“Risk comes from not knowing what you are doing”
Warren Buffet was once the richest man in the world. He now sits at number 3. It would be wise to take note.
Sadly too many of us fall into the category of not educating ourselves to a level where we can make informed decisions. People say the stock market is risky, but clearly Warren has been at top of the pile for a while now. Surely if it was as risky as people say, he wouldn’t have been able to keep his lofty position for as long as he has.
He is not extremely lucky. He has a system and an understanding of how the stock markets works. That’s not to say there is no risk, Warren has just simply been able to mitigate the level of risk in his investments. The same cannot be said of many wannabe investors who throw their savings into a company simply for emotional and irrational reasons.
I’ll be honest and say I have never actively invested in the stock market, but I know enough about it to make a reasonable assessment of the associated risks.
Deciding to invest in a company because you were given advice from a self-proclaimed professional investor, or the business has a name you like, or you buy from their store, or the company is perceived to be a robust organisation, or you work for that organisation, or it has a nice logo, or you have a “feeling” it will do well is misguided. Even to assume that a rise in sales is evidence of a sound investment is naive.
You can mitigate a lot of the risk and uncertainty by employing an account manager to decide where and when to invest your money, if you have no experience in the matter. However, there is still plenty of risk in the game. Otherwise you can educate yourself to read and understand financial reports, market trends, the impact of company statements and decisions etc.
There is no doubt that property has its own risks, but unlike trading shares, property is far more predictable. The three main reasons why I prefer property investment to stock market are:
Big businesses rise and fall with the times. One week a company may be listed in the fortune 500, only for them to be a piece of history the next. This has happened before. You only need to look back as far as 2008 when the Lehman Brothers, a global business with over 25,000 staff and specialised in financial services went bust. People said it would never happen and that they were too big to fail. They were wrong. The same has happened much closer to home with the fall of more recognisable business such as Woolworths, Toys’R’Us and Blockbusters. Unlike the Lehman Brothers , who failed because of over-speculating and mismanagement of their mortgage products, these three popular UK stores failed because of an inability to adapt in changing markets. This lack of innovation has now seen Netflix replace Blockbuster as the place for getting your TV binge fix. Meanwhile, Amazon has replaced Woolworths and Toys’R’Us as the go-to store for certain goods and toys. Now that they are gone, there is nothing but nostalgia for those of us old enough to remember buying their Pick N Mix, Barbie doll or renting a series of Friends on VHS. Failure to innovate is one, if not the main, reason for the failure of big businesses. This trend will continue to be the case for as long the moon circles the Earth. The good news is, this type of death does not exist in property.
Despite what people may say about the fluctuations in the property industry, they are very robust and the stats are there to prove it. On average, property prices double every 10 years. This does not mean that in 2028 property prices will be exactly twice of what they are today (April 2018). However, if we were to look at the data (Nationwide UK house prices), then the figures show house prices less than doubled over the last 10 years (1.18) but in the previous 10 years they more than doubled (2.85) and this trend continues with an average of 2.36 over the last half century. House price increases and decreases obviously vary from location to location. There will be some regions where this trend is actually higher and there will be some that are lower. The big trend to keep your eye on is this… “demand is greater” than supply and has been for many years. Unless this changes, which seems unlikely, then property prices will more often than not rise rather than fall. The population is increasing, family separations are more common, people are living longer and not enough houses are being built. Hence why the demand for shared accommodation has taken off. There is a reason people say “safe as houses”.
One of the main disadvantages of buying shares in a company is that the level of control you have over the company is limited. Company owners will only make decisions on matters such as changing the name of the business, appointing or removing directors, changing directors’ powers and altering the articles of association. However, when it comes to business operations including strategic planning and day-to-day tasks, the shareholders have no say in the matter. They can of course appoint a director who shares the same values as themselves; however, this does not mean the director must comply with the shareholders’ requests. If you are an average investor in a large public company then it’s unlikely that your voice will be heard at all. But then again, that’s probably not your ambition as your attention is more likely directed towards making a return on investment through selling shares at a higher price or receiving dividends. Nevertheless, you will have no control over how much you receive and when.
When it comes to owning a property, you are now the decision maker. Of course, this is only worthwhile if you are competent at property investment, because if not then you may be better off investing in the stock market. The thing to note is that if you see an opportunity to strengthen your investment or an opportunity has presented itself to take advantage of, you don’t need to rely on others to make the decision to act. The decision to remortgage, perform an equity release, sell, buy, renovate, rent is all up to you.
There is nothing better than property for seeing what your money can buy. Or in this case being able to touch what your money can buy. This commodity can have extreme longevity. It’s not uncommon to find properties that are over 100 years old that are now more valuable than they were to begin with. The likelihood is that they will still be around for years to come. In terms of the balance sheet, your property is an asset that will not disappear for some time. Even if the property market was to fall on its face like it did in 2008, your property will still retain most of its value, with the likelihood that it will return to its original value in the future. Those that won during the financial crash were those that held on to their properties and weathered the storm or who bought at below market value from the panicked sellers who lost sold up and lost thousands.
The same stability cannot be said for shares in a company. When a company goes into insolvent liquidation, the shares can become worthless, meaning you won’t get back any of the money you put in. Shareholders are the last to get paid after the liquidators, secured creditors (both fixed and floating), preferential creditors, unsecured creditors and both connected and unconnected unsecured creditors. Stone dead last.
There is a reason why you can approach a bank and receive a 75% Loan to Value (LTV) of the property. What other investment opportunity would allow you to approach a provider and enjoy the same LTV ratio to buy an asset so expensive? That’s because mortgage providers see property as a safe bet. Can you imagine asking a bank for £10,000 to begin your stock market trading expedition? You would be laughed out of the building.
There is no doubt many people have made fortunes from operating in the stock market, Warren Buffet being the most obvious. These are the success stories. However, be aware that there are also stories we don’t hear about, when investments go bad. When mistakes or changing circumstances arise as a property investor, the repercussions can be far more forgiving, with a far better chance of returning to a positive situation. With greater control over the investment, you have the ability to decide how and when it us used.