By Sean Peche
“Landlords Face Ruin as Buy to Let Mortgage Rates Soar” is not a headline any of the 2.6m British landlords want to read from www.landlordsguild.com
All of whom went in search of “passive income” but are now “actively stressing” over mortgage rates doubling, financially stretched tenants, changing taxes, and few buyers for their tiny, expensive UK properties
What happened?
The economic environment changed.
Just when these “landlords” thought they’d finally found the “Holy Grail” at a “Passive Income Property Conference” and made leveraged bets on: low inflation, low mortgage rates, and a strong economy lasting forever.
But if experienced investors and advisors can fall victim to “Recency Bias” and think that predicting the next 10-year performance of any asset class is as simple as looking at the performance over the last 10 (which many do!)
What hope do inexperienced “landlords” have?
So they just keep “betting on black”.
In a story all too common, “Vince” buys a two-bed flat, renovates the bathroom, interest rates fall a little, and just like magic, “equity” is created, which he uses to buy another two bed.. and then a three bed… and then a block of flats and before you know it, Vince owns 30 properties and is on the front page of the Daily Mail as their latest, “property millionaire”.
Except what Vince has effectively done, is repeatedly “bet on black” at the roulette table. And when black “came up”, he reinvested those winnings
Back on black.
Over and over.
Because despite not being at the roulette table all that long, Vince convinced himself that he “understands black”.
The problem of course, is that when the roulette ball eventually lands on red, the croupier doesn’t care about how much Vince “understands black” or has previously “won on black”, he simply swoops in and scoops away his bet – in this case, all of Vince’s prior winnings..
But if Vince had spent more time studying history and odds, he would know that red, like black, also wins almost 50% of the time (green zero is the reason for “almost”).
So a better strategy would have been for Vince to, increasingly diversify his wealth as his “bets paid off”. Maybe he wouldn’t have grown his wealth quite as fast, but at least he would have preserved some of it.
Berkshire Hathaway’s origins were in textiles but can you imagine if Buffett and Munger had only reinvested those early textile profits back into more textile looms? Only the croupier would know them today. We wouldn’t. Instead, they diversified their “winnings” into: insurance, furniture, soft drinks, banks, trains, energy, “Apples” and others. And by doing that, they preserved and grew Berkshire’s wealth.
Read more: BNC#5 Q&A with Sean Peche – How to stay among the world’s 1% performers
What are they buying now?
Japanese trading companies – some of the oldest businesses in Japan.
And do you know how these businesses survived wars and recessions and got to be so “old”? By diversifying as they grew – into shipping, food, retail, mining, banking, etc.
So if you or your clients are heavily exposed to one strategy be that:
- Growth Funds or
- Quality Funds or
- Real Estate or
- Passive
because those “bets paid off” in recent years.
And aren’t at least equally diversified in “Active Value Funds” because “red hasn’t come up recently”.
Just remember Vince and diversification, and the risks of a changing economic environment on yours and your clients’ wealth if the roulette ball doesn’t keep “landing on black”.
Read more: Boardroom Talk: Japanese market attracting attention from Buffett, Ellliott + other bargain hunters
Value is THE winning strategy over the “long term” and that’s because it’s rooted in basic economics and maths, and doesn’t require finding a “greater fool” (with money) .
Of course, we all know that Value didn’t “win” the relative race during the years of QE and abnormally low interest rates,
But you still made money!
And now the economic environment has now changed.
So learn from the mistakes of those overexposed landlords facing ruin and protect yourself before it’s too late.
You don’t want the croupiers to swoop away all your prior “winnings”.
Read more: Sean Peche: One year, one last chance for SA, all it could take is less than 1%
