Be aware of the dangers of short-term investing, warn two experts. Whether it’s property or shares people invest in, the first priority should be to think about returns over many years, with appropriate levels of risk.
Two investment experts with very different specialities agree on the dangers of short-term investing.
For many investors, the biggest dilemma is which growth-oriented asset class to allocate their next tranche of investment funds. Should they choose property or shares?
For two investors who specialise in these polar-opposite asset classes, the decision-making process is slightly different. Both of them stress that whether it’s property or shares people invest in, the first priority should be to think about returns over many years, with appropriate levels of risk.
Margaret Lomas is a leading voice in property investment and founder of the Destiny Group on the New South Wales Central Coast. She is against “short-term flipping” and calls herself an enemy of property spruikers selling pre-packaged units to mum-and-dad investors who borrow 100 per cent of a property’s value with interest-only loans. She says property needs to be part of a balanced investment portfolio, which should also include shares.
Roger Montgomery is the founder of Sydney-based Montgomery Investment Management, which has about A$1 billion in funds under management. His take is that chasing dividend yield through buying blue chips is a waste of time and that those investors who look at the share market as “a place to buy things that go up and avoid things that go down” are essentially treating it like a casino.
“The only way I think the stock market is attractive is an opportunity to buy into outstanding businesses.” Roger Montgomery, Montgomery Investment Management
There is a common thread in the views of Lomas and Montgomery that investors who want to make their money work hardest need to take the long-term view.
“The only way I think the stock market is attractive is an opportunity to buy into outstanding businesses,” says Montgomery.
His definition of an outstanding business is one that has an ability to charge higher prices for what it does, retain its incremental capital and re-invest it to create higher rates of return, reflected in the share price.
He is disdainful of investing in companies such as BHP Billiton or Rio Tinto, which accept market prices for their commodities rather than setting the price. Telstra’s dividend yield is also unimpressive to Montgomery. He points out that A$100,000 invested in Telstra in 2005 would now be worth A$112,000, with the annual dividend growing from A$5900 to A$6500 over that time.
Much more attractive, says Montgomery, is smaller telco M2. The same A$100,000 invested in M2 in 2005 would now be worth about A$1 million, and while the 2005 dividend was smaller at A$3900, it has exploded to just under A$100,000 in 2016.
Investors don’t need to pick these outperformers at an early stage, either. It is just as good to invest in established companies such as biopharmaceutical giant CSL, which has demonstrated its track record and sustainable advantage.
Montgomery has an analogy of the share market. Imagine you have bought a farm at a good price and it is consistently productive. The share market is a noisy neighbour, shouting over the fence and offering to buy at various prices. He can be ignored or if the price is good enough, you can take him up on his offer.
For Lomas, successful property investment is based on research and a long-term approach. Her advice is to find an area with faster-than-average population growth and a large percentage of families, because they are long-term residents.
Also seek property with a council that is developing infrastructure and offering diversified job opportunities. If all these boxes are ticked and the prices are affordable, Lomas says it is likely to deliver “generational growth”.
“It might not boom all of a sudden, but it will grow year in, year out,” she says. “And that is the best way to get your money to work for you.”