19 Mar Is it a good thing to invest for the long-term?
“There is this saying that crops up again and again or this piece of advice that somebody came up with – I don’t know how many decades ago – that success in property investing is all about investing for the long term”, Simon Buckingham from ResultsMentoring.com tells us why he thinks investing for the long-term is the worst piece of advice he has heard.
Kevin: As you might know by now, we’ve been talking over the last couple of weeks about an article that’s in the latest Australian Property Investor magazine, which is out now – the April issue – and it is called Secrets of Our Success. In that article, they’ve spoken to a number of experts about their strategies.
The thing we do know is that there is no one strategy that fits all. However, there is one strategy that Simon Buckingham, who is the Director and Results Mentor at ResultsMentoring.com, says is a bit of a waste of time – it’s actually not good advice at all – and that is investing for the long term. He joins me.
Hi, Simon. I’m a bit curious about this. You don’t think it’s a good thing to invest for the long term?
Simon: Hi, Kevin. Thanks for having me on the show.
Simon: I guess in my own experience and in the experiences I’ve seen many other investors go through over the years, there is this saying that crops up again and again or this piece of advice that somebody came up with – I don’t know how many decades ago – that success in property investing is all about investing for the long term. But I’ve come to regard that – perhaps a little controversially – as some of the worst advice anyone could ever give you in property investing.
There are a number of reasons for that, but perhaps, we need to look at first in terms of why people recommend that you invest in property for the long term. Most market commentators will say that holding on for the long term is a great way to build wealth in property, that if you just hang in there for, say, ten or more years, you’ll be fine and you’ll see your property values double – words to that effect.
The promotion of this approach seems to be based on an idea that it doesn’t really matter where you buy or what you buy, property prices are going to double on average every eight years or so.
Now, if we actually step back from the hype behind that approach and these kind of ideas and start to think for ourselves and question what’s behind all of this, rather than just accepting it as law or common wisdom in property, when we dig below the surface, we start to see actually quite a different picture.
For property prices to double on average every eight years or so, you need an average annual growth rate of around 9% per annum. Unfortunately, when you do go back in time and look at what has actually happened in the behavior of property prices, that 9% average is a myth. In fact, there’s no statistical evidence on it.
If you take studies of median house price movements going right back to 1901, which is about as far back as the records can go, the average rate of growth is a lot less. It works out to be something closer to 6%, and that’s even before you take out inflation, so it can potentially be a lot less.
Kevin: Yes, I agree totally. I think you’re highlighting a point here that a number of our experts have said, too, and that is that there is no one market around Australia. They’re all very, very independent, they’re different, and they change from time to time, Simon.
Simon: Yes, absolutely right. If you look at times where property prices have done really well generally – and then again, there would be differences down at the individual state, city, and suburb levels – the prices have only really doubled in eight years in times like the late 1940s, during the post-war years, and really between around about 1967 and 1990. Outside of those times, the rate of growth has generally been much, much lower.
I think the attitude that just buy anything anywhere, doesn’t matter, probably prices will double in eight years, hold on for ten years or more, you’ll be fine, ignores a few realities. One is, as you said, you will get quite significant differences from one place to the next. It also ignores the reality that property prices in an area can and will go down and sideways potentially for an extended period of time.
Kevin: Of course, sophisticated property investors, as you rightly point out, seek greater certainty in that they take greater responsibility for their financial outcomes. They actually do their homework and make sure they do this due diligence on it.
Simon: That’s right. If you throw out a statement like “invest for the long term,” it’s the equivalent of saying “she’ll be right, mate.” As a sophisticated investor, obviously, we need to be a bit smarter than that, not just have a cop-out that says, “Well, I don’t know what the markets going to do tomorrow, five years, or ten years from now. So I’ll just gamble and hope and pray that everything turns out okay by waiting long enough.”
That’s ultimately an abdication of responsibility for your own financial outcomes. As a smarter, sophisticated investor, you need to be not throwing away that responsibility but taking on that responsibility.
Kevin: Simon, what’s your top investment rule?
Simon: My number one investing rule really goes opposite to the invest for the long term mentality. My number one investing rule is that if I don’t expect to make a significant profit in a six- to 36-month timeframe, I won’t do the deal.
There are a few reasons for that. A significant profit to me, is five figures or better, or if I was doing it for income, it would be some sort of immediate or near-term positive cash flow. But when I look at a property deal, before I go into it — and you’ve said this yourself, Kevin – it’s absolutely critical to understand the numbers in the deal, to do the due diligence, and from my perspective, to actually quantify the profit you expect to make.
I won’t accept the notion that it’s okay to invest in a property if it goes up in value. I want to know how much am I expecting it to go up in value by and by when, and specifically, how much do I expect to make from this property deal in the next six to 36 months?
If I can’t quantify it or if I can’t put a timeframe around it, I won’t buy the deal. The reason for that is because if I focus on a 36-month horizon, I’m in a far better position to be able to predict the movements in the local market. I can have regard to things like the dynamics of the balance between supply of housing and listings versus the demand evidenced by sales in the area and what direction that’s going, and I can make some fairly accurate inferences about where prices are likely to go in that six- to 36-month timeframe.
If I try to look beyond that, there is no science in the world that can give you any degree of accuracy or high confidence in what prices will actually do. You just start to get too many influences coming in and too many unknowns that far out. Frankly, if anyone tells you that they can predict where property prices will be ten years from now, you should turn around and run away very quickly because it’s frankly impossible.
That’s where I get a little bit anxious or upset when I’m talking to investors and they show me things like a table in an off-the-plan sales pack that says, “The average growth in this property over the next ten years is likely to be 8% or 10% per annum.”
That’s completely made up. There’s no way anyone can say that that’s going to occur with any confidence.
Kevin: That’s right. Very sobering advice and very good advice, too.
Simon, I want to thank you for joining us on the show and bringing that to our attention. Simon Buckingham, who is the Director and Results Mentor at ResultsMentoring.com.
Thanks for your time, Simon.
Simon: Thanks, Kevin. You’re more than welcome.