Real Estate Investment:Today

What are the two vital traits of every successful investor?

Key takeaways

People make two common financial mistakes: not investing or doing too much.

When it comes to investing, doing nothing is often the most intelligent thing to do. Research shows that buying and selling destroy wealth and that inactive accounts produced the best returns, on average.

Compounding capital growth takes time. Quality assets and time are the key ingredients for increasing equity.

Changing your investments or strategy just because you’re impatient destroys wealth, so make changes only if the market hasn’t delivered returns in the time frame that you expected.

In the long run, fundamentals will drive returns. If you invest based on sound fundamentals, and you use evidence and a rules-based approach, you should not change your investment unless there is overwhelming evidence that long-term fundamentals have changed.

I find it ironic that the two common financial mistakes that people make are

  1. not investing i.e., procrastination or
  2. doing too much i.e., turning over investments, changing their minds and so on.

But, sometimes reacting, changing, tinkering, selling, buying and so on can be equally as bad.

The truth is that investing requires a lot of patience.

Investing Property

The quote below from Warren Buffett’s business partner since 1975, Charlie Munger says it perfectly:

Look at those hedge funds – you think they can wait? They don’t know how to wait! I have sat for years at a time with $10 to $12 million in treasuries or municipals, just waiting, waiting…As Jesse Livermore said, ‘The big money is not in the buying and selling…but in the waiting.

When it comes to investing, doing nothing is often sometimes the most intelligent thing to do.

Research demonstrates that buying and selling destroy wealth

There’s a commonly cited story about global fund manager, Fidelity conducting research into which investment accounts performed the best.

It is said that it found that inactive accounts i.e., where the investor forgot that the account existed produced the best returns, on average.

A study that included 66,465 investors concluded that portfolio turnover (i.e. buying and selling stocks) is inversely related to returns.

That is, higher turnover leads to lower (about 5.5% per annum) returns, on average.

Whilst this study only considered stocks, the same would be true for every other asset class.

Three reasons why you need the discipline to be patient

If you have the discipline to be patient, you will enjoy much better investment returns for three reasons.

(1) Markets move in cycles

Most investment markets move in cycles.

That is, a period of above-average returns follows a period of below-average returns, as shown in this chart of historic property returns:

Distribution Of Property Price Growth Since 1980

If you were unlucky and invested at the beginning of a flat growth period, it’s likely that you must hold an asset for a much longer period to generate a return close to the long-term average (i.e., 7-8% per annum.).

For example, generally, you must be prepared to hold a property for at least 10 years to enjoy the long-term average return (i.e., 7-8% per annum.).

However, if you invest at the beginning of a flat period, you’ll have to hold the property for 15 to 20 years.

Returns should be similar in both cases (i.e., 7-8% per annum).

The difference is the distribution of returns over time.

Investment-grade apartments are a good example of this.

(2) Returns compound

Compounding capital growth takes time.

As the chart below demonstrates, the projected growth (equity) in the first decade of ownership is $580k.

Value Of $500k Property That Increases In Value

But in the third decade is projected to be $2.7 million!

That is the power of compounding returns.

The two key ingredients are (1) quality assets and (2) time. When it comes to the impact of time, there are no shortcuts.

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