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I'm not a dealer! Lessons from Property


Our favourite holding period is forever. Warren Buffett

I’ve spent a good proportion of my working life observing and working with property people. Property has a curious appeal. From an academic perspective (surveying, financial and legal) it is arguably one of the driest disciplines. It presents as a scientific endeavour, with an abundance of rules, minefields and procedure. Yet it remains one of the biggest stores of value. If it wasn’t for the security of land, there would not be the confidence that enables the coursing of capital. With the dynamic of financial flow overlaid with the trust that only comes from good working human relationships, property comes alive in practice. Accepted, there are complicated rules of the game, but when understood (rather like cricket) they serve to enable rather than stifle.

Now you might question- this is a blog about trading and investing shares*. Why on earth are you bringing up Property?

Well I think that Property can teach us share types a thing or two, particularly when it comes to distinguishing between trading and investing.

So often when you come to talking about dealing in shares, “trading” and “investing” are used inter-changeably. I’m guilty of it myself. You see behaviours of traders emerge and butt up against traditional investor behaviours. You see practices mixed. It all leads to the question- should we define ourselves as traders or investors? This prompts the inevitable follow up question- is it be permissible to mix behaviours?

The discipline of Property has something to teach us here. The dynamic, creative, riskier end of Property is Development. The beauty of Development (whether commercial or residential) is that every project is different and brings its own problems to be solved.

Fairly early in my career, I was involved in a project where we landed a great site and managed to do a deal with an arm of government to build them a new purpose built office. As the quality of the tenant was great, we knew that the value of the completed project would deliver a higher than usual level of profit as the Market would be keen to bid up the price.

As soon as we’d navigated the deal with the tenant through the lawyers, I was taken aback when the Developer announced that they would be selling it on “immediately”. Others I’d worked with previously would have built and held on to the asset for a while, enjoying the income stream which would have more than serviced the debt. This Developer was however a trader and nothing was going to stop him from selling on immediately so he could reinvest the proceeds in the next project as soon as he could.

That project was delivered in times of financial plenty. Sadly, the Developers who were just traders, were badly caught out by the timing of the Market. Since the financial crash of 2008-2009, I have witnessed an interesting change in events. Developers have started holding on to some stock and have become investors. They have realised that having some income stream is really useful to pay the bills when times are hard.

The investor in Property is wired in a totally different way. They are interested in two things. Certainty of income, with risks to be minimised as far as feasible and yield to increase over time. With flat rental growths in the past 15 years, indexed linked rents have become ever more attractive.

The typical investor will want to hold property for at least five years. This is so as to ensure capital appreciation through the first rent review (which typically run on 5 year cycles) so that the best price can be achieved for the property. They will only be interested in selling if they can realise a better return on their capital elsewhere. Given the lack of liquidity in property compared to shares (it takes a while to sell and buy and it’s expensive) inertia is usually the more attractive option.

Property is an area I know well and appreciate. The players whom I’ve admired the most are the investors who have adopted trader mind-sets. What is it that they do?

These property investors buy stock with an angle. Perhaps the previous owner has not fully realised the value of the asset? Maybe there are unclaimed tax allowances? There is a discovery that part of the site could be sold at value, allowing reinvestment to improve another part of the site?

They are masters at spotting value and growth opportunities. They realise that they will need to hold for a period, but when they do come to sell (and they will have an exit strategy) they will be confident that the asset will be worth more than what they paid for it. Oh and along the way they would have collected dividends.

Most share people I know class themselves as investors and are suspicious of traders. Some go as far as never to employ stop losses. In one sense, there is nothing wrong with this approach. Certainly from 1999 to 2012, a long term investor who reinvested dividends would have outperformed most other share traders. That remains a solid strategy. However, failure to control the downside is in my personal view a flawed strategy. The best investors recognise that on the distribution curve, you profit more long term by running your winners and controlling or killing your losers. Your big losers will without question impair your performance.

There is a distinct temptation to look at big dividend payers in the FTSE100, buy a bunch of them and let them grow by reinvesting dividends. That is a good strategy, provided that you have long term confidence in those companies that you are buying. Warren Buffett talks about investing in companies with big competitive advantages or “moats”. In my personal view, any company with a dividend above 6% should be viewed with an extra level of scrutiny. Yes of course an unloved sector could present a great opportunity if you are a deep value investor. You must be careful though. Even this week (5th February 2020) Imperial Brands (IMB) suffered a 9% fall in one day following an RNS. That fall was enough to knock out a year’s dividend.

One of the best Property investors I ever worked with told me some years ago that he would not buy supermarket investments. His argument was that they all yielded 5%. Why would you buy bricks and mortar when you could just buy shares in Tesco (TSCO) or Sainsbury’s (SBRY)with a 5% dividend? Warren Buffett himself clearly thought so, as he scooped up a large portion of Tesco shares at that time.

Well as we all know, Tesco shares did not prove to be the safe investment that everyone had thought Following a precipitous drop in 2014, even Mr Buffett admitted that he had got Tesco wrong.

I have personally indulged in a little trading from time to time. The share price of some companies trade in a nice range and you can make reasonable money from buying at the bottom of the curve and selling out at the top, waiting for the next dip and repeating. However, this is a short term strategy with some risk and will only make you serious money if you dedicate yourself to it and enjoy luck along the way. No, the big safe money is made by the long term patient investor. There are some great examples of ISA millionaires in the UK where they have grown tax free funds to (in some cases) many millions with only the ability to invest a few thousand pounds every year (the limit in 2020 is presently £20,000).  In my humble view, longer term investment remains the best strategy, albeit with three conditions.

Firstly, adopt the mind-set of the best Property investors. Buy stocks with an angle- either under-valued or with good growth prospects.

Secondly own the best companies for as long as you can.

Thirdly control your losses.

If you manage these three things, you will most likely graduate from being an average investor into a great investor.

*This blog is published subject to this disclaimer.

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