What I tell family and friends about investing
by Neil Jenman
Article written and provided by Neil Jenman from Jenman.com.au . To see the original source of this article please click here. https://jenman.com.au/the-property-boom-will-end/. Neil Jenman is Australia’s trusted consumer crusader. He can support you, all the way, from choosing an agent who will get you the highest price guaranteed to when your removalist comes! You get an unprecedented level of total support. All for free. To find out more visit jenman.com.au
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In 1972, I was an office boy in a real estate office in Yeppoon, a Central Queensland coastal town. The area had been booming for years. But, for me, it was too late. I had missed my chance. I should have bought earlier when prices were lower. The salespeople in the office, all old men (aged 30+), felt sorry for me. The boom had priced me out of the market. The glory days were gone. Never to return.
Of course, like most people who make predictions in real estate, the old salesmen were wrong. Within four years – at the age of 21 – I had moved to Sydney and bought my first home. It cost me the equivalent of my year’s wages – about $28,000.
Another four years went past – and my first home was still worth what I paid for it. What happened to all those predictions about real estate going up? Maybe the old salespeople were right, after all. The booms were over. For good. Never to return. The gloom had set in. It was clear that “real estate was no good”. That’s what everyone seemed to be saying.
A year later I nearly sold my home for $42,000. At the last minute I pulled out. I had a feeling the market was going to go higher. And so, instead of selling, I bought another home. I paid $37,000 (at an auction. I was prepared to pay $40,000. So began my love of buying at auction).
Another couple of years went past and I sold my first home for $72,000. It had more than doubled in less than seven years. The boom was back.
THE 8 BIG Ws OF PROPERTY INVESTING.
You’ve probably heard that “real estate doubles every seven years”. That statement is both true and false. It depends where you buy and when you buy.
Remember those two W words – Where and When. I’ll give you more soon.
In the early 2000s – when the market was gloomy, I bought a home in Tasmania (a place where I’ve had great success investing) for $80,000. Seven years later, when the market was booming, I sold it for $160,000. A near-perfect investment.
Another seven years later, when the market was gloomy again, I bought it back (yes, the same home) for $165,000. Almost another seven years have now gone past. The market is booming again, and this home is now valued at $350,000 (more than double in less than seven years).
Can you see the pattern? It’s so simple, it’s almost embarrassing.
I buy in a gloom, and I sell in a boom.
And that’s what I’ve been telling my friends and family for years. Buy in gloom, sell in boom.
Which means this: Do not sell in a gloom. Do not buy in a boom. And certainly, don’t sell at the bottom of the gloom, or buy at the top of the boom. That’s what most people do.
A couple of years ago – just before I wrote an article about “the coming boom in Victoria” – one of my sons bought a home in Ballarat. The market was flat – close to another gloom. Now the boom is well under way in regional centres. The home has increased greatly. Ditto another home in Tassie for another family member – which has increased about $100,000 in the 12 months since purchase.
W NUMBER 3 – WHO!
As well as knowing when to buy and where to buy. You need to be very careful from whom you take your advice. That’s another W to remember – WHO!
In 2008 – when get-rich-spruikers were urging naïve investors to buy property in country towns (especially mining towns) – someone bought a block of land in my hometown (in Central Queensland) for $108,000. It was a true crazy boom (meaning it doesn’t make sense). For eight years – from 2011 to 2019 – once he realised his mistake, this naïve investor tried to sell his block of land. He started at $100,000 – after a year, no takers. He reduced the price again and again and again. Year after year after year. The population in our town is 190.
Eventually this block of land was for sale for $25,000.
My 19-year-old son had been working for four months since leaving school and had saved most of his salary (thanks to lockdowns and no social life). He contacted the agent and offered his savings. That was last year in 2020. The owner accepted the offer of $10,000. After 12 years land which cost $108,000 had re-sold for $10,000.
Again, be warned about WHO gives you advice. My son had me. The naïve investor paid thousands to some get-rich seminar guru.
W NUMBER 4 – RIDE THE WAVE!
In the late 70s, when I began to understand some of the principles (rules, if you like) of real estate and the market was starting to boom, I bought and re-sold many homes. It was the equivalent of real estate surfing. I was riding the wave of the boom.
That’s another W with property and investing – WAVE.
Ride the wave as it’s building, not when it’s at a great height just before it crashes.
As it did. The gloom came. The market crashed in many areas.
People were caught in one of real estate’s most horrible traps – negative equity. That’s when the amount of the loan is more than the value of the property.
Of course, you’re now going to be asking the question everyone asks: When does a boom or a gloom end?
Here’s a fact of property or any sort of investing: You can never pick the exact top or the exact bottom. I have never heard of anyone doing such a thing consistently.
If you buy when a market is starting to rise, it means you will never buy at the exact bottom of the market. And if you sell when the market starts to boom – or, if you are smart about it, when the wave is climbing to a great height, you will never sell at the peak of the boom.
But that doesn’t matter. That’s part of a pragmatic strategy.
You will get yourself into all sorts of trouble – and not just financially – trying to sell-out at the top of a market and buy-in at the bottom.
It will psychologically drive you wild.
Many times, over my nearly 50 years in real estate, I have seen people sell for far less than they could have sold. When asked, “Why didn’t you sell when the prices were really high?”, they all give the same reply, “I thought it was going to go higher.”
There is a great investing maxim: You never go broke making a profit.
But you can miss-out big-time if you try to time the exact top of the market.
Accept that you cannot pick the exactly high or low of a market.
But here’s what you can do:
W NUMBER 5 – WATCH!
If you watch a market carefully, here is what you will see: Before a market booms or glooms, it starts to boom.
The same thing happens in the gloom. The market starts to slow down.
Rarely does a market explode overnight. The same with the gloom. Rarely does it crash overnight. Unless it’s tremendously over-heated.
If you watch it carefully, you will see it clearly. Markets start to rise before they boom. At first, there are just a few people buying, but enough to push prices up.
And then the crowds come. And then the madness comes. And that’s when I stand back.
Unless it’s my dream home that I have been searching for all my life, and I can easily afford it, I never join the stampeding herd.
If there is one thing I have learned in my life that has helped me more than any other thing – when it comes to investing – it’s this: Most people are wrong.
Oh sure, they often seem to “prove” me wrong. I told one of my good friends late last year that I thought the Sydney market was far too hot. I suggested alternatives.
But no, he charged in, elbowing aside other buyers to buy a semi-detached home in Newtown for $2 million. I consider that to be far too much. The rent return is about 2 per cent.
Now, a year later, he takes great delight in telling me that agents are saying he’ll “easily get $2.5 million.”
So, sure, I look wrong. But let me give you this analogy: Would it be smart to wear a blindfold and run across an eight-lane freeway? If you make it across, you make a profit of half a million dollars.
But not for me. That’s a risk that, in my opinion, turns into a gamble. It does not pass my seven word-question test.
W NUMBER 6 – KNOW THE “WORST”!
Luckily, I have lived my financial life based on a sixth W. It stands for the ‘WORST’.
I always ask myself a seven-word question: “What is the WORST that can happen?”
I have always been cautious – to extreme lengths. I may be a risk-taker, but I am not a gambler. I take calculated risks – all of which involve asking the “worst scenario” question. I am not kidding when I say this: That question has saved my financial life. Just as I have seen it ruin the financial lives of so many people – those who were so focused on the best that could happen they gave no thought to the possible worst. These are the people who make the most common mistake in any form of investing – believing that the present conditions are permanent.
When the market is booming, they think it will never end. They think it will just keep going up and up and up and up. That has never happened. All booms end.
To my knowledge there has never been a boom – of any sort, in any thing – that has not ended. And often badly.
These people – the majority – also think glooms will last forever. The number of times I have heard the four words, “The market is stuffed.” For me, that’s time to buy. In the mid-late 90s, the beautiful city of Adelaide was about as gloomy as glooms can be. It seemed everyone wanted to sell, and no one wanted to buy. The headline on the front page of their newspaper, The Advertiser, screamed that the population of Adelaide was tipped to fall below a million.
That was a great buy signal.
And so, I bought several properties – all ranging from $50,000 to $85,000. So did many of my friends. We ignored those who said we were “mad”.
Between the next seven and 15 years, we sold those properties – ranging from $190,000 (for the ones that cost us $50,000) up to almost $300,000 (for the ones that cost us $85,000). We bought in the gloom and sold in the boom.
A boom is the best time to sell. If you are going to get out of a property – whether it’s your own home or an investment – the best time to sell is in a boom.
And that’s what I am telling my friends right now. Sell now while you can. Agents will always tell you that it’s always the best time to sell (or buy). But now really is the best time to sell – if the market is booming in your area – as it is in most. The boom will not last.
As I said on Twitter this week: “Please be aware. The property boom will end. Probably badly. Be careful.”
Albert Einstein was a genius, one of the smartest people who’ve ever lived. He said, “If you want to know the future, look at the past.” Every property boom in every country at some point in time has always ended. Just as night follows day, a boom is followed by gloom.
So many people asked me “WHEN”.
Well, come on, please. We are not children anymore. We do not have a fairy that will grant us those three great wishes, one of which would be to have next Sunday’s newspaper with all the lottery and horse racing results.
If you want to be successful at anything – and that includes investing – you must do something that’s quite out of fashion in these modern “entitlement” times.
W NUMBER 7 – WORK!
This is not a racetrack. I am not a tipster telling you which horse to back. I am trying to tell you what I have learned from a lifetime of observing real estate. I work earnestly and diligently at gaining as much knowledge as I can.
The more you know, the more you grow. The more you learn, the more you earn. On it goes.
Getting rich without work scares me. The aim in life is to be happy not rich. Of course, being financially secure can increase your happiness in that it gives you freedom – and prevents that dreaded curse of always having to worry about money. But trying to get rich quick or to do it without working is not something that leads to happiness.
Gandhi once said that seven things will destroy us. The first is “wealth without work.”
To “work” at investing begins with something as simple as reading a great book. Recently I wrote about a book I discovered on investing that is as good as any I have ever read. It’s up there with Max Gunther’s Zurich Axioms. It’s called Richer, Wiser, Happier and is written by William Green.
I often speak with people who have down-sized and have large sums to invest. They are far too eager to rush out and invest. As if investing is going to be illegal. I tell them to slow down, to think, to wait. I give them a three-word suggestion: READ THE BOOK. It is a must-read book.
From my decades in the real estate industry, from the thousands of hours I have spent studying real estate, from the hundreds of books I have read – and, from my own investing life – here’s what I know for sure: The property boom – especially as it is in the two big cities of Sydney and Melbourne – will end.
As the wisest investors know, it’s impossible to predict when a boom will stop, but the outcome is certain, it will stop. And my feeling – and it’s only a feeling (albeit strong) – is that the places where there has been the biggest boom will be places where we will see the biggest gloom.
To be sure, there are some places where the wave still seems to be building – such as many of Brisbane’s mum-and-dad suburbs (like Runcorn). And many regional centres still seem to have short-term upside potential. But I am not going to tie that blindfold over my eyes and sprint across the freeways of Sydney and Melbourne.
It must be remembered that it takes no intelligence to buy. Indeed, in many cases, it’s stupidly easy to buy property – and the more someone is urging you to “buy now”, the more stupid it is to deal with such people.
When buying real estate, you must avoid the so-called “experts”. You need to learn the danger signals – and the words, such as “rental guarantees” and any company that has lots of great reviews from those who have bought (but never sold) properties. Thousands of investors never realise they have been duped until they decide to sell. It takes no brains to buy real estate.
Sure, it’s tempting, when everyone else is buying property and it just seems to keep going up and up and up and up. But as one of the world’s greatest investors, Sir John Templeton, once said: “The four most expensive words in the English language are: This time is different.”
The best investors are not like most “investors”. They don’t care about being criticised or abused. Here’s what I’d like to say to anyone who criticises me for my caution with investing beliefs: “I’d like to compare my investing record alongside yours.”
I am almost embarrassed with my investing performance over the years. Embarrassed for two reasons: First, on how well I have managed to do. And second, on how simple it has been. If I could give you just one lesson – aside from my passion for knowledge – it would be this: Do the opposite to what most people are doing.
Don’t buy when there is madness in the boom. That’s the time to sell. Last Friday, my wife and I sold a property for a large sum. People ask the common question: “What will you do with the money?”
And that brings me to the final W.
W NUMBER 8 – WAIT!
Why the need to rush out and buy? Especially in a boom. To quote John Templeton again, “It is impossible to produce superior performance unless you do something different from the majority.”
Think please. Thinking is uncommon in investing. But think of his words. Impossible. Different. Majority.
Right now, in so many areas, the majority are buying. I am not going to join them. I repeat: The boom is the time to sell. And then, when you do sell – and you are cashed-up – you need to learn the beauty of patience. Of waiting. It takes no brains to say yes. It takes intelligence and character and courage to say no. Especially when everyone else is saying yes.
As another famous investor, Warren Buffett, says, “The difference between successful people and really successful people is that really successful people say no to almost everything.”
Ordinary property investments – especially those where the person selling them (the agent and the developer) is making a huge profit – are like buses. There’s one coming every minute.
But the good deals, the best buys, the ones that will set you up for life, well, you must wait for those. Maybe you will have to wait for a year, maybe five years.
But I can promise you this:
If you stick with the Ws mentioned in this article, you will become very successful with investing. I know many successful investors. Without wanting to seem immodest, I am one of them. I know someone who bought a property and was the subject of laughter for “paying too much”. That property – which has been held for more than 20 years – has appreciated, on average, by $17,000 per week. Yes, you read it right – more than $900,000 a year on average.
And the original purchase price?
Less than a million dollars.
I know many people who bought in a gloom and whose properties have appreciated by thousands of dollars a week culminating in millions of dollars in profit over, as little as five or ten years. But these people do not rush in. They are happy to wait. When you wait, you are there, ready to act when a great opportunity comes along.
Do not do what the majority is doing. Do what the truly successful minority is doing.
To find out more of what the truly successful investors are doing, start your journey of discovery. Read the book, Richer, Wiser, Happier. Take the time to get it right. Watch the Jordan Peterson video on YouTube where he explains – in less than 20 minutes – why only 5 per cent of people succeed in life.
Stop being so impatient. Don’t be greedy. Be prepared to learn. Stop trying to find a winner before you know how to identify a winner. Someone once said that the only place in the world where you can start at the top is digging holes.
What I have told you in this article is what I tell my friends. And my family.
There’s one more thing I tell my friends: Before you start to invest, find out why you want to invest. If you succeed – which you will if you follow the right rules and resist getting swept along with the herd – what are you going to do with the money you earn?
To help you answer that important question, consider this: There are only two reasons to earn a lot of money.
The first is to give yourself financial freedom.
The second is to help those less fortunate than you.
Who are you going to help?