By Carrie Law
On 5 May 2018, legendary investor Warren Buffett will host the Berkshire Hathaway annual general meeting. If past AGMs are any guide, he will use the opportunity to share some of his choice investing tips.
Buffet devised his investment philosophy for equities. In honor of the 2018 Berkshire Hathaway annual general meeting, I have reinterpreted his five most important principles in terms that can be applied by the performance-driven international property investor.
By following his advice, you can look forward to many profitable years.
Buy and hold, and hold, and hold
Buffett has written that his key principle is to “stick with big easy decisions and eschew activity.” He famously likes to buy an asset “for life.” That makes him very different from investors who buy and sell, buy and sell, always seeking quick gains and a better opportunity.
Buffett rightly points out that, of all the possible assets available for acquisition, only a relative handful are actually both high-quality and available at a low price. Finding this handful of true gems from among all the coloured glass can be hard work. If you find a great asset that is both gaining value and generating returns, why not hold onto it for life? After all, if you sell it, you will just have to find something else to put your money into.
Another downside to activity is that every transaction has a cost. In real estate, the costs are often high and consist of taxes, commissions, and closing expenses. Buying and holding a great asset keeps your transaction costs to a minimum.
Time is your friend
Buffett rightly points out that time is the friend of the wonderful investment and the enemy of the mediocre. Your investment will generate both cash flow and capital gains over the years. You can reinvest this value to create still more gains.
This is Buffett’s gold standard, an investment which generates cash that can be reinvested to generate more cash, which can in turn be reinvested to generate still more … and on and on and on.
Prepare for the bad years
Buffett also believes investors should be prepared for what he calls “economic discontinuities.”
Adapting this approach to real estate investment is easy as long as you are realistic and take a long-term view. In any market there will not only be good years but also bad years. Protecting yourself from disaster during a bad year is more important than earning a little bit more during the good years. If you do protect yourself, your long-term returns will be much higher.
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This is why Buffett’s taste for debt is very low and that this “aversion to leverage has dampened our returns over the years” but that it helps him sleep well. Buffett believes it is “insane to risk what you have and need in order to obtain what you don’t need.”
For property investors, Buffett’s advice means keep your debt low enough to be manageable even during a stretch of bad luck. Just as Berkshire uses the float from its insurance companies to make further investments, you can use equity from your existing assets to fund additional acquisitions. But don’t risk being forced to sell an asset at a discount because your debt is too big to service.
Buy durable competitive strengths
Buffett says that he looks for companies with durable competitive strengths. For real estate investors, this translates into purchasing property with features that will make it valuable in any market, including a central location, access to transit, proximity to good schools, low operating costs, and water views.
Many amateur investors are lured into buying properties in marginal neighborhoods where prices seem to be growing more quickly than in more established locations. When conditions turn, marginal locations are the first to lose value. Look for safe value rather than risky gains.
Pay a sensible price
A key tenet for Buffett is to only buy if you can obtain a sensible purchase price. He always measures price against value, not against the market average. By acquiring assets at a discount from its true value, you give yourself a “margin of safety,” as he puts it, that protects you from possible losses.
The desire for good assets at good prices is also behind his famous rule: “You want to be greedy when others are fearful. You want to be fearful when others are greedy. It’s that simple.”
When others are fearful, they are willing to sell assets for less than their true long-term value. It’s an opportunity for smart, brave investors.
Warren Buffett has beaten the stock market over the past 53 years. In fact, he has more than doubled the wider market’s compound annual gain. One-thousand dollars invested with him in 1964 would be worth almost USD16 million today. I encourage you to take his investment tips and use them wisely.
Carrie Law is the CEO of Juwai.com, the number one Chinese international real estate website and the exclusive international real estate partner of Chinese online giant Tencent
This article was originally published on Property-Report.com. For more stories from Asia’s most trusted and enduring luxury real estate, architecture and design publication, visit Property-Report.com
