A conversation I seem to be having a lot with my friends lately is one about how I should invest my money in property rather than stocks. Mention the stock market and people recoil, as if the words themselves might bite. Houses, on the other hand, are always seen as safe.
I'm based in the UK so it's the UK housing market with which my friends are so enamoured - and London is indeed currently in the grip of housing boom madness. But while gains might be large, costs are too. Even in this red-hot market, if I'd have put my original $108K into London property in November 2014 when I set up Little Acorns, I would be looking at a 4.9% unrealised gain (Houseprice Index, before costs) right now instead of the 15% my portfolio has made (including dividends, after costs). This is assuming I could have found anything cheap enough in our prohibitively expensive city in which to invest. A parking space, perhaps?
Safe as houses?
Undoubtedly, there are people who have realised great returns from property investments - usually large scale developers, those able to buy something outright or off plan that can be used to generate solid returns from rental or resale in excess of 40% or the extremely fortunate who have, either on purpose or by lucky accident, timed it perfectly. For most investors, however, owning property is not the golden egg laying goose we think it will be. In the majority of cases property investment is riskier, harder work and lower yield than we think.
For ten years, I was a buy-to-let investor. I followed advice from property authors, fellow investors and finance experts to the letter: I bought at a relatively down time, negotiated a 5% discount on the asking price, in the right area, on the edge of London. Over the ten years that I owned and managed the property - two bedroom, two bathroom new build flat - I saw four sets of tenants come and go, navigated a couple of neighbourly disputes and had a few arguments with the block managing agents; all standard stuff.
The thing that really bothered me was, on selling, after taking into account all my expenses, I made a grand total of 1.73% per year, 18% overall. Nowhere near the 5 - 10% p.a. I had been told to expect by the pile of books I'd read before embarking on the project.
As I'm sure you can imagine, I have recounted several times my frustrating property ownership experience in comparison with my - so far much more entertaining and successful - value investing one. What I have come to realise can be summarised into two things:
1. Brits are hard-wired to believe the web of deliberate confusion that the financial industry weaves around stocks
2. Almost everyone I know pins their best hopes for future financial security on one day selling their home for at least twice what they paid for it
This is akin to believing in the big, bad wolf because you've read Little Red Riding Hood and putting every egg you own into a single basket with a rather dodgy looking handle.
Lots of acorns in lots of baskets: globally diversified value stocks mean stability
I will never invest all my money in a single venture, stock, property or market again. I simply didn't realise at the time of my flat purchase how risky I was being because, like so many others, I saw houses as 'safe'. The reality was that I was 100% invested in a single property in a single market. You will never find an investment book that recommends such a risky approach and yet somehow, we are sold on the idea that property is different. It isn't; it's just that it's so expensive to buy property now that we have no choice but to put everything into one place.
My $108K would today convert into about £70K, a fairly decent deposit to use on a UK property. I would then have to take out a mortgage to cover the rest of the purchase cost: UK average - £282K; Greater London average - £514K. Interest rates on mortgages currently stand at around 4%, while other purchase costs include stamp duty and any service charges, ground rent and lease costs if I was buying a flat.
Prices in London's most central boroughs of Westminster and the City have risen 22% in the last year. Seems pretty attractive to an investor. But even if I could buy a property outright here, where the average price is £1.5M for a flat, the stamp duty alone adds almost £100K to the price of the purchase!
So desperate are some to buy into the London property market that they are now buying up small slices of properties using syndicates. This idea makes even less sense to me. The only thing worse than investing all your eggs in one basket is putting all your eggs into a tiny fraction of a wildly over-valued basket. How can this possibly be better than buying a few stocks in great, low risk businesses that are currently being sold for a steal?
The property market can crash like any other and the houses you own within that market can lose value for all sorts of reasons, just like stocks. The difference with stocks of course is that you can own a little bit of a lot of things and if one goes down, as long as others go up, it doesn't matter in the long term. Value stocks are slices of great businesses, financially stable in their own right, that prove under analysis their ability to withstand market shocks. They grow, evolve and expand with a life of their own, supporting other people with employment and helping to keep a buoyant economy.
Property is static. It is unable to grow and expand like a business, instead being subject exclusively to the market forces raging around it. You can't buy property and expect it to make you returns if you simply leave it alone. If you do, it will deteriorate and fall down rather than pay you dividends along the way. You have to constantly pour money and effort into property whereas with great value stocks, you choose, you buy and you wait. If you'd have bought into Apple in 2009 when STRIDE identified the stock as a value play, you would have made ten times your money by now. I've never heard of a property investment generating that kind of return in the same time frame.
I have seen first hand this month the power of diversification and negative correlation at work in my portfolio. My $108K is growing steadily and I've had to do practically nothing apart from buy stock when it becomes a 3D target. I don't own a huge amount of anything, but as one thing goes down, others go up to outweigh any losses with gains. Owning 28 stocks, across 16 markets, in 13 currencies has protected my investment this month. While I haven't gained, I also haven't lost anything either and I'm still more than 10% up on where I would have been if I'd have played it 'safe' with the UK property market. I'm also 11% ahead of the S&P 500, proving that this value approach to investing beats index funds too.
Since April, I've added a further five stocks to Little Acorns.
Gilead - Nasdaq Global Select: GILD
Gilead Sciences, Inc., a biopharmaceutical company, discovers, develops, and commercializes medicines in areas of unmet medical nee in North America, South America, Europe, and the Asia-Pacific. The company’s products include Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost, and Vitekta for the treatment of human immunodeficiency virus (HIV) infection in adults; and Harvoni, Sovaldi, Viread, and Hepsera products for the treatment of liver disease.
Chong Hing Bank - SEHK: 1111
Chong Hing Bank Limited provides banking and related financial services in Hong Kong, Macau, Mainland China, and the United States. The company operates through Corporate and Retail Banking, Treasury Activities, Securities Business, and Others segments. It offers lending and trade finance facilities, auto financing, consumer financing, overdraft facilities, provident fund services, fixed deposits, current and savings accounts, credit cards, and personal wealth management services. The company also provides automated telephone and Internet banking services.
Investor AB - OM: INVE A
Investor AB is a private equity and venture capital firm operating through four business areas including core, private equity, operating, and financial investments. For core investments, the firm considers investments in listed companies in leading minority positions. It invests in health care, care, and education sectors. The firm seeks to invest globally and acquire a board seat. For its operating investments, the firm seeks to focus on medium-sized to large companies headquartered in Northern Europe.
Lyondell Bassell - NYSE: LYB
LyondellBasell Industries N.V. operates as a manufacturer of chemicals and polymers, refiner of crude oil, producer of gasoline blending components, and developer and licensor of technologies for production of polymers. The company operates in five segments: Olefins and Polyolefins—Americas; Olefins and Polyolefins—Europe, Asia, International; Intermediates and Derivatives; Refining; and Technology.
FT Communications - Jasdaq: 2763
FT Communications Co., Ltd. supplies communications devices to small and medium-sized enterprises in Japan. The company offers communications and office automation equipment, LED lights, and photo voltaic systems. It also provides optical fiber line, ISP, Internet, and broadband services; corporate mobiles; and marking supplies or printer consumables.
Biggest gainer is again, C-QUADRAT. This stock just keeps on giving! 87.28% up so far.
Biggest loser is - also again - Seal. -34.56%
It's an awesome surprise to see that I've already made 1.3% in dividends. Looking at the dividends forecast for the stocks that I'm holding, I should be able to make another purchase within the next few months purely from this income.
Check out my latest email summary below for more details on the portfolio and compare with my last post here.