Due to Covid-19, the stock market has taken a beating, and share prices are at historical lows. With a massive discount on prices, some people have shifted their attention to the stock market. Some retail investors are so upbeat about the stock market that they decided to take advances on their credit cards, leverage this advance and go all in. After all, when does an opportunity like this appear?
However, some people will classify this behaviour more towards speculation rather than investment. So how do you know if an act is considered speculative or one made in good judgement?
The Intelligent Investor by Benjamin Graham
During this quarantine period, I had the opportunity to read The Intelligent Investor. Warren Buffet quoted this book by Benjamin Graham as one of the best books on investing ever written. If the Oracle of Omaha says that is the best book, then it probably is. Although the focuses mainly on stocks, the principles behind what defines an investor and a speculator are the same.
“Same Same” But Different
In both scenarios of speculating and investing, the act is the same. You exchange your money for an investment vehicle and expect a higher return at the end of the day when you sell the instrument. The only difference is that the investor is the one that did his/her homework. In Graham’s book, the definition of doing homework is this. “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Investment Is All About Protecting Your Principal
In other words, protecting your principal is the single most crucial aspect when it comes to investing. If you fail to do this, then it is considered speculation. On the far end of the speculation spectrum is what we call gambling. For example, you have a favourite football team, and they are playing today. The team has a home ground advantage, and they are expected to win. You go to Singapore Pools and make a bet. If your team wins, you get some returns on your “investment”. However, if they lose your entire principal is gone.
Speculation Is Not Exactly “Bad”
Speculation in itself is not entirely wrong. If not for this “hunch”, shares prices of Amazon and Apple will not be what we see today as well. However, the problem with speculation is that this is intrinsic human behaviour. When everyone is making money, you would want to be in on the action too. Once you add in self-justification, the entire decision-making process becomes no different than placing a bet on your favourite football team. So how can we think logically when we are programmed otherwise? Well, I came up with a few observations that might help you to figure out if you are doing all you can to protect your principal.
1. Jump In because there is a lot of interest in the subject matter
The stock market is a hot topic these days, and there is a lot of interest in the subject matter. Prices of some stocks like SIA are a mere fraction of what they used to cost ten years ago. With such an incredible discount, you cannot go wrong, right? Moreover, Warren Buffett did say “Be Greedy When Others Are Fearful”. However, I have a serious problem with this quotation because it is always taken out of context. In addition to this requirement, the companies he buys must also be profitable and have an “economic moat”. An economic moat is termed as an exclusive attribute that the company has over its competitors.
When you take this context and put them into real estate, you will find that the “economic moat” is the single and most important factor when it comes into price appreciation. This “moat” is the reason why new launches tend to outperform their resale counterparts.
While SIA share prices are low now, have you thought about the profitability of the company? And the “economic moat” it possesses? If you have done your homework and believe that you can retain your capital, then it is an investment.
2. Have Limited Understanding on The Subject Matter
One of the common objections my fellow real estate agents tell me is that clients will always say there is an oversupply issue. Once the supply hits the market, then prices will fall, and they are there to scoop up cheap deals. Well, the problem with this thinking is that these buyers are looking at things from a rather superficial level, and they do not examine or spend time to explore the specifics. Let us say that you are keen on an investment property that is around $700k. Do you know where these properties are located? Which area has the highest rental yields? Why are the price trends for these properties? What is the volume during this time? Why did prices only fall 1% during this time?
If you can answer these questions, then you are thinking like an investor.
3. Jump In without understanding the risk.
Whenever you buy a stock, it can either go up or down. If it goes up, then you make money, and if it goes down, you lose money. The problem is, no matter how good the company is; there is a limit to its profitability. For a stock to keep doubling in price, the profits for that company must also double. That is the reason why Warren Buffett is a contrarian investor. Due to this profitability limitation, the best way to make money is to buy a stock that no one else is buying but at the same time, that stock still has the “economic moat potential”. When other investors see that profitability materialized, that is when the share prices increase, and you make money. Besides, your risk is minimal because the company is profitable.
However, becoming a contrarian investor for real estate may not work. Take the example my J Gateway versus Regent Grove article. The value of the “cheap” property went lower while the “expensive” one went up in price. This logic does not make sense to the value or contrarian investor simply because there are so many other factors in real estate that affect the price. Share prices, on the other hand, are only a function of their profitability. Understanding this J Gateway logic is important because the risk involved in real estate is quite different from that of stocks and shares.
4. Expect to Make A Windfall Within A Short Time
With the government’s cooling measures in place, there is absolutely no room for any form of real estate speculation in Singapore. Although I did write about some buyers profiting $700k over a timeframe of 2 years, there is still an element of time. You still need to wait for the land value to go up. Which also means that those people who are buying real estate right now are investors. They must have done a lot of homework to have the confidence to enter the market today. Speculators tend to look for something with a much shorter timeframe and shy away from the market when there is no activity.
5. No Idea on The Investment Timeframe
Whenever we make rash decisions, there is always a focus on the short term. This YOLO moment can be easily summarized in the world-famous tag line “What Happens In Vegas, Stays In Vegas”. You may enjoy every second of it during the moment but regret what you do the next day. This regret is the same as property investment. The purchase you make may not coincide with when you want to exit. While the property may appreciate, the time which you exit may not. So before you decide when to put money in, you must already know when you are taking it out.
Start Becoming An Investor By Doing Homework Today!
Now that we have a better understanding of what are the differences between an investor and a speculator, why not start doing your homework today? If you are new to the stock market, you can pick up The Intelligent Investor via my Amazon affiliate link to get started. At the same time, your purchase will allow me to buy coffee and cookies—two of the most important raw materials for me to write articles like these. As for real estate investments in Singapore, do read through some of my other blog posts. Alternatively, you can also book a video call appointment with us.
Article contributed by Jerry Wong.
Jerry Wong is a realtor with Propnex Realty. He loves coffee, cookies and condos and has been in real estate for ten years. Most importantly, he loves connecting people to properties and gets enormous satisfaction when they acquire their dream home. Or making well-informed decisions that see their assets grow. Book a video call appointment and Jerry will share with you the following.
- How certain factors affect real estate prices. Why some condos can make a million dollars while others can lose that same million.
- Why timing is not the most important thing. Because some people can buy the same condo at the same time, but one end up making $100k to $200k while the other suffers losses of the same amount!
- Understanding your requirements and craft a solution for your real estate needs. Be it in the form of asset progression, tax planning, etc.
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