5 things you can learn from shares
It would be a strange investment landscape if nobody were to proclaim a preference for either property or shares. Despite the divide, many investors have made their fortunes from a combination of the two.
It’s therefore worth considering just what property investors can learn from those making money elsewhere.
Scott Phillips, investment adviser at The Motley Fool Australia, explains that both assets are really quite similar.
“With any investment, you’re paying $1 today to have something worth $2, $5 or $10 at some point years into the future,” Mr Phillips explains.
Indeed, the underlying motivation for investing in both asset classes is the same – to build wealth – so there is much that investors can learn from their share-trading brethren.
Number one: diversification
Purchasing a property is often described as ‘one of the biggest investments you’ll ever make’, so for many people, investing in property ties up their funds.
Unfortunately, this can cause diversification plans to fall by the wayside.
Dale Gillham, executive director and chief investment analyst for Wealth Within Limited, says diversification is all about perspective.
“I often ask ‘If you went to spend $500,000 on a property, could you do that?’ and a majority of people will answer in the affirmative,” he explains.
“When I say ‘Would you put $500,000 into one share?’, the whole ambiance changes.” Clearly, this isn’t a path many would walk down.
The large cash outlay that is required to invest in property may hold some investors back from properly scrutinising their diversification strategy, but Mr Phillips explains some people prefer to spread their risk.
“A combination of both classes might make sense for investors who like to have their eggs in more than one basket,” says Mr Phillips.
Diversification, however, doesn’t just apply to spreading your investments between asset classes. The concept can also be applied within specific classes.
Indeed, while property investors are likely to have one $500,000 investment, a share trader will spread their purchases out between different stocks.
Property investors may therefore want to re-examine their strategies and consider purchasing a number of cheaper properties in different areas.
Suburbs across the country are driven by different demographics and demands, so by diversifying your portfolio you can ensure you’re less reliant on one particular market factor.
Watching the share market you can see it constantly moving in real time, but people don’t look at the valuation of a property other than when they buy or sell.
Number two: continual planning
Some property investors fail to seek professional advice and thus their portfolio becomes disorganised and ineffective, according to George Lucas, managing director of Instreet Investment Limited.
Far more share investors head to an adviser than property investors, he explains, “although more and more property is being adviser directed”.
Without advice, it can be a “hit and miss” approach, warns Mr Gillham.
“[Property investors] hear di¬fferent things, there’s no real structure around it. When we teach people how to trade, we put a structure around it all. First thing is: What’s your goal? Where do you want to be? What will your investments look like?”
Ongoing planning is also made easier for share investors due to the instant access they have to information. Market movements and the value of stocks are relatively easy to monitor and as a result, they’re likely to visit their portfolio more regularly for review.
Unfortunately for property investors, even professional valuations can vary.
“Pricing can be anything and two properties can be almost identical and can go for different prices, but I can properly value that share [instantly],” explains Mr Gillham.
“We do have dips [in the housing market] and if a house was valued every second of the day, they’d be just as nervous about property as they are about shares.”
Having this instant reminder of how your investment is performing is incredibly powerful.
“Watching the share market you can see it constantly moving in real time, but people don’t look at the valuation of a property other than when they buy or sell,” says Mr Lucas
Number three: specific research
Many property investors think their understanding of the real estate market is sufficient because they’ve seen someone else purchase a home, or have done so themselves.
“They think they know it because they live in a house,” Mr Gillham warns. “[Most] know the share market is risky.”
However, property can also be risky and the transactions and investment processes can be just as complex.
Mr Phillips points to US business magnate and investor Warren Buffett’s research as an example of what property investors should be doing before diving in.
“[Warren Buffett] followed railway stocks for literally decades before buying a railroad company, and similarly read IT giant IBM’s annual reports for years before being comfortable enough to buy,” he explains. While this is extensive, it’s not uncommon to hear of the best share investors reading annual reports to understand the different dynamics.
“Sticking to what you know but working on expanding that expertise can be a formidable combination for investors in both shares and property,” says Mr Phillips.
Property investors need to ensure they enter the market with eyes wide open, even if the potential outcomes may be uncomfortable.
Number four: getting to grips with risk
The main driver for investing in property should be “the numbers”, according to Mr Gillham.
“It’s numbers, that’s it. It’s not about the bathroom [or the] bedroom, it’s numbers,” he says.
Mr Gillham says he often questions why property investors become so emotionally involved in their investments and want to ‘see’ their purchases.
“I ask ‘why?’ Until they can understand that property is an investment as numbers, which is how shares are looked at, they’re not as savvy,” he says.
Share investors who get to a point where they want to buy property are “much savvier than property investors, as they know risk is involved; they know they need to research,” he says. “I’ve had property investors come to us, who have a few million dollars but have no idea how to manage risk.”
This comes down to accepting volatility, something property investors aren’t always up to date with. Mr Lucas explains that while share investors are aware that anything can drop, often property buyers “can’t look at past history as an indicator of future growth”.
Some property investors only envisage what will happen if the market rises – a risky approach, according to Mr Gillham.
“They don’t think they can lose, which is another misconception of property investors,” he says. “I know lots of people who have. In contrast, they intrinsically know they can lose on a share.”
Property investors need to ensure they enter the market with eyes wide open, even if the potential outcomes may be uncomfortable.
Number five: being open-minded
The best property investors look at many areas across the country, but others simply stick to their backyard. The latter approach can limit your ability to find the best investments, according to Mr Gillham.
“Statistics show that investors buy a property in the suburb next to them or the one they’re in, which to me is completely silly,” he explains.
Buying what and where you know does have its positives; it can help reduce risks and the research required, but it can also limit your chances of recognising opportunities elsewhere.
“In some ways, because it is tangible, [property investors] tend to invest in areas they are familiar with,” says Mr Lucas.
Share investors, however, often aren’t handcuffed by the need to ‘see’ their investments. The intangible nature of the financial markets means investors are unlikely to be tempted to visit every company in which they own shares.
That’s not to say property investors should entirely avoid getting out in the field. Instead, they could take a few lessons from share investors and aim to be less emotionally connected to their investments.