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Psychology
Safety in Numbers
02/May/2014
Physically outwardly people are different and different nationalities each have their own cultures but, other than gender, human beings are basically inwardly the same. When for whatever reason we are emotionally upset at some level, whether consciously or subconsciously, we become psychologically off-balance so will have a propensity that steers us in one direction more than another. It is inclination, a ‘position of comfort’, that is, for example, why people generally only listen to what they want to hear, or don’t take any notice of anything that doesn’t make sense to them. In such a state, warning signals, often subtle, can go unheeded. Often it is only after a tangible symptom is experienced that we take action to remedy the situation in the hope it is not too late to do anything about the underlying problem.
Many people think problems of any sort are normal, but I do not. In my philosophy, a problem is a fault in direction so, essentially, it is not possible to have more than one problem at a time. In reality, having more than one problem at any time is simply fragments of the same underlying problem. Delve and you’ll find a common thread. A problem will not go away of its own accord: it may be swept under the metaphorical carpet, put to the back of your mind, but inevitably it will find a way to attract your attention. You will have to do something about it. The longer the delay, the harder it can get, the more expensive it can become to remedy. The reason problems are direction-related is to enable us and the reality we can create for ourselves to remain in sync with the ups-and-downs of life generally. About how you respond and react to whatever is happening right now, including what you are reading now and thinking about as you go. A problem must be transformed into an opportunity and the more adept you are at doing that as you go the less likely you’ll come unstuck in times of change. As I say, everything in life hinges upon the consequences of two words ‘yes’ and ‘no’. Which means problems can be avoided by taking preventative action. (Word of warning: trying to think of every possibility in advance is likely to leads to nervous breakdown.)
Applied self-development is integral to investment success. When you know yourself inside out, you’ll naturally know whatever you need to say and do and if you want to help make a difference to the lives of others what needs saying and doing. (Caution: don’t try this at home unless you feel confident enough)
In a balanced frame of mind and in the context of property investment, essentially, there is no difference between residential and commercial, or any other type of property for that matter. Both have the potential for investment, of enabling you to become better off than you are now. The only differences that can affect your prospects of success are in how the property is bought, managed, and sold. Any other differences are by-products of bias and prejudice. Both have their share of success stories, of the property that spectacularly outperforms, or the tenant whose improved covenant and financial standing enhances capital value. And both have their share of horror stories, of the tenant that goes broke or trashes the place before leaving.
Demand and supply provide the fuel for short-term action and whether change is seen as for the better or worse depends upon your ability to capitalise on opportunity. The long-term driving force is the socio-political economy and how the property market relates to what will happen in future.
At macro-level, residential property is subject to political ideology, a continual cry to build more new homes suggests shortage to the opportunist but can put a damper on prices for existing properties in the locality. Rents for residential property can increase as mortgage criteria for would-be buyers tightens, but lending relaxation can remove the froth. Commercial property can be affected by new development, changes in the law, and tenants rethinking their business priorities. Ultimately investment value of all property depends upon someone else paying more than you; and the profitability of the particular property to you depends upon how much you pay when you buy, what return you get during the period of ownership, and what you get when you sell.
For peak performance, the goal for human beings is perfect balance and harmony. Extremely challenging self-discipline to always be spot-on, second-best is to have emotional flexibility and financial agility, to be able to adjust your attitude and consequently your thinking at a moment’s notice. But most people are not as fit as that: instead they are set in their ways, do not have what it takes, and most investments prove second-rate. Hence, the property is held beyond its shelf -life as an investment and gradually becomes a problem, where the tenant’s conduct and requests are accommodated regardless.
A common reason for not wanting to sell is tax. Private investors particularly dislike paying tax even though the net proceeds from selling at peak will often be more than after management problems have set in. Another reason is what to do with the money which considering many private investors do depend upon the income from their property might in principle make one think they would be more canny at maximising were it not for a laziness that comes from being an armchair investor. The question is not what to do with the money but whether it would pay to re-invest in a prevailing market when prices are out of sync with property fundamentals. But that is also symptomatic of impatience. It doesn’t follow that one should immediately reinvest the proceeds for the sake of it: what should follow is to hold the cash until the right investment opportunity comes along whereupon it can be bought at a moment’s notice: an investment approach which held in good stead many investors during the immediate aftermath of the 2008 financial crisis. The best time to buy is when the world and his wife cannot. A contrarian approach that calls for deep thinking of a special kind.
Investment is about liquidity, about being able to at least get your money back at short notice. Inflation is present by default so can be ignored in the calculation. In the pecking order, cash on deposit is the purist form of investment, closely followed by equities (stocks and shares) which provide the most opportunity to pit your wits and skills, the sheer volume of transactions assists market liquidity and keeps costs to a minimum. Then there are alternative forms of investment of which property is especially attractive for its unique attribute: the legally-binding payment of rent and in the case of commercial property the ‘upward-only’ rent review whereby at the least the same rent as passing will endure for the contractual term.
Measuring return on investment can be benchmark-related, such as an index, or absolute. In my opinion, absolute, cash performance net of tax, is the better approach. Generally, the financial services industry thinks in headlines. Being told an investment has grown by 10% is more impressive than the true figure after adjusting for inflation and the costs of realising that gain.
Unlike shares in a property company that is quoted on the stock market, where share-price performance is subject to stock market psychology as well as the skill of the company’s managers, direct ownership of property is an illiquid investment, whose costs are hefty which means the risk of loss is greater so the need for rewarding performance to counteract has to be certain. There are however no guarantees, no reason other than emotional and intellectual know-how for your choice of particular property to succeed as an investment. Therefore, because know- how is the test that most investors fail to pass, to overcome the uncertainty and to prevent demand from becoming static, property has developed a reputation as a hedge against inflation. Consequently, people generally buy into the idea that the property market must be viewed as a long-term investment.
Long-term investment in the property market is a source of rich pickings for banks and advisers. Regardless of whether or not your choice of property performs, whether or not you do in fact become better off, a substantial percentage of financial resources is extracted from you, being one of the multitude, into lining the pockets of the few. That is why, all other factors remaining equal, the ease of management in the choice of property medium is critical. And that is why the cost of borrowing and the cost of advice in themselves will make a difference to your return on capital.
Psychological imbalance is caused by adverse influence in early upbringing, social conditioning, and peer pressure. Instead of equal measures of yes and no, a combination of positive support and constructive criticism, the cumulative affect of an overly negatively or underly-enthusiastic here and there can as the years pass make all the difference. I believe that in our heart of hearts, we are all purists. It is at the more mundane superficial levels where the impurities have crept in and toxins allowed to fester and run riot that psychological damage occurs. Naturally geared to balance and harmony, we can counter-act any deficiencies but what sort of adjustments and how much fine-tuning depends upon each individual. Only you know what you need.
It is natural to want to be better off, so choice of investment ought not be a hit and miss affair, but frequently it is. Indeed, choice, a psychological device for ensuring we are on track for our own individual aspirations rather than those of others, ought not to enter our thinking at all, but it does. Decisions, decisions. Bombarded by attention-seekers and half-baked ideas, we can, unless we learn to be ruthless become confused, thought and feeling in a state of uncertainty. (If the idea of becoming ‘ruthless’ bothers then define it as being friendly to everyone but saying no to most of them.) Living in fear, to protect ourselves from repeating mistakes, evidence is preferred to instinct. Rather than unreservedly trust intuition, gut-feeling is analysed and doubted. Instead of formulating a strategy, we disconnect from our metaphorical true path and end up buying whatever takes the fancy, the mood of the moment. The property investment portfolio is a hotchpotch which we might justify as diversification for spreading the risk but really it’s just safety in numbers.
Many people think problems of any sort are normal, but I do not. In my philosophy, a problem is a fault in direction so, essentially, it is not possible to have more than one problem at a time. In reality, having more than one problem at any time is simply fragments of the same underlying problem. Delve and you’ll find a common thread. A problem will not go away of its own accord: it may be swept under the metaphorical carpet, put to the back of your mind, but inevitably it will find a way to attract your attention. You will have to do something about it. The longer the delay, the harder it can get, the more expensive it can become to remedy. The reason problems are direction-related is to enable us and the reality we can create for ourselves to remain in sync with the ups-and-downs of life generally. About how you respond and react to whatever is happening right now, including what you are reading now and thinking about as you go. A problem must be transformed into an opportunity and the more adept you are at doing that as you go the less likely you’ll come unstuck in times of change. As I say, everything in life hinges upon the consequences of two words ‘yes’ and ‘no’. Which means problems can be avoided by taking preventative action. (Word of warning: trying to think of every possibility in advance is likely to leads to nervous breakdown.)
Applied self-development is integral to investment success. When you know yourself inside out, you’ll naturally know whatever you need to say and do and if you want to help make a difference to the lives of others what needs saying and doing. (Caution: don’t try this at home unless you feel confident enough)
In a balanced frame of mind and in the context of property investment, essentially, there is no difference between residential and commercial, or any other type of property for that matter. Both have the potential for investment, of enabling you to become better off than you are now. The only differences that can affect your prospects of success are in how the property is bought, managed, and sold. Any other differences are by-products of bias and prejudice. Both have their share of success stories, of the property that spectacularly outperforms, or the tenant whose improved covenant and financial standing enhances capital value. And both have their share of horror stories, of the tenant that goes broke or trashes the place before leaving.
Demand and supply provide the fuel for short-term action and whether change is seen as for the better or worse depends upon your ability to capitalise on opportunity. The long-term driving force is the socio-political economy and how the property market relates to what will happen in future.
At macro-level, residential property is subject to political ideology, a continual cry to build more new homes suggests shortage to the opportunist but can put a damper on prices for existing properties in the locality. Rents for residential property can increase as mortgage criteria for would-be buyers tightens, but lending relaxation can remove the froth. Commercial property can be affected by new development, changes in the law, and tenants rethinking their business priorities. Ultimately investment value of all property depends upon someone else paying more than you; and the profitability of the particular property to you depends upon how much you pay when you buy, what return you get during the period of ownership, and what you get when you sell.
For peak performance, the goal for human beings is perfect balance and harmony. Extremely challenging self-discipline to always be spot-on, second-best is to have emotional flexibility and financial agility, to be able to adjust your attitude and consequently your thinking at a moment’s notice. But most people are not as fit as that: instead they are set in their ways, do not have what it takes, and most investments prove second-rate. Hence, the property is held beyond its shelf -life as an investment and gradually becomes a problem, where the tenant’s conduct and requests are accommodated regardless.
A common reason for not wanting to sell is tax. Private investors particularly dislike paying tax even though the net proceeds from selling at peak will often be more than after management problems have set in. Another reason is what to do with the money which considering many private investors do depend upon the income from their property might in principle make one think they would be more canny at maximising were it not for a laziness that comes from being an armchair investor. The question is not what to do with the money but whether it would pay to re-invest in a prevailing market when prices are out of sync with property fundamentals. But that is also symptomatic of impatience. It doesn’t follow that one should immediately reinvest the proceeds for the sake of it: what should follow is to hold the cash until the right investment opportunity comes along whereupon it can be bought at a moment’s notice: an investment approach which held in good stead many investors during the immediate aftermath of the 2008 financial crisis. The best time to buy is when the world and his wife cannot. A contrarian approach that calls for deep thinking of a special kind.
Investment is about liquidity, about being able to at least get your money back at short notice. Inflation is present by default so can be ignored in the calculation. In the pecking order, cash on deposit is the purist form of investment, closely followed by equities (stocks and shares) which provide the most opportunity to pit your wits and skills, the sheer volume of transactions assists market liquidity and keeps costs to a minimum. Then there are alternative forms of investment of which property is especially attractive for its unique attribute: the legally-binding payment of rent and in the case of commercial property the ‘upward-only’ rent review whereby at the least the same rent as passing will endure for the contractual term.
Measuring return on investment can be benchmark-related, such as an index, or absolute. In my opinion, absolute, cash performance net of tax, is the better approach. Generally, the financial services industry thinks in headlines. Being told an investment has grown by 10% is more impressive than the true figure after adjusting for inflation and the costs of realising that gain.
Unlike shares in a property company that is quoted on the stock market, where share-price performance is subject to stock market psychology as well as the skill of the company’s managers, direct ownership of property is an illiquid investment, whose costs are hefty which means the risk of loss is greater so the need for rewarding performance to counteract has to be certain. There are however no guarantees, no reason other than emotional and intellectual know-how for your choice of particular property to succeed as an investment. Therefore, because know- how is the test that most investors fail to pass, to overcome the uncertainty and to prevent demand from becoming static, property has developed a reputation as a hedge against inflation. Consequently, people generally buy into the idea that the property market must be viewed as a long-term investment.
Long-term investment in the property market is a source of rich pickings for banks and advisers. Regardless of whether or not your choice of property performs, whether or not you do in fact become better off, a substantial percentage of financial resources is extracted from you, being one of the multitude, into lining the pockets of the few. That is why, all other factors remaining equal, the ease of management in the choice of property medium is critical. And that is why the cost of borrowing and the cost of advice in themselves will make a difference to your return on capital.
Psychological imbalance is caused by adverse influence in early upbringing, social conditioning, and peer pressure. Instead of equal measures of yes and no, a combination of positive support and constructive criticism, the cumulative affect of an overly negatively or underly-enthusiastic here and there can as the years pass make all the difference. I believe that in our heart of hearts, we are all purists. It is at the more mundane superficial levels where the impurities have crept in and toxins allowed to fester and run riot that psychological damage occurs. Naturally geared to balance and harmony, we can counter-act any deficiencies but what sort of adjustments and how much fine-tuning depends upon each individual. Only you know what you need.
It is natural to want to be better off, so choice of investment ought not be a hit and miss affair, but frequently it is. Indeed, choice, a psychological device for ensuring we are on track for our own individual aspirations rather than those of others, ought not to enter our thinking at all, but it does. Decisions, decisions. Bombarded by attention-seekers and half-baked ideas, we can, unless we learn to be ruthless become confused, thought and feeling in a state of uncertainty. (If the idea of becoming ‘ruthless’ bothers then define it as being friendly to everyone but saying no to most of them.) Living in fear, to protect ourselves from repeating mistakes, evidence is preferred to instinct. Rather than unreservedly trust intuition, gut-feeling is analysed and doubted. Instead of formulating a strategy, we disconnect from our metaphorical true path and end up buying whatever takes the fancy, the mood of the moment. The property investment portfolio is a hotchpotch which we might justify as diversification for spreading the risk but really it’s just safety in numbers.
Investment Psychology
27/March/2014
Psychology occupies the middle-ground between who you are and who you want to become, and all that that entails. To become something you have to invest. Investment is about becoming better off than you are now. How long it takes to become better off depends upon a combination of two factors: the practical and the psychological.
The practical is the time that it takes to make a profit; the psychological the level of risk that the investor is willing to shoulder. How much profit depends upon your personal definition of whether the amount of profit is worthwhile. For example, if you want to make a profit to enable you to afford a property in a different league then the profit from each proposition could be likened to stepping stones.
A plan for creating a commercial property portfolio from scratch is to buy with a mortgage then re-mortgage the equity at intervals and use the released money to buy more property.
A difference ought not to exist between investment and successful investment but it does. Property is a depreciating asset whose value fluctuates depending on the state of the market. Allowing for costs of buying and selling, management costs, mortgage interest including loss of notional interest on personal equity, and adjusting for inflation and taxes, an investment might not perform as well as imagined.
If you ignore all those factors and simply calculate profit as the difference between how much you paid and what the property would fetch were you to sell it then growth is largely a delusion.
The rate of depreciation is not a constant so that in itself is challenging. To exceed or at least maintain parity with the rate of depreciation, the investment will have to perform. Property performance is the measure of growth.
Property has a reputation as a long-term hedge against inflation but, when you invest in property, you are not buying into the market in its entirety, but a particular property. Therefore, the criteria for whether the proposition is likely to perform needs to be assessed against that particular property, regardless of what might be happening in the market generally.
It may be suggested there is never a right time to buy property but there is. There are only two times: (1) when the seller has under-priced the value of the property, or (2) when mortgages are difficult to come by.
To assess whether a proposition is under-priced, you really have to know your stuff: the technicalities and the fundamentals. If you simply assess by reference to superficial criteria (for example, yield) then a proposition could appear cheap when actually it is not.
When credit is hard to get and market activity is driven by cash buyers, most investors will be left out in the cold. When bank lending criteria is relaxed, the number of investors increases and so do selling prices.
For successful investment, a rising market is a double-edged sword: on one side, an improvement in sentiment is comforting generally so can override caution. On the other, higher prices bring better quality propositions onto the market, thereby testing buyer experience of the nature of potential and the challenge of whether the propositions are really that much better.
Most investments fail to perform, sometimes miserably, but if your luck’s in then they end up ordinary, nothing special. Two reasons investments fail to succeed is to do with misunderstanding initial yield and buying covenant.
Yield is a measure of the rental return you’ll get from the property, all being well, but it is not the only measure. Indeed, it could be the least important even though the inexperienced invariably regard yield as paramount.
Over the years, covenant, the tenant’s financial standing, has worked its way up the appraisal–ladder, so much so that it has usurped technicalities and fundamentals and created a new layer of analysis: sentiment.
If you are borrowing to buy then the cost of borrowing may need to be covered by the rental. I emphasise ‘may’ because not all investors suffer the iniquity of having to justify each proposition to a lender. Many investors have facilities that do not require them to get the bank’s permission beforehand. When each proposition has to stack up so far as the bank is concerned, the buyer is less likely to apply for a loan on a proposition that the bank would reject. Hence, the popularity of readily-mortgageable investments.
For sellers, the measure of popularity amongst buyers is heaven-sent: attractively packaged, an investment dressed up to look good and ticking all the right boxes on the buyer checklist, such as long term lease and tenant covenant, is a guarantee that the price obtainable will most likely exceed the value of the proposition.
Value is not the same as price. Price is subjective. Price is the worth of the property to the buyer, the price that the buyer is willing to pay. Value is objective, how much the market would pay. Most buyers do not see it like that; most buyers think they are the market. Their concerns are for the attractiveness of the proposition.
The negative aspects are discounted in favour of the plus points. Criticism can sound illogical and be interpreted as out of touch. In this scientific world we have created for ourselves, the only test is evidence.
Opinions don’t count for much. Pitfalls can be explained away, doubts dispelled by overlooking the blemishes. Excited by market momentum, itching to spend, money burning a hole in the investor pocket, infected with auction fever, a show of hands, enthusiasm carries them away.
Investors that think themselves the market and take comfort from prices obtained in auction rooms are living in cloud cuckoo-land. If you do not strip away the superficiality and expose the proposition for what it is, if you do not listen to what you don’t want to hear, then more than likely you are going to experience the difference between investment and successful investment.
The practical is the time that it takes to make a profit; the psychological the level of risk that the investor is willing to shoulder. How much profit depends upon your personal definition of whether the amount of profit is worthwhile. For example, if you want to make a profit to enable you to afford a property in a different league then the profit from each proposition could be likened to stepping stones.
A plan for creating a commercial property portfolio from scratch is to buy with a mortgage then re-mortgage the equity at intervals and use the released money to buy more property.
A difference ought not to exist between investment and successful investment but it does. Property is a depreciating asset whose value fluctuates depending on the state of the market. Allowing for costs of buying and selling, management costs, mortgage interest including loss of notional interest on personal equity, and adjusting for inflation and taxes, an investment might not perform as well as imagined.
If you ignore all those factors and simply calculate profit as the difference between how much you paid and what the property would fetch were you to sell it then growth is largely a delusion.
The rate of depreciation is not a constant so that in itself is challenging. To exceed or at least maintain parity with the rate of depreciation, the investment will have to perform. Property performance is the measure of growth.
Property has a reputation as a long-term hedge against inflation but, when you invest in property, you are not buying into the market in its entirety, but a particular property. Therefore, the criteria for whether the proposition is likely to perform needs to be assessed against that particular property, regardless of what might be happening in the market generally.
It may be suggested there is never a right time to buy property but there is. There are only two times: (1) when the seller has under-priced the value of the property, or (2) when mortgages are difficult to come by.
To assess whether a proposition is under-priced, you really have to know your stuff: the technicalities and the fundamentals. If you simply assess by reference to superficial criteria (for example, yield) then a proposition could appear cheap when actually it is not.
When credit is hard to get and market activity is driven by cash buyers, most investors will be left out in the cold. When bank lending criteria is relaxed, the number of investors increases and so do selling prices.
For successful investment, a rising market is a double-edged sword: on one side, an improvement in sentiment is comforting generally so can override caution. On the other, higher prices bring better quality propositions onto the market, thereby testing buyer experience of the nature of potential and the challenge of whether the propositions are really that much better.
Most investments fail to perform, sometimes miserably, but if your luck’s in then they end up ordinary, nothing special. Two reasons investments fail to succeed is to do with misunderstanding initial yield and buying covenant.
Yield is a measure of the rental return you’ll get from the property, all being well, but it is not the only measure. Indeed, it could be the least important even though the inexperienced invariably regard yield as paramount.
Over the years, covenant, the tenant’s financial standing, has worked its way up the appraisal–ladder, so much so that it has usurped technicalities and fundamentals and created a new layer of analysis: sentiment.
If you are borrowing to buy then the cost of borrowing may need to be covered by the rental. I emphasise ‘may’ because not all investors suffer the iniquity of having to justify each proposition to a lender. Many investors have facilities that do not require them to get the bank’s permission beforehand. When each proposition has to stack up so far as the bank is concerned, the buyer is less likely to apply for a loan on a proposition that the bank would reject. Hence, the popularity of readily-mortgageable investments.
For sellers, the measure of popularity amongst buyers is heaven-sent: attractively packaged, an investment dressed up to look good and ticking all the right boxes on the buyer checklist, such as long term lease and tenant covenant, is a guarantee that the price obtainable will most likely exceed the value of the proposition.
Value is not the same as price. Price is subjective. Price is the worth of the property to the buyer, the price that the buyer is willing to pay. Value is objective, how much the market would pay. Most buyers do not see it like that; most buyers think they are the market. Their concerns are for the attractiveness of the proposition.
The negative aspects are discounted in favour of the plus points. Criticism can sound illogical and be interpreted as out of touch. In this scientific world we have created for ourselves, the only test is evidence.
Opinions don’t count for much. Pitfalls can be explained away, doubts dispelled by overlooking the blemishes. Excited by market momentum, itching to spend, money burning a hole in the investor pocket, infected with auction fever, a show of hands, enthusiasm carries them away.
Investors that think themselves the market and take comfort from prices obtained in auction rooms are living in cloud cuckoo-land. If you do not strip away the superficiality and expose the proposition for what it is, if you do not listen to what you don’t want to hear, then more than likely you are going to experience the difference between investment and successful investment.