By guest contributor Gerald Tay
Here are four of my all-time favourite Conventional Wisdom Myths for the ordinary investor. I define an ordinary investor as anyone who’s holding a full-time back-breaking job, dependent on a job for income, maybe has a family to support, has some money to invest, dreams of becoming wealthy one day, and wants badly to get out of the rat race.
There is tons of information out there on how to invest in property: the internet, books, seminars, newspapers, financial “gurus”, property “experts” and even your next-door neighbour. Most of this “information” contains a grain of truth and a lot of misinformation.
How do the “gurus” fool so many people for so long? How do they get people to believe in what they’re selling even after it has been proven time and time again to be a bad idea? I just realized one day how dumb the conventional wisdom is and questioned why everyone believes in it.
Many ordinary investors have been fed with investment “knowledge” that is often unusable, impractical or even nonsensical, by those with only self- interest to gain from a sale or “experts” who know no more than the man on the streets.
Here are the four Conventional Wisdom Myths for the Ordinary Investor:
1. Buy and Hold a Property because it’s a Good Long-Term Investment
Just like equities and other investments, the word “Long-Term” is often misused and misunderstood by many. It’s often uttered by salespeople who are out of touch with the changing dynamics of our highly volatile world. I mean, it’s sure going to be a long term investment for you… if you buy at the wrong price or the wrong property.
Any long-term investment may lose money for an investor if he or she is insufficiently educated (think mutual funds). Assuming that an ordinary investor is lucky, his “anyhow invested” property goes up in value with the inflation rate. But he or she has already lost periods of great opportunities to invest (during property down-turns) that will give exponential growth of passive income (cash flow) to help him or her to get out of the rat race. The opportunity cost is too high.
Even a dead fish will swim downstream. A property that goes up in value by the inflation rate is called inflation growth and not investment growth. A great property investment will always reward a smart investor with greater than inflation returns plus a good positive cash flow every month.
The baby boomers in the USA are now facing a retirement crisis because they foolishly believed that property was always a good long term investment for retirement. However, the 2008 US mortgage crisis proved fatal and dashed those retirement dreams. They actually believed that such an event would never occur within their lifetime!
2. Buy, Hold and Sell Property for Capital Gains
You’ve heard people who boast about how they make a fortune buying and selling properties, and you’re eager to learn how they do it. What if I say this strategy is no different from gambling? And you don’t need to learn to gamble. I rather you go buy 4D or TOTO which is a lot less expensive (of course the odds are different).
I call this the Buy, Hold and Pray strategy. As my late multi-millionaire grandfather put it, “Amateurs invest on capital gains. True-blue investors invest on immediate cash flow.” Nobody knows or can predict the future, not even the gurus. A good investment makes money for the investor on the Buy, not on the Sell.
You should prioritize cash flow over capital gains. Your immediate cash flow return should be at least on par or greater than current inflation rate. If you wish to, you should be able to buy a good investment property, hold for passive cash flow and never sell!
3. You Can Make Millions Investing In Property
Anyone who wants to sell you overnight success or wealth is not interested in your success; they are interested in your money. Enough of over-hyped marketing gimmicks from seminar “gurus”! Unless you are a property developer who buys a piece of land, builds and sells multiple units wholesale, you can almost never make millions by simply being an ordinary retail investor.
It’s a complete myth that one needs to make millions in property investment to become rich. As an ordinary investor, you don’t want to become a millionaire on paper; you want enough passive income to get you out of the rat race. And you don’t have to buy multiple properties (it’s a bonus if you can) to retire wealthy. Just one or two great income generating properties with reasonable returns will be enough.
4. You Must Invest Constantly to Beat Inflation
Never invest for the sake of investing. Invest only because you want to, not because you need to. Invest when the investment makes sense. If it doesn’t, don’t invest! Billionaire Donald Trump says it clearly, “Sometimes your best investments are the ones you don’t make
I’m personally out of the Singapore property market for now (that’s why I’ve more time to write articles like this). Currently, I‘ve cash sitting in the bank deposits with low returns. Am I even concerned about inflation? No. Why waste your money buying over- inflated assets with returns that barely beat the current inflation rate? It’s safer for it to be in the bank (at least I know my money will be there) than to risk losing it.
But when it’s time to buy, I’ll go in big time. Is it not risky, you might ask? Not if one is educated enough to see and ride on opportunities when presented.
Who’s naked when the tide turns?
There are many today who are buying on hopes of capital gains in a booming property market. Let’s see who stands naked when the tide turns. Smart investors know how to make money both ways, amateurs only during boom times.
Invest on common sense and logic. Invest with your head, not your heart. Be a smart property investor.
By guest contributor Gerald Tay, CEO and Chief Trainer at CREi Academy Group.