the upper class, or change of resident profile over time.”
“When everybody knows that it is a good location, it is difficult to get a good bargain.”
You can find a fabulous company with great competitive advantage. But there are two problems. It may not be cheap because most investors recognise it is a great company and have already invested. Second, what is great today may not be great tomorrow. No one knows. In this era, many industries can be brought down in a short time by technology due to their disruptive nature. Think wikipedia vs encyclopedia, online music stores vs CD shops, ebooks vs bookstores, and the list goes on. Nothing is guaranteed (except death and taxes). Nothing lasts forever.
#10 – Hardwork
When we did an interview with Property Soul, we asked this question: What do you think was the biggest factor that attributed to your success in property investments?
“Hardwork, hardwork and hardwork (not location, location, location).”
Successful investing in stocks is also hardwork, not just good earnings. Good earnings may not be sustainable afterall when you dig further. Good earnings may not be worthwhile paying for if it is over-priced even for future prospect. One cannot just buy into a story of a stock due to an earnings surprise or a report on the potential earnings of a company. You need hardwork to evaluate these stocks. Only hardwork can help you find opportunities.
#11 – Contrarian
Property Soul mentioned she found that old leasehold properties, due to the short life span of 20 to 40 years of lease, were not popular in 2006 and were priced lower than government flat in the same area. She was able to invest in these undervalued properties and reap a decent profit.
There is a collective perception when it comes to investment. Do not subscribe to this collective perception as it is rarely profitable. Be daring to take the contrarian path if logic says so.
#12 – Patience
“Patience and perseverance are the prerequisites to win the game. It is researching, waiting, waiting again and buying – a four-step process that you are repeating over and over again.”
Patience to wait for the right price. Patience to wait for the gains to be realised. Patience is required because opportunities do not knock on the door everyday. Stock market do not correct or crash every day. And bull run doesn’t come every year. You need to have patience to wait out and take action when required. It is foolish to expect the market to perform according to your preferred time-frame.
#13 – Take Responsibility
“Don’t put the blame on others. The investment is your choice and the loss is your responsibility.”
Some investors find it a must to consult experts or gurus on your investments. They have actually made a decision to invest and they are just seeking confirmations while rejecting alternate viewpoints (confirmation bias). Most importantly, they can blame the experts and gurus if their investments turn out to be wrong.
#14 – Passion to Invest
“It can be your love for properties, your hunger for good deals, or your plan to achieve financial freedom one day. Your aspiration determines your destiny. When there’s a will, there’s a way.”
You must have passion for investing to sustain all the hard work and emotional challenges you have to put through. Otherwise, you will give up or end up in an easy way out – listen to others or conform to the herd, either which are unprofitable endeavours. Passion is what keeps you going when the going is tough.