By Gerald Tay (guest contributor)
In any investments, and especially in property due to its highly illiquid nature, there are four fundamental rules of property investment ordinary investors must to adhere to if they want to be successful:
- You Must Preserve Your Capital (the ability to at least preserve the initial investment capital without losing it),
- Money Must Be in Constant Velocity (generating immediate returns)
- You Must Be In Control (YOU Control the investment, not the other way around)
- Never Invest in Something You Don’t Understand Well
These are the four rules I followed religiously ever since embarking on my property investment journey 10 years ago, and these crucial rules have helped cushion my property investments in the ups and downs of the market over the years. These rules are not entirely created by me, but they have always been used by successful investors and entrepreneurs whom I have had the privilege to learn from. One of them is my late wealthy grandfather who had built a multi-million dollar business and property empire by simply adhering to these four fundamental investment rules.
Rule 1: You Must Preserve Your Capital
Sounds logical and simple enough, yet many gullible investors forget this rule when greed, arrogance, ignorance and a gambling streak arise.
When an investor tries to find those investments that will give them the best possible returns on their investment capital, they will often absent-mindedly ignore the potential downsides of the investment and economy. Greed and arrogance will cause them to pursue investments that promise so called ‘high returns’ that look good on the surface with unsubstantiated claims of potential high rental yields or capital gains that the properties or investment can fetch.
Take for example, buying overseas property in exhibitions and property seminars. Smart overseas property marketers know greed and ignorance always sells, and they know how to use it to prey on unsuspecting investors who may be completely ignorant of the market, especially in an overseas market which one may be unfamiliar with. Greed has foreshadowed fundamentals. Most of the time, the investor does not realise it unknowingly, and we all know that greed will always lead to dire financial consequences.
If you want to do well in any investment, you must possess some basic business knowledge. Knowing how to differentiate between a winning investment and a losing investment takes many years of experience, humble learning and a basic understanding of reading a simple business financial statement. The problem with most amateur investors is that they cannot even manage their own personal finances properly, or to distinguish what an asset and liability is.
Rule 2: Money Must Be in Constant Velocity
If the investment does NOT give immediate returns today, it’s not an investment. Any investment bought on future price gains and yield is gambling! For example, buying a property off-the-plan only to see completion four years later is more of a consumer choice than an investment choice.
If you have an obese bank account with many other income producing assets, I say sure, go ahead and speculate on some off-the-plan property projects or other investments that will ‘ripen’ years down the road. You can afford to wait and play the game patiently.
However, for the ordinary investor, where time is of crucial importance in growing wealth, who has yet to secure his retirement funds, and has no passive income from zero assets nor a million dollars in the bank account today, ‘trapping’ your limited capital resources for four years or more with zero returns in the period (not to mention the potential downside and economic changes that might happen in four years’ time) can prevent you from seizing other potential opportunities to grow that wealth earlier.
Rule 3: You Must Be in Control
It’s called the control of money. The rich get richer, while the poor get poorer because the rich understands the importance of having control in any investment. They control the money, sufficiently protecting their downside. They control the investment and the returns they want through managing income cash flow and expenses.
Holding Power is NOT a protection of downside: “Never mind, my downside protection is if the property cannot be rented out or fetch the price I want, I can always stay in it or use it myself.”
It’s the same as saying if I fail to woo the girl I like, I can still hope to win her heart back with more flowers and expensive gifts. There are plenty of other good choices around. ‘Dump’ the losing property and move on. Holding power is for people who have already made their wealth, and not for ordinary investors who have very limited capital resources for more productive uses in other opportunities.
Property developers take their initial investment back within five years by selling units to property buyers as soon as they can. Banks (and even loan sharks) take back their money lent to borrowers in the form of immediate monthly loan re-payments as interest income.
The middle class becomes poorer because their one and only ‘Get Wealthy’ strategy is to buy off-the-plan-properties and have mutual funds for retirement plans. There is no control here. The only people in control are the property developers, the economy and the fund managers themselves.
Rule 4: Never invest in Something You Don’t Understand Well
You don’t know what you don’t know.
We need to understand Risk Vs Risky. All investments come with risk, but not all are risky – if you know what you are doing. A professional mountain climber knows he/she faces risk when doing this sport, and they love to do it as it gives them an adrenalin high and a strong sense of satisfaction (‘high returns’), but he/she does not view it as risky because they follow a set of strict rules, proper system, proper safety techniques and constant training to minimise those risk associated with mountain climbing. The untrained ones like us, however, will view mountain climbing as a very risky ‘investment’.
The point is this: If you do not know what you are doing, it is considered risky. And surprisingly, most untrained investors (arrogant and ignorant) think they know what they are doing.
Focus on ONE key investment area you know very well, before even considering venturing into the next. Focus, NOT diversify! Diversification is for those with no control and do not know what they are doing.
David Beckam, the famous professional football star, does not say he will diversify playing professionally into other sports like golf (and hope to become another Tiger Woods) simply because his managers tell him there is a danger of tearing his leg ligament just by playing soccer alone. Yes he plays golf but that’s a hobby he can afford and not a career.
Luciano Pavarotti, the famous opera singer does not diversify into singing rock songs, because there are fewer opera listeners and rock is more popular.
Take commercial and industrial property investment for example. With massive cooling measures on residential property sector, many unwitting home-buyers have gone into the commercial and industrial sector. Being only residential buyers for their own homes, most small-time ordinary retail investors have very little or no knowledge of how the commercial and industrial sector works, yet they invest on hopes of returns (if any). The investment dynamics and structure of the commercial and industrial property sector is completely different from that of residential homes.
Implement Strict Personal Investment Criteria and System
Do you have a personal investment system with a strict set of investment criteria?
I follow all four of the fundamental rules strictly and if an investment does not meet just one of those rules, I do not invest at all. All my property investments are ‘low risk, high returns’ (returns which meet my criteria according to my personal goals) because I understand them very well, they fit my strict personal criteria and system, and they adhere strictly to the 4 Rules of Investment.
You need to have constant training, ground experience and implement a set of rules and system catered specifically to your own needs and life priorities and most importantly, follow them without fail! I have my own set of strict investment system and criteria, and I follow them. If a particular investment does not meet any of my set criteria, I do not invest, no matter how promising the returns are.
Having a personal investment philosophy would also help tremendously. Having first evaluated these goals will help determine one’s preferred investment returns, to preserve or grow one’s wealth, and what sort of investments should you invest in.
As Sun Tse‘s Art of War says, “Knowing yourself and knowing your enemy is the key to winning all battles.”
Follow strictly your rules of engagement for any investments. The investment can either be your dearest friend or it can be your deadly enemy. You decide.
By guest contributor Gerald Tay, CEO of CREI Academy Group, who exposes widely-held property investment myths that have proven highly ineffective in creating wealth, and prevent a comfortable retirement for the ordinary investor.