Value Investing

Have just finished reading Benjamin Graham's The Intelligent Investor. Here are some more really good quotes regarding his philosophy on value investing, along with my comments on applying this to real estate:

On diversification in equity funds: Investing in index funds (which own all the stocks in the market, all the time, without any pretense of being able to select the "best" and avoid the "worst" will) beat most funds over the long run...[while] the average stock fund, with its 1.5% in operating expenses and roughly 2% in trading costs will be lucky to gain 3.5% annually.

On Over-confidence:--In 1999, Money magazine asked more than 500 people whether their portfolios had beaten the market. One in four said yes. When asked to specify their returns, however, 80% of those investors reported gains lower than the market's. (Four percent had no idea how much their portfolios rose - but were sure they had beaten the market anyway!)
--A Swedish study asked drivers who had been in severe car crashes to rate their own skills behind the wheel. These people...insisted they were better-than-average drivers.
--In a poll taken in late 2000, Time and CNN asked more than 1000 likely voters whether they thought they were in the top 1% of the population by income. Nineteen percent placed themselves among the richest 1% of Americans.
--In late 1997, a survey of 750 investors found that 74% believed their mutual-fund holdings would "consistently beat the Standard & Poor's 500 each year - even though most funds fail to beat the S&P 500 in the long run and many fail to beat it in any year.

On investment advice: If the reason people invest is to make money, then in seeking advice they are asking others to tell them how to make money. That idea has some element of naivete. Businessmen seek professional advice on various elements of their business, but they do not expect to be told how to make a profit.

Trust, but Verify: Remember that financial con artists thrive by talking you into trusting them and by talking you out of investigating them. Before you place your financial future in the hands of an adviser, it's imperative that you find someone who not only makes you comfortable but whose honesty is beyond reproach.

One of the most central concepts of investment proposed by Graham is that of a "margin of safety." In real estate terms, this would mean buying properties at a reasonable discount (40 cents on the dollar is one example Graham gives as a safe "margin of safety" in buying stocks). Here are Graham's comments on the combination of safety margin and diversification:
Diversification is an established tenet of conservative investment. By accepting it so universally, investors are really demonstrating their acceptance of the margin-of-safety principle, to which diversification is the companion.

Those invested solely in stocks and bonds, may want to consider real estate as an investment to help diversify their portfolios, where many of the same investment principles apply as to an investment. For information on buying real estate directly, please contact Home Land Investment Properties at HomeLandInvestment@gmail.com. And for information on passive real estate investment through a private real estate equity fund, please contact info@REICapitalusa.com, or Wendy Ceccherelli for all things real estate: 425.270.7292.

Happy Investing!



Photo courtesy of freepictures.me

The Intelligent Investor

I am currently reading The Intelligent Investor: The Definitive Book on Value Investing by Benjamin Graham, which Warren Buffett calls “By far the best book on investing ever written.”

While the book is mostly about investing in stocks and bonds, and the author admits that he is not an expert in precious metals or real estate, there is much good advice for anyone who invests in any asset class.

Here are a few of my favorite quotes so far:

On defining “investing:” An investment operation is one in which, upon thorough analysis, promises safety of principal and an adequate return. Note that investing, according to Graham, consists equally of three elements: you must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock (Wendy’s note: in real estate, we would call this “due diligence” and understanding value); you must deliberately protect yourself against serious losses; you must aspire to “adequate,” not extraordinary performance (Wendy’s note: Get rich slow).

On gold as an investment: The standard policy of people all over the world who mistrust their currency has been to buy and hold gold….[From 1935 to 1972] the price of gold in the open market has advanced…only 35%. But during all this time, the holder of gold has received no income return on his capital, and instead has incurred some annual expense for storage. Obviously, he would have done much better with his money at interest in a savings bank….

On real estate as a hedge against inflation: The outright ownership of real estate has long been considered as a sound long-term investment, carrying with it a goodly amount of protection against inflation.

On investing during inflationary times: When inflation shot above 6%, stocks…stank. The stock market lost money in eight of the 14 years in which inflation exceeded 6%; the average return for those 14 years was a measly 2.6%....Since Graham last wrote, two inflation-fighters have become widely available to investors: REITs [Real Estate Investment Trusts] and TIPS [Treasury Inflation-Protected Securities].

On forecasting the future based on past performance: The heart of Graham’s argument is that the intelligent investor must never forecast the future exclusively by extrapolating the past.

On active or passive investing: There are two ways to be an intelligent investor: by continually researching, selecting and monitoring a dynamic mix of stocks, bonds or mutual funds; or by creating a permanent portfolio that runs on autopilot and requires no further effort.

On investing only in stocks: Unless you can honestly pass all these tests, you have no business putting all your money in stocks: Have set aside enough cash to support your family for at least one year; will be investing steadily for at least 20 years to come; survived the [most recent] bear market; did not sell stocks during the bear market; have read chapter 8 in this book and implemented a formal plan to control your own investing behavior.

On investing in what you know: But first, let’s look at something the defensive investor must always defend against: the belief that you can pick stocks without doing any homework….[Peter] Lynch’s rule – “you can outperform the experts if you use your edge by investing in companies or industries you already understand” – can work only if you follow its corollary as well: “Finding the promising company is only the first step. The other step is doing the research.”

On the right price: A great company is not a great investment if you pay too much for the stock.

On diversification: Nearly all the richest people in America trace their wealth to a concentrated investment in a single industry or even a single company….The Forbes 400 list of the richest Americans, for example, has been dominated by undiversified fortunes ever since it was first compiled in 1982….[Yet] only 64 of the original [1982 Forbes 400] members – a measly 16% - were still on the list in 2002….When hard times hit, none of these people…were properly prepared. (Wendy’s note: OK, so maybe they were no longer in the top 400, but I am betting they were still way better off financially than most of the rest of us).

Please contact me directly at HomeLandInvestment@gmail.com or 425.270.7292, if you would like to learn more about investing in real estate.

Happy investing!

Photo courtesy of freepictures.me