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Lessons from the World’s most successful investor

First Published: February 2015 | Available in: Property Articles Your Property Network

By specialist property accountant Stephen Fay ACA

Warren Buffett is widely acknowledged to be the world’s most successful investor. From a standing start he has built up a personal fortune of around £50 billion – and Buffet is well-known for his witty quotes, and his willingness to pass on his knowledge. He is known as the ‘Oracle of Omaha’ and the annual general meeting for his company, Berkshire Hathaway, is a mecca for investors world-wide, seeking pearls of wisdom from the world’s richest investor.

This article looks at Buffett’s most well-known tips and sound-bites, and looks at how these might apply to property investors.

“Risk comes from not knowing what you’re doing”

Property investors are often advised to diversify their interest to protect themselves from risk. But, the most successful investors take the opposite approach – they concentrate their activities and investments into just the few areas that they know well, and trust their own skill and judgement. Buffett refers to this as his ‘circle of competence’ – he only invests in companies that he understands – for example, he famously avoids technology investments.

Property investors should focus on becoming an expert in something – whether it is HMOs, LHA tenants, or a particular geographic area. Learn your ‘trade’, so that you know your area of expertise and focus on it. Don’t be distracted by ‘shiny penny’ alternative investment areas or types, that detract away from your core competence – it’s better to be boring and profitable, than interesting and loss-making!

“The best thing that happens to us is when a great company gets into temporary trouble… We want to buy them when they’re on the operating table”

Property investors should try – wherever possible – to buy investment properties from ‘motivated sellers’ – people with financial issues, divorcing couples, probate sales etc, are all scenarios where a bargain can be had.

There is always an ethical angle when dealing with motivated sellers, but for example, many motivated sellers of property don’t have the common sense and self-discipline to keep some cash on hand – and so when life throws them a curveball, they then have to liquidate their property asset quickly – which means a lower price, as is the case in all fire-sale scenarios. However, bear in mind the next quote!

“Price is what you pay; value is what you get – whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down”

Property investors should buy quality assets – whatever “quality” means in the investors’ own business. In the ‘BMV years’, many investors bought any old property so long as it was selling at a discount (or, in many case a “supposed” discount!). Many of these ‘BMV investors’ now hold inferior properties in terms of the building itself, and often the yield is poor.

Everyone wants a bargain, but it’s far better to get “value” – a property that isn’t necessarily the cheapest, but might be a high-yield HMO in an ‘A’ area, a property that’s ripe for value-adding extension, or a property than can be split, improved, or refurb’d cost-effectively.

For too many investors, price alone is the only criteria for ‘a good buy’.

“The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, “Swing, you bum!”

Some property investors are tempted to buy properties that don’t fit their strategy – seduced by a discount that is below their stated ‘discount requirement’ (or yield), or in a different area than they normally invest in, or just because they were presented with a deal and they get excited…

Buffet’s point in this quote is that there is no rush to wealth, and it’s far better to be patient and disciplined and build a portfolio (whether stocks or property) that fits your own personal criteria, than to buy property for the sake of it – there are around 22 million properties in the Uk, and most investors only want to buy around 10-20 of them … so you can afford to bide your time and be choosey (even when you’re cash-rich!).

“You only have to do a very few things right in your life so long as you don’t do too many things wrong – don’t ignore Rule Number 1: Don’t lose Money”

Buffet’s point is especially relevant to property investors – avoiding a serious property mistake can be as important as making a ‘star’ investment. Unlike many businesses, making a property mistake can means a very serious financial setback – liquid funds now tied up in an illiquid investment, the sheer cost of buying and selling property even if sold at break-even, and the opportunity cost of tied-up capital (the deals you COULD have done if you weren’t invested in a dud deal) – property is worse than many investments, including shares, in that just a single bad deal can cause major financial pain (remember that when auction fever sets in!).

“Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway”

This is a classic Buffet quip! But, a serious point is being made – beware advisers and gurus who talk a good game but can’t themselves demonstrate financial performance to match their theory.

“You only find out who is swimming naked when the tide goes out”

A famous phrase … meaning when everything is rosy, even a poor investor looks good – e.g. during a sustained period of low interest rates. And, while holding cash reserves may not be “sexy”, when times change, the more conservative investors will prosper, and those who fly by the seat of their pants get found out…

“When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever”

This is a fundamental piece of investment advice – why would you sell a quality investment? So many property investors refer to some undefined future point when they will sell their properties – even the best ones. But, the question is – what are the resulting funds then invested in to produce a decent income? Why not keep a good quality property forever, and bring in paid support – e.g. letting agents – when old age prevents a more hands-on approach.

“I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will”

Property investors who buy properties that are attractive to tenants are in a strong position – and even a useless letting agent can let a great property.

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for 10 years”

Imagine if every time you buy a property, you can’t sell it for 10 years – how would that affect your property-buying decisions? Surely, this would focus your attention on yield, and therefore profit, and not on some future uncertain capital gain. And, isn’t income production the main reason for investment at the most fundamental level i.e. spending your own money plus someone else’s money on a property, in the expectation of receiving MORE money back in the future.

Suppose that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”
Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in the imagination of a fool does such a response exist.”

A sound lesson in investing – don’t let the tax tail wag the dog. Making a profit is a good thing, even if there is tax to pay on it. Some investors seem more upset by having to pay some tax, rather than the good news of having made a profit.

I had to finish on a tax point … of course!

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