This book is often recommended. The author sees shares as safer than term deposits, prefers low dividends and isn't keen on property. I was keen to read it.
Here are my highlights:
Two tips
Spend less than you earn. Borrow less than you can afford.
Those two tips alone would help so many people.
Assets and liabilities
What we often call assets are really liabilities (they cost us to maintain). Houses, cars, boats can be liabilities - useful for "status or position in the pecking order".Attitude to shares
He says the sharemarket is our friend, and "provided it is treated with respect, it creates appropriate wealth for all those who use it sensibly. However if we approach it as a gambler, we need to be prepared for the inevitable outcome."
He recommends understanding what the sharemarket is, and to look at dividends not just the share price. For example if the sharemarket is at the same level as two years ago, that's actually a profit.
Two-dimensions of shares.
So many people (especially retirees) go for term deposits because they are safer, Peter says. He prefers the "safety and security of the sharemarket over the volatility and risks of term deposits".
Even when term deposits were offering high interest he would prefer shares. Why?
Shares have two-dimensions. They give you a share of the profits each year (a dividend) but the value of the shares usually also rises. This can mean that a 3% dividend gets bigger each year because it's 3% of a bigger number.
Shares versus term deposit
Peter compares two investments. Each $100,000. Each invested from 1980 to 2015.
Term deposits did well in the first few years (when interest rates were huge) and their income was more than income from shares. But over time the shares grew and so did their income.
In the final year, the shares made $78k, compared to $3k from the term deposit. Adding up all the years, the shares made $1.35 million compared to $262 thousand by the term deposit.
As an added bonus, while the term deposit is still worth $100k at the end (just as it was at the start) the shares have grown to $1.7M
The yield trap
It seems sensible to want shares that have a high percentage dividend. But Peter suggests this is short-term thinking.
If two companies each earn 5% profit he'd prefer one that pays out 2% dividend rather than a 5% dividend. Why? Because such a company is putting the other 3% back into the business to make it more profitable in the future.
There are exceptions of course, but as a general principle he likes a low dividend provided earnings are still good and are being reinvested.
But aren't shares risky?
Peter says that sharemarket riskiness is a perception. This perception exists because of (i) daily prices, which don't exist for property, (ii) the media focus on crashes not rises, and (iii) loss aversion, the human tendency to feel loss more keenly than gain.
Here in 2020, there's been a lot of media references to past crashes like 1987 and 1929. But did you know about the rises in 1986/7 and in 1927-29?
From October '86 to October '87 the share market doubled. In October '87 it halved. Back to where it started. We remember '87 as the year of the big crash but in reality the value was the same as it was a year before.
Similar for 1929. Before the crash (and depression) the share market rose 51% in 12 months and 80% in 21 months.
Crashes usually come after a period of irrationally high prices. Peter says "Measuring the time from one irrational high to the next irrational high is irrational." But strangely you do hear people talking about whether the market has reached it's 'previous peak' - as if that's a sign of strength of the market.
6 Myths about property
He list 6 things we tell ourselves about property that may not be totally true. He follows up each one with a correction.
Things like "I know property" (no we don't); "Property is a good long-term investment" (so are shares with that mindset); "You can lose money in shares" (same for property); "I have always made more money out of property" (yes, because you risk more money and borrow more money); "Property is safe" (just perception); and "property never goes down".
That last one is a theme he returns to a number of times. Property values go up and down all the time but the value of property is not flashed across TV screens every night like share prices are. This is his explanation for why we think that shares are more prone to decreases in value.
Property problems
Peter says there's no money in residential property and believes it's because of Australia's short-term leases (ie. 6 or 12 months). This forces people who want security to buy instead of rent, resulting in a lack of rental demand.
We tend to ignore the substantial maintenance and upgrades when comparing property to other investments. So we get the impression that it's better than it really is.
4 Reasons to invest in shares instead
Diversification means reduced risk. This is easy in shares, but for many property owners all their eggs are in the one basket - a particular suburb, city or country. If the housing market in that place goes bad, so do all their investments.
Liquidity. Shares can be sold and the money can be accessed within days should you need it.
Tax Effectiveness. You can gear shares as you would a property, plus in Australia you get imputation tax credits (franking credits).
Mobility. People don't live in the same place as much as they did in previous generations. So owning your own home is less convenient.
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