Value, Passive, Index, Residential Property, Kiwi Saver, Land, Black?

Investment Perspective – July 2017

“Neither the investing method nor the fundamentals of the business are right or wrong because the mood of the market is favourable or unfavourable toward the “stock”. That is because when you really think about it, “stocks” (shares) are all about the financials and the trading price, the share price… the cash up value. What matters more is the economics of the business” 

Peter Flannery

Question: Is black a colour?

Answer: No. 

Black is a shade that absorbs the light from other colours. 

Question: what is the best investment?  A passive index fund, a managed fund, a KiwiSaver scheme, momentum investing through share brokers, residential property, value investing, land or…? 

Answer: Depends …

It comes down to investment / investment method and investor match.  Suitability for the investor is the key to the best investment and investment success.  Also, productive assets that grow will likely outperform long term.

Finding The Best Investment

The typical way to work it out is to compare assets using historical data showing how the price of each asset has “performed” over time.  Whilst somewhat useful, this type of analysis often concludes what the author wants you to believe.  The numerous variables used in the calculations can be selected so as to deliver the desired outcome.  Spotting self-interest in the analysis is not always easy.

The best investment is about what and where to invest, but much more about, how.  Methodology is therefore also important.

Your Own Private Enterprise

This is not to say that you cannot make money out of all of the above including bare land as well. 

Successfully owning and running your own business would likely provide you with a better return on your time, effort and money and certainly use capital at a higher rate than big businesses listed on the share market or residential property.  Simply, your own business can make the most money.

Suitability is important because if I do not know how to run a business (as distinct from being self-employed) then chances are, I will make a mess of it and it will not be the best investment for me. 

To become a millionaire business owner, I will need to understand how to build a team around me based on their unique ability and the roles required within the business.  When they come to work because they want to and they go out of their way to look after the customers of the business, then I have the makings of a good team.  Also, once I implement rigorous process, I then have a system that can consistently generate reliable cash flow.  Add in proper use of technology and then develop intellectual property, not only do I have growing cash flow but growing capital as well.  The best part is that the pace of growth is possibly better than anything else. 

Residential Property

Just for the sake of discussion, we can look at the New Zealand investors favourite (actually 2^nd behind money in the bank!), which continues to be residential property. 

If for example, I was not comfortable managing tenants, not able to tolerate debt, not motivated to look for properties with good economics, then investing in residential property would likely offer limited success – a poor match.

To be clear, the leverage of property (the debt against it) is what makes it work.  Over the last 30 odd years or so, what has also been helpful is the liquidity bubble, as it has grown and grown.  So to have residential property prices as a result.

Easy money conditions, growing levels of debt, declining interest rates, along with some supply and demand pressure (particularly in New Zealand) and we have ideal conditions for investing in residential property. 

Long story short, the success of residential property in New Zealand and other countries like New Zealand is due in part to variable economic conditions.  Indeed, it is a specific set of circumstances that have come together that are unusual and may not last. 

The question is, when we take away even one of those market related conditions, where does that leave residential property as an investment?  Well, by the time we take into account rates, insurance, along with the cost of repairs and maintenance, the returns can resemble those from a term deposit in your nearest bank. 

By the way, I regard residential property as a useful asset and continue to include it in The Sustainable Wealth Model for my clients who are still in the phase of ‘getting the money.’  What I like about that model is the fact that we do not rely on property as being the only game in town.  In other words, we can take it or leave it because we have other options. 

Land

This brings us to bare land.  Those who own land and have done so for many years can be unshakeable in their faith around land (their confident motto is…”they are not making any more of it!”). 

Although I am generalising, they often do not have much of an understanding about other forms of investment (not always true) so just as those who have only ever placed their money in the bank do not know anything else or those who have invested in residential property can be biased in that direction, those that have invested in land, over time, will have seen the capital value grow and therefore can be blind to other, just as useful investment options. 

No problem with land where the price rises over time, however somewhere, we need to be able to generate some cash flow off that land. 

Arguably, bare land by itself without an income stream is not ideal.  This becomes clear when you put some numbers on a spreadsheet and compound up the returns over 15 or 20 years.   

Whilst I do not disagree with the notion that land is secure, this is often borne out of fear or a lack of understanding about how other investments are also secure and profitable. 

The fact that they’re not making any more land is just a fact.  It does not mean though that other assets and other forms of investment are not also secure (although if you listen to the popular media, it is understandable how some have a mistrust, even a fear of investment assets that they are not familiar with). 

Productive assets such as big businesses listed on the share market also represent a worthy option for investment.  The innovation and the leverage provided by a well-positioned business with robust economics is difficult to beat.  The richest people in the world invest in productive assets (usually not property).

Of course, if I have no idea about how to go about investing in big businesses listed on the share market and give it a go, the chances are I am going to be successful by chance more than by design.  The chances are I will not be successful.

There is plenty of information available for those wanting to have a go through share brokers. The methodology though is momentum, which, a bit like the use of passive index funds, is okay if you are not that worried about the long-term returns. 

Passive Index Funds

Investing in passive index funds such as exchange traded funds (ETF’s) that are low cost has become popular around the world over the last few years.

Indeed, this type of investing approach for those who have little concern about the long-term outcome can be quite suitable. 

Investors get access to investments in a way that is easy and low cost. 

It is useful though to understand that the so-called ‘passive’ index funds such as exchange traded funds are not the passive way of investing that many people believe.  That is simply because they struggle to reflect the indexes in which they invest.  Therefore, by default, they can be arguably considered to be active.  Also, just wait until there is a significant general market price correction – those passive index funds will reflect the index against in which they invest straight away…  i.e. a 15% market drop will mean a 15% loss on that passive index fund.

However, that is just semantics.  The bottom line with these low cost, passive index funds such as exchange traded funds boils down to an easy approach to investing, the low cost structure and to a lesser extent the taxation. 

The tax issue is a little complex and can depend on individual circumstances, however for New Zealanders, mostly there is limited advantage or disadvantage either way with exchange traded funds as a form of investing (remember though that individuals who generally are active traders can be taxed on their capital gains, which can be treated as accessible income). 

Passive index funds, by nature, whilst not exactly passive, nonetheless usually satisfy the low trading frequency requirement for Inland Revenue generally.

So, this approach to investing offers low cost which is a real advantage, but limits returns to what ever the market does – a real disadvantage, particularly long term.

Kiwi saver

For those with little understanding about money, how to invest and those with limited ambition around investment outcomes, Kiwi saver can be appropriate.  Kiwi saver is one of those high cost managed funds that uses modern portfolio theory to manage risk.

Kiwi saver now appears to be gaining brand strength as an option and is encouraging many to save money where they otherwise may not have bothered.  That is definitely “all good”.

Using ones retirement scheme as a home ownership plan sounds clever for those going after their first home.  I wonder though how many will ever crunch the numbers to see the damage this does to the end result (this part of it is not all good)?  Just saying…

Value Investing

Value Investing is sometimes wrongly described as long term buy and hold or just buying shares that are cheap.

Actually, Value Investing is more about methodology than an actual investment asset.  

At WISEplanning, we can apply this method to big business, small business and residential property.  So, for those investing in financial assets it is about investing in a (big) business with sound economics at the right price.  We can keep costs under control too because we buy the business rather than play the markets.  This means lower transaction costs and also reduces the chance of investing error around market timing. 

For example, portfolio-rebalancing techniques commonly used by fund managers and share brokers can see investors move in and out of the same business on several occasions.  Each buy and sell costs money.  There is also the real possibility that the selling and buying can be poorly timed, costing more money.

We prefer to buy good businesses and hold as long as possible – thus minimising timing mistakes and transaction costs.

Black and Investing

If I believe black is a colour and not a shade no matter what the facts are, then black to me is a colour.

If I believe that passive Index funds, residential property, land or money in the bank is the best investment, then that is likely where it stays.

Being open to the less than obvious facts and being prepared to match yourself with investments and investing methodology that can generate better results is a good place to start making more money.

“Calling someone who plays the markets an investor is like calling someone who repeatedly engages in one night stands, a romantic.“

Warren Buffett