The Similarities Between The Property And Share Market
Over the past few months during this pandemic I've been much more "active" than I had been previously when it comes to the share market. The wild fluctuations after mass hysteria, market crash during March and the ultimate V-Shaped recovery has been too difficult to ignore even for a largely set-and-forget investor like myself. Previously my share market knowledge and interest was predominately based around a few boring bank shares, how much RIO/BHP is currently worth and whether I had a balanced or high-growth setup in my super fund. I had been dabbling in some ETF/LIC index funds which are extremely low-risk if you come to understand them. Low interest rates has basically forced most savers to do the same especially when a "high interest" savings account is probably worth circa 2% max. This Covid period however has certainly sparked my interest more than normal, and I'm not alone. An article released in June shows new trading accounts according to ASIC had skyrocketed! Everyone seems to be chasing the quick $. The headlines have been dominated by examples such as Afterpay. Shares in the Buy Now Pay Later company hit a low of $8 during the March lows. On Thursday 27th August Afterpay hit $95...
But - It got me thinking and I started to reflect on the similarities seen in the share market often mirror those seen in property. Of course there is always differences between the two asset classes. You can read more about those differences in an article I published here.
Size Matters
Much like the property, shares can be divided into markets relative to their size. Share investors will be familiar with the terms small, mid and large cap. These refer to the market capitalization or "worth" of a business. Similarly, property is often categorized by their regions and relative value. Taking a very general view of shares, Small Caps can be seen as early stage "speculative" businesses looking to find their feet, Mid Caps have started to firm as a more reliable choice with some risk and Large Caps are almost "too big to fail". There is however value to be found in every category. Small Caps are akin to small regional markets. Think 10-20k population supported by 1 or 2 local industries. The risks are higher as the demand/supply ratio can change on a dime. Timing and research is very important in markets such as these. Local knowledge is gold and entry price is seen as "cheap". Just like Small Cap shares you need to be all over a market like this in order to time your entry point and be well aware when you are overpaying or if there is value. I compare Mid Caps to larger regional/metro areas. Towns and cities that have that 100k+ populations with multiple economic drivers. The "risk" is mitigated with higher demand but a trade off is the price is higher. They are great for balanced investors with a moderate budget. Large Caps are like your big city markets. CSL, CBA, Macquarie Bank, etc are just like your Melbourne and Sydney property markets. The wild swings in price are almost non-existent when looking long term. These property markets consistently perform and provide reliable returns. They are expensive for a reason as they have high demand, more economic drivers and more factors underpinning their value.
The Market Can Be Irrational
There's an old story comparing the share market to a dramatic and unstable neighbor who offers to sell you his farm everyday. One day he offers to sell ridiculously over priced and the following, unbelievably cheap. You just need to decide what the "value" is and the decision rests with you as to whether you purchase or not. Property is much the same albeit slightly less "dramatic". There will always be times when markets are over or undervalued. The important thing to recognise is that YOU are in control of the price you pay and the timing of that decision to purchase. The market can be extremely irrational. It is so important to remember that YOU are in control not the market.
Fundamentals Don’t Change
Here's where shares and property are almost identical. The fundamentals underpinning the true value of the asset do not change. In shares I look for quality management, excellent financials, a quality product, plenty of upside, low competitors and the ability to diversify. Property I look for good location, well-built, good tenant/owner appeal, decent land content, close to schools, shops and amenities, good cash-flow, add-value opportunity and in within diverse economies. I try not to over-complicate these decisions. If I see value, the timing is right and our own financial situation allows then we buy. Don't be swayed by the flavour of the month.
Remember - There was a stage 6 years ago that Port Hedland (a small mining town in the NW Pilbara region of WA) had a median house price pushing $1 million and was more expensive than Sydney! A Small Cap becoming a Large Cap very, very quickly. It was underpinned by mining and that was it. A small population coupled with a reliance on one industry you could see that the market was extremely irrational. There was no fundamental reason for these prices to last. After the commodity bust, house prices in Port Hedland crashed by circa 70%. There was blood on the streets for those entering late in that cycle. The early stage investors had made their money and moved on. I mentioned earlier Afterpay shares recently hit an all time high of $90+. Many investors have made good money in the past few months. It is important though that Afterpay is essentially it is a credit provider for those that aren't willing to pay the full amount for a product up front. The company is also yet to post a profit. Can I see these prices lasting? Honestly? No idea. But they aren't for me at $90 a share!
- The Tattooed Investor