UK Value Investor

Generally there are two ways that people invest for their retirement.  The first is in the stock and bond markets and the second is in property.  In both cases this can be either through a fund of some sort or directly as a stock picker or buy-to-let investor.

Thinking about the stock market in terms of property investing is useful as the two fields have quite a lot of overlap, even if they aren’t usually compared directly.

A sensible approach for both property and stock market investors is to focus on income first and capital growth second with each individual investment being viewed with a long term perspective. 

Learning lessons from the property tycoons

For property investors the rental income, including void periods, should more than cover the costs of running the property.  In my experience something in the region of £5,000 to £10,000 cash profit per property is a reasonable goal for most buy-to-letters.  In other words, income must be generated today.

As for capital growth, everybody knows that house prices go up in the long term and everybody also now knows that property prices don’t only go up, they can also go down in the short and medium term.  This means that although capital growth is an important part of a property investment's total returns, there is no guarantee when they will turn up and so growth should be of secondary importance to income.

Without income the invested capital is effectively sitting fallow waiting for some distant future when capital gains can be unlocked.

Applying those lessons to the stock market

When I invest in shares it’s exactly the same thing.  I’m buying a real asset – this time a company instead of a house.  I’m buying something that generates profit from day 1 (the dividend).  I’m buying something where the market price may go up and it may go down, but the expectation is that in the long run it’s likely to go up. 

When I buy I try to get as much value for my money as I can.  If I were investing in a property it’s not the price that matters but what I would be getting for that price, both in terms of the expected cash yield (the lower the buying price the higher the yield) and in terms of what the bricks and mortar are actually worth, or perhaps more importantly what they’re likely to be worth in 5 or 10 years time.

Observe the masses and do the opposite

With both property and stock market investing the real problems always begin when everybody looks only at capital gains.  It’s when house prices or share prices only go up.  It’s when the market’s hot and everybody and their milkman are trying to get in on the game. 

That’s exactly when the investor with a long term, income first perspective steps back and starts to think about getting out.

At the end of the day, there are 3 things that I need to remember day in, day out in order to keep beating the market:

Income First - Capital Growth Second - Invest for the Long term