In my family I’m the odd one out. My parents see property investments as their pension. My brother sees property investments as his pension. My cousins see property investments as their pension.
I’m the only one, as far as I know, who favours stock market investments over property investments. And this is despite the fact that most of my personal retirement funds came from some lucky timing in the property market between 1995 and 2005.
Although I don’t think one is necessarily better than the other, I do think stock market investors can learn a lot from their property investing counterparts.
Specifically, there are four things stock market investors should do to make themselves more like property investors:
1: Don’t focus on short-term price fluctuations
Here’s a good example of too much attention paid to short-term price movements:
During the financial crisis the FTSE 100‘s market price fell by about 50%. To some extent, it fell because large numbers of investors sold their shares simply because they were worried about further price declines.
In the UK property market this scale of knee-jerk panic-selling just did not happen.
As far as I can tell, most property investors were happy to hold onto a property as long as it remained cash-flow positive (i.e. rental income exceeds mortgage expenses), or something close to it.
Property investors who held fast during the crisis were acting like true investors. They focused on the fact that property prices are very likely to go up in the long-term, and that helped them to largely ignore short-term price declines (yes, property prices can go down in the short-term).
Stock market investors who sold purely because prices were falling were acting more like speculators; buying and holding while prices were going up but running for the hills when prices started going down.
And I’m not being judgemental because running for the hills is exactly what I did in the earlier 2000-2003 bear market.
But that was a mistake, just as it was a mistake for stock market investors to panic-sell in the 2008-2009 crash or the recent ‘correction’ of early 2018.
2: Do focus on the underlying investment and its long-term prospects
For property investors this is easy.
Properties are concrete (sometimes literally) and in most cases you can see them and even touch them, so they’re easy to picture in your mind as the thing you’re actually invested in.
But what about the price you could buy or sell a property for on any given day? It simply doesn’t exist.
Okay, you could ask Bob down the pub how much he’d buy your house for today, but how far below ‘fair value’ would the price have to be to get that sort of quick sale?
So the daily price of a house is effectively abstract; it’s invisible and there’s no easy way to discover it, so most property investors don’t think about it.
For stock market investors it’s the other way around.
Companies are an abstract legal entity; you can’t see or touch them. You can visit a company’s head office or factory, but that’s not the same thing.
Share prices are what people see as concrete. You can watch the market price of a listed company go up and down on a screen all day long. You can even buy or sell a piece of that company at that exact price, with just the click of a button.
That’s why so many stock market investors become accidental speculators.
They focus on short-term share price fluctuations which they can see and even touch on screen, and they pay more attention to those price fluctuations than they do the actual companies they’re invested in.
3: Ignore the market most of the time
Treat the stock market and market prices as they were meant to be treated: As a market.
You go to the market, buy what you want, then you leave.
So when you have some cash to invest, go to the stock market, buy a good company at a good price, and then leave.
Don’t keep looking back at the market to see what other people think your investment is worth.
And if the market price of one of your investments drops by 50%, all that means is that one investor was selling at that price while another was buying. So which of these anonymous investors should you trust? The answer, of course, is neither.
You must trust your own judgement, not the market’s.
After all, if you’d bought the company outright there would be no daily share price to watch, just as there is no daily market price for a house.
You would own the business and its management team would send you annual and interim reports outlining the company’s recent results and their plans and vision for its future.
Other than reading those results there would be nothing to do and no market price to worry about.
And that is as it should be.
4: Relax, put your feet up and do the occasional spot of gardening
Instead of worrying about which of your stocks have gone up and which have gone down, do as property investors do:
Spend 99% of your time sitting on your metaphorical backside, letting your carefully chosen investments do the work of generating long-term capital and income growth.
Spend the rest of your time (perhaps one day each month) on some low-effort investment gardening, occasionally trimming back fast-growing investments and replacing weedy-investments with more attractive and robust alternatives.
Reminds of Warren Buffett’s refusal to split the stock of Berkshire Hatheway. Buffett wants the patronage of investors, not speculators. Currently the class A stock is worth approx $289k, Buffett grudgingly introduced class B stock to ward off invest trusts.
The beauty of Berkshire Hatheway stock being so expensive is that it forces the individual investor to hold the stock for the long term to maximise returns kind of like properties. The buying and selling introduces too much friction which brings down the actual return for the investor.
Good point. The small size and high liquidity of most stocks makes the stock market very convenient, but it also contributes massively to excessive trading.
Perhaps shares should have one price per day, like unit trusts?
I have a more controversial suggestion change the tax bands, for long-term investors. Tax should be reduced to a lower rate depending on the length of holding for a stock. The longer you hold a stock the less you should be taxed. It would change peoples behaviour in relation to selecting stocks.
This has the added benefit of ensuring quality companies are not being pressurised to engineer results to satisfy short-term holders. I personally believe many quality companies have been ruined by the demands of short-term holders and market volatility.
I’m not really a fan of using the tax system to deliberately change behaviour, but I totally agree with your sentiment, especially your comments on quality companies being forced to aggressively pursue higher short-term returns (at higher risk, of course).
It reminds me of the story of M&S. I recommend anyone interested in retail to read; The Rise and Fall of Marks and Spencer.
By 1980s to early 1990s the company was at its peak. It was in the same league as Walmart! Unfortunately, the managers sought growth via costly overseas expansion. These failed spectacularly costing investor billions of pounds as management had no experience in the new sector.
The main factor responsible for this was a focus on short-term growth. If only management asked themselves what they needed in terms of capital to maintain its current position for the long term they could have returned the excess capital via dividend/ purchase of stock.
Perhaps M&S can adapt though. My local M&S is converting into a food-only store. Perhaps five or ten years from now it will be a top-end supermarket like Waitrose but with local high street stores like Aldi and Lidl. Would be an interesting combination.
As for its overseas expansion, it was too far too fast in my opinion. Look at JD Sports with its slow incremental rollout into international markets. Buy up a few overseas stores, spend a few years learning about the market and the local distribution infrastructure, improve the businesses you’ve bought and then build scale once you’ve built a solid base. (admittedly I haven’t looked at JD for a while, so this is what it was doing a few years ago, but the basic approach is sound).
Property investment was good for every landlord who owns properties as they gain capital appreciation, which helped to raise their rental income. But, I fear the property market appears to be in a bubble as more people can afford to rent despite record low mortgage rates.
Could be tough for the property market in the next few years, especially in London.
Also, I think you should do a rainbow chart for the property market.
Hi Walter, a rainbow chart for the property market is a good idea. I think it’s been over a year since I wrote about the UK’s overpriced (London-centric) property market and the lessons are completely relevant for stock market investors too.
John,
The key thing which applies to all investments are cycles-economic, property or interest rates.
The rest what people are comfortable with.
Property is prone to more government intervention right or left then listed entities as they are seen as wealth creators.
The current government has made property investment less lucrative for small investors with its recent changes. And the interest rate cycle delayed by brexit will be further barrier. Beware – that said there is room for both – I dabble in both. Cheers,Rajan.
I agree that there’s room for both. However, my point really was that property investors rarely see the property market as a casino, and unfortunately that’s exactly how many investors see the stock market.
John, The average 3 bed semi sells for around £300K where I live. Rent is approx £1000-1100 gross rent a month.
That put’s the price earnings ratio at around 25 which seems toppy for a boring undifferentiated product.
The net rent is probably closer to £700 a month. That’s a 2.8% yield which has poor coverage if you consider voids and potential non payments.
Then there is maintenance – over an above general running costs – could be up to 0.5 to 1%.
So your real P/E loaded is closer to 40 or 50.
It’s a busted flush – property prices could easily halve from here.
The average property price nationally is about £250K
The average salary nationally is about £27K
The ratio, which has been around 3.5 to 4X for over 100 years is now over 9
Your family could be in for a shock, or if they are not heavily leveraged, they may not care.
LR
Such is the nature of price bubbles. The higher prices go, the further they have to fall…
As for my family, some are buy to let, some own multiple properties outright, so it’s a mix. I don’t know the exact details, but yes, those with the most leverage are most at risk that’s for sure.
Like investors and people buying property care about averages, multiples etc. They don’t.
For example we have foreign investors who they do not care about investment return, but they need a place to store wealth in a jurisdiction with a good legal system. Pound devaluation helped them.
We have parents downsizing helping their children on the property ladder. As a financial planners this is now an objective of nearly 65% of our UK based clients.
Property has another dynamic than equity investing. In bad times as demands contracts, supply contracts too and people delay in puting properties on the market. It is not the same with equity investment.
“In bad times as demands contracts, supply contracts too and people delay in putting properties on the market. It is not the same with equity investment.”
It is Eugen, liquidity dries up and it becomes difficult to offload many categories of stock.
Re your other point, foreign investment in UK property is a tiny proportion of the overall market. And you are right many investors in property don’t care about multiples, that’s why they get burned when the market turns south and they get caught or trapped in negative equity..
It’s the same in equities(shares), pay over the odds in leisure and good times and repent when valuations contract and the share price multiple gets re-rated.
LR
The big difference that I see between stock market and property investors is leverage. Property investors love it and in recent times many have made a lot of money by using it. Of course leverage works well when the market is rising quickly. When the market turns bearish it is a very different matter…
Hi RIT, yes it’s all about leverage and liquidity.
However, it’s been more than 20 years since the last property market decline, so it’s outside the experience of a lot of younger property investors, so they just don’t see the risk as real.
They tell themselves that the government will never let house prices fall, but the last big crash in the late 80’s was largely the government’s fault!
Hi John
I like the advice to go to the market, buy what you want and then leave.
Typo in 4 – 4: Relax, put your feed up.
Feed should be feet, I think.
Best wishes
Richard
Hi Richard, thanks. Typo corrected. I must have been hungry when I typed it.