Learn how to live where you want, but invest where you can afford. Welcome to the Rentvesting Podcast! This week we’re speaking about our n00b errors we made as young, naive investors!
In this episode, we’re going to cover:
- Speculating over investing
- Not diversifying
- Listening to the media
1. Speculating, not actually investing
Investing is about making an educated decision. Speculating is jumping straight in and thinking an asset will go up 20x in the next few days. Louis has lost a lot of money through speculating into shares, specifically through penny shares and resources companies.
What are penny shares?
Penny shares are one cent shares that you buy billions worth for say, $10. In my experience (Louis) I paid 80c a share but still lost out.
Microcapped – It’s not about the price of the share but how big it is, so buyer capitalisation. You can take Telstra for instance which has hundreds of millions of shares under $5. It’s not about the price but how big the company is. I used to hang around the micro-cap market and put money on companies I thought would go up. Out of the many I’ve done, I’ve had one go well and about 15 go poorly.
When it comes to the micro-cap market, about 95% of companies don’t do so well, and 5% do, so if you want to gamble you’ve got better chances on Roulette than those sort of investments.
Through the penny share side of things, the reason why they’re not great investments is because a lot of the time there is no liquidity in them. So if you’re trying to sell them quickly, no one will want to buy them and if it goes down you can’t get out. You get trapped in the investment which will compound your losses. The other thing is if they have no earnings, negative earnings or uncertain earnings… There is a reason why a lot of companies are in micro capped place, as they don’t actually earn an income.
We saw this in 2000 with the .com bubble where a lot of companies were listed but actually weren’t making an income as they were just a startups. They also had no psychical property.
Everyone was buying them and that pushed the price of the shares up. Then the news came out that the startups weren’t actually making any money and didn’t have a physical location and investors then got stuck. This is where the bubbles occur and the price goes up too much for the share, and a lot of them can’t recover.
Resource companies – I used to speculate on small mining companies, which looked promising. However all of the sudden, if something goes wrong and the one mine shuts down – the whole company is gone.
Mistake made: You want to look for a company with lots of different revenue streams and products like pharmaceutical or banks which are diversified. Rather than a company that only operates in one market.
2. Not diversifying
Pre-GFC, all my investments were just Australian shares. When the GFC hit, most of my assets were in the same thing and they dropped by 40%. I saw that all of the sudden my portfolio value dropped in a very short time. Lucky I didn’t freak out and sell (which is another thing to beware of).
If I had shares between different sizes of companies and ones that were more stable, the portfolio wouldn’t have dropped as much.
- Aim for some in financials, telecommunications and resources, which are all important.
- Other asset classes that aren’t correlated is important.
Bonds – In the GFC, shares dropped about 30% but bonds went up 11%. If I had thrown some bonds into my portfolio it wouldn’t have gone down as much.
The biggest thing is capital loss. If you lose 50% on the down, you then need to make 100% to get it back to where it was. It has to double on the way back up to get to the original value. So diversification will help combat this.
Mistake made: Not having a diversified portfolio means that you have more room for loss when the market drops.
3. Listening to the media
As a younger investor, I used to get a lot of information from just media and general news sites. Typically it doesn’t work so well. There used to be a lot of things like “Here is the next best place to buy” etc. However, a lot of the time these articles are just written by someone who is trying to sell in the area. A lot of them are fear related, so if you listen to the media and sell off the back of it, it won’t be a good thing. At the end of the day, it’s all just opinion.
Contrary investment is a useful tactic – doing the opposite of what the media says. Going against the mass negative exterior in the market, which can work in your favour.
Mistake made: Listening to the media! Make your own decisions and keep in mind that all content put out is skewed to benefit the creator.
During the GFC, in the share sense, I worked at Macquarie Bank (Jayden). A lot of the directors had massive margin loans up until the market tanked – and they had issues because they were using borrowed money. This meant as the shares dropped the losses were amplified as they had bought not only the shares they could afford, but also those on margin loans. When shares are going down, that is the worst time to sell. Then the bank says, you owe us money – so you need to either pay us or sell these shares. A lot of the time those who are taking out margin loans don’t have enough equity to pay it out and that’s where you can be forced to sell.
Mistake made: In a property sense, not realising the expenses, having a buffer and extra costs specifically when interest rates go up. Back then, Jayden had to use his oven as a heater because he hadn’t budgeted enough money to purchase a heater. This is where he slightly over-leveraged and didn’t realise the expenses involved in owning his two apartments in Sydney.
Overspending, where you won’t make a return. I (Jayden) bought a house on the Gold Coast and the market was terrible at that time, but it was the old worst house, best street concept. We ended up spending well over what we had budgeted on renovations ($10k) and were emotionally invested and spent over $100k.
A lot of times, when you’re involved in property, you need to plan ahead and look at the end game instead of flying off the cuff. In this situation, we broke even, but we could have made a lot more money if we didn’t over capitalise. Start with the end in mind and look at who is going to buy the place.
Mistake made: Don’t get emotionally involved and overspend when renovating property. View it as an investment.
Here are some of the silly mistakes we’ve made over the years when it comes to property and investing. If you’d like some free advice or to just have a chat about your current situation email Jayden at [email protected] or Louis at [email protected]
The Rentvesting Podcast, available on iTunes, was created by Red & Co’s Jayden Vecchio and expert financial planner Louis Strange. Together, Jayden and Louis unpack the facts behind the property market, explain what’s really going on & where the market is heading. They believe in challenging the status quo and want to get out there to educate absolutely anyone looking to enter the property market.