Stock Market Investors: How To Think Like A Property Investor

by: John Kingham

In my family, I'm the odd one out. My parents see property investments as their pension. My brother sees property investments as his pension. My cousins see property investments as their pension.

I'm the only one, as far as I know, who favours stock market investments over property investments. And this is despite the fact that most of my personal retirement funds came from some lucky timing in the property market between 1995 and 2005.

Although I don't think one is necessarily better than the other, I do think stock market investors can learn a lot from their property investing counterparts.

Specifically, there are four things stock market investors should do to make themselves more like property investors:

1: Don't Focus On Short-term Price Fluctuations

Here's a good example of too much attention paid to short-term price movements:

During the financial crisis, the FTSE 100's market price fell by about 50%. To some extent, it fell because large numbers of investors sold their shares simply because they were worried about further price declines.

In the UK property market, this scale of knee-jerk panic-selling just did not happen.

As far as I can tell, most property investors were happy to hold onto a property as long as it remained cash-flow positive (i.e. rental income exceeds mortgage expenses), or something close to it.

Property investors who held fast during the crisis were acting like true investors. They focused on the fact that property prices are very likely to go up in the long-term, and that helped them to largely ignore short-term price declines (yes, property prices can go down in the short term).

Stock market investors who sold purely because prices were falling were acting more like speculators; buying and holding while prices were going up but running for the hills when prices started going down.

And I'm not being judgemental because running for the hills is exactly what I did in the earlier 2000-2003 bear market.

But that was a mistake, just as it was a mistake for stock market investors to panic-sell in the 2008-2009 crash or the recent 'correction' of early 2018.

2: Do Focus On The Underlying Investment And Its Long-term Prospects

For property investors this is easy.

Properties are concrete (sometimes literally), and in most cases, you can see them and even touch them, so they're easy to picture in your mind as the thing you're actually invested in.

But what about the price you could buy or sell a property for on any given day? It simply doesn't exist.

Okay, you could ask Bob down the pub how much he'd buy your house for today, but how far below 'fair value' would the price have to be to get that sort of quick sale?

So, the daily price of a house is effectively abstract; it's invisible and there's no easy way to discover it, so most property investors don't think about it.

For stock market investors, it's the other way around.

Companies are an abstract legal entity; you can't see or touch them. You can visit a company's head office or factory, but that's not the same thing.

Share prices are what people see as concrete. You can watch the market price of a listed company go up and down on a screen all day long. You can even buy or sell a piece of that company at that exact price, with just the click of a button.

That's why so many stock market investors become accidental speculators.

They focus on short-term share price fluctuations which they can see and even touch on screen, and they pay more attention to those price fluctuations than they do the actual companies they're invested in.

3: Ignore The Market Most Of The Time

Treat the stock market and market prices as they were meant to be treated: As a market.

You go to the market, buy what you want, then you leave.

So, when you have some cash to invest, go to the stock market, buy a good company at a good price, and then leave.

Don't keep looking back at the market to see what other people think your investment is worth.

And if the market price of one of your investments drops by 50%, all that means is that one investor was selling at that price while another was buying. So which of these anonymous investors should you trust? The answer, of course, is neither.

You must trust your own judgement, not the market's.

After all, if you'd bought the company outright, there would be no daily share price to watch, just as there is no daily market price for a house.

You would own the business and its management team would send you annual and interim reports outlining the company's recent results and their plans and vision for its future.

Other than reading those results, there would be nothing to do and no market price to worry about.

And that is as it should be.

4: Relax, Put Your Feed Up And Do The Occasional Spot Of Gardening

Instead of worrying about which of your stocks have gone up and which have gone down, do as property investors do:

Spend 99% of your time sitting on your metaphorical backside, letting your carefully chosen investments do the work of generating long-term capital and income growth.

Spend the rest of your time (perhaps one day each month) on some low-effort investment gardening, occasionally trimming back fast-growing investments and replacing weedy-investments with more attractive and robust alternatives.