Property investing and stock market investing are more similar than most people realise. Of course there are many differences in the details, but long-term investors who are active in either asset class can benefit from the same sound and timeless investment principles.
Ben Graham laid out many of these principles almost 80 years ago, but more recently I found them within the pages of “The five fundamental principles of property investment”, a short guide written by Nick Carlile of Platinum Portfolio Builder.
What particularly caught my eye was that Nick and his team build and manage a portfolio of buy-to-let investments for their clients, who for their part simply supply the investment capital (£100,000 is required as a minimum so that a portfolio of at least a few houses can be created).
In many ways this model is similar to the relationship between shareholders and the companies whose shares they hold. The investor supplies capital and a management team allocates that capital to various projects; Nick uses it to buy houses for his clients while Sainsbury uses it to build supermarkets.
The management take their cut from the income generated by the house (or supermarket), some is reinvested to improve the asset (new kitchen and bathroom in the house or a refit for an old supermarket) and the remainder finds its way back to the investor as a cash income.
While it may not be the proverbial “fag paper”, there isn’t a huge difference between investing in property and investing in shares under those circumstances. And in many ways that’s why the same investment principles apply to both.
Investment principle #1 – Always buy at a discount
The first investment principle is to always buy low, everybody knows that; but many, or perhaps most, fail to apply that knowledge.
The idea in property, according to Nick, is to always buy at Below Surveyed Value (BSV). Specifically, a discount of 25% to the valuation from a chartered surveyor is suggested as the most that should ever be paid.
Buying low increases the cash yield in the short-term and also increases likely capital gains over the longer-term.
As an value investor buying at a discount to BSV sounds virtually identical to Ben Graham’s idea of always buying with a healthy discount, or margin of safety, to intrinsic value.
Ben Graham suggested buying at a 33% discount, but whether the discount is 25% or 33% the principle of buying at a discounted price remains…
