29 Mar The ‘perfect’ investment – Michael Yardney
One thing is certain: there is no such thing as a perfect investment. If somebody tells you they have found “the perfect investment” be very sceptical and ask lots of question, because chances are they’re trying to sell you something you just shouldn’t buy. In today’s show Michael Yardney, from Metropole Property Strategists, tells us what to look for in an investment including liquidity and appreciation.
Kevin: As the market continually changes, you have to continually be looking at your investments and I guess with all of the strife we’re seeing around the world right now, there would be great temptations to change your strategy. Is it such a good idea? What should you be looking for in a good investment? Michael Yardney from Metropole Property Strategists joins me.
Michael: Hello, Kevin.
Kevin: I’d pose that question of you, Michael. What do you think we should be looking for in an investment?
Michael: One thing that’s certain, Kevin, is there’s no such thing as a perfect investment. In fact, if somebody tells you that they’ve found the perfect investment, be very skeptical and ask lots of questions because chances are they’re trying to sell you something that maybe you shouldn’t be buying.
Kevin: Michael, what should you look for in an investment?
Michael: Kevin, when I look at my investments, I look at a number of factors. First of all, I look for liquidity – in other words, the ability to take my money out by either selling or borrowing against it. I look for easy management. I look for strong and stable rates of capital appreciation, so I want them to grow what I call wealth-producing rates of return. I look for properties that give me a steady cash flow, and I look for something that’s going to give me a hedge against inflation, something that’s going to increase faster than inflation, and also good tax benefits.
So Kevin, I think most investors put money in a number of different things. They’ve got some money in their super, in shares, in property, as well. So that’s, I guess, the same criteria I would look at for any type of investment vehicle. When you look at the major categories of investment, you’ll recognize that not many of them fit the bill of meeting all those criteria.
In this new era, as the market is changing a bit, maybe the long-winded answer to your question is look for investments that are powerful and stable. By powerful, I mean I want investments that are going to act as a hedge against inflation, that are going to grow at wealth-producing rates of return, which means I can borrow against them.
I also look for stability, especially at this stage of the cycle, Kevin. Property values should grow steadily and surely rather than having the major fluctuations like one tends to get with share markets or properties that aren’t in areas that have a large owner-occupier population creating a stability of continuing demand.
Kevin: I guess in fairness, Michael, just to balance the conversation, we might just have a quick look at what are the investment alternatives?
Michael: Sure, Kevin. I think if you look at the alternatives, you can either invest in cash, putting your money in a bank as people used to do in the past. I remember, Kevin, getting 12% or 15% interest on my deposits years ago. Now you get 2% or 3%, so I don’t think that’s an alternative for people wanting to grow their wealth.
There’s shares, stocks, which give you a combination of dividends, so it gives you cash flow and also increased growth, but in my mind, the stock market has the liquidity, it means that you can actually sell quickly, but that foregoes the stability. In other words, you can get 10% or 15% fluctuations in values over days or even sometimes within the same day.
Then there’s real estate, which, in my mind, doesn’t have the liquidity but because it doesn’t have the liquidity, it gives you the stability of not fluctuating too much in price.
The other thing I like about residential real estate as an investment vehicle is it’s the only investment market not dominated by investors. If you think about it, Kevin, 70% of people who own residential real estate are owner-occupiers, and they don’t make the decisions the same way you and I do regarding what’s going to happen to interest rates, what’s going to happen to negative gearing, what happens if the economy goes down. They keep their houses in the long term.
I like investing in a property investment vehicle in residential real estate because, essentially, a market dominated by non-investors, that gives me stability.
Kevin: I guess the other thing, too, at property over shares is that with shares, you don’t really have any control over the value of those shares, whereas with property, you do. You can add value.
Michael: Correct, Kevin, and that’s another reason why at this stage of the cycle, established residential real estate makes a better investment in my mind because you can add value while buying new properties, you’re at least paying full price or maybe a premium.
I also like properties that are more what I’d call “how to” rather than “when to.” “When to” investments, to me, mean you have to actually know the timing of them. You need to know when to buy, when to sell, timing is crucial for these investments. If you buy low and sell high, you’ve done well; if you get your timing wrong, your money can be wiped out, and in my mind, that’s shares, it’s commodities, it’s futures, they’re when to investments.
As I said, I’d rather put my money to what I call “how to” investments, such as real estate, which increases steadily in value and doesn’t have the wide fluctuations in price. While timing is still important with “how to” investments, it’s nowhere near as important as how you buy them, how you add value.
So “how to” investments are really liquid but they do produce real wealth, while most “when to” investments, like the stock market, only produce a handful of large winners and the majority of people getting in those tend to be losers. On the other hand, in my mind, residential real estate produced hundreds of thousands of wealthy people and only a handful of losers.
Kevin: Michael, earlier in our conversation, you were kind enough to tell us what you look for in an investment – just very quickly liquidity, I think easy management, strong stable rates, and capital appreciation, steady cash flow, a hedge against inflation, and you also said good tax benefits. They’re six great things to look for. Are any of those negotiable, or do you look for all of them?
Michael: You’re never going to get all of them in the same investment, so more important to me at my stage of life is stability. I don’t need hassles. I’m not a speculator; I’m an investor, so I want investments that are going to grow at wealth-producing rates of return, so I wouldn’t compromise on the capital growth potential of my investments, Kevin.
Kevin: Yes, thank you, Michael. You answered that very well. Thank you, Michael Yardney from Metropole Property Strategists.
Thanks again, Michael.
Michael: My pleasure.