My investment strategies: property, shares and bitcoin
A message from our CEO & Founder, Joseph Chou*
Bitcoin. It’s the new thing, it’s what everyone is talking about. Perhaps not since the California Gold Rush in the 19th century has there been such excitement or so many people considering how they can get on board.
But it’s also got its fair share of sceptics, including a number of very successful investors. Warren Buffett says he doesn’t even consider bitcoin to be an ‘investment’ rather, it’s speculative, a gamble… and likely to come to a ‘bad ending’.
Given the lack of regulation of cryptocurrencies, its limited recognition on a global scale, and the significant price fluctuations of late, it’s easy to see why.
My personal philosophy is never to dismiss anything new, so I’ve been keeping a close eye on bitcoin and trying to learn a lot more about it as well as blockchain technology.
My take on it at this point, is that while it’s popular, I want to start by looking at the wider context.
Should I invest in bitcoin now, or is it already too late?
People often forget that while bitcoin seems to be the ‘new thing’ it’s actually far from being a new technology or concept, so it’s possible that the biggest growth has already happened.
The truth is, people tend to follow the crowd when it comes to investing – and property investment is a case in point. People often buy property close to the peak of a market cycle, when everybody else is buying – and when it’s already too late to take advantage of the biggest gains in the cycle. So they have to wait longer to see that growth.
The same thing could be said for bitcoin – that the best time to buy was when most of us weren’t buying or even thinking to buy. It’s hard for me to know for sure.
Long-term value
Warren Buffet pointed out that if you compare bitcoin to other speculative investments, like gold – gold still has the advantage of being globally recognised for centuries and is able to be made into something such as jewellery, homeware,etc. The blockchain technology behind Bitcoin and other cryptocurrencies is very interesting and has many possibilities and potential functions which governments and business are all investigating. However, bitcoin in and of itself, though it has a limited supply, has a value which is ‘in the eye of the beholder’.
And if governments decide to come in and take a position on the trading of bitcoin – then there is a real issue in terms of how it is going to work to be able to convert into the current credit system that we all understand.
What bitcoin is right now is no guarantee as to whether it will present long-term value – there’s too much uncertainty there for me.
Higher risk / higher return
That said, investing in bitcoin isn’t a ‘hard no’ from me. I simply don’t know enough about it to make a judgement as to whether it’s a viable means of exchange and will present long-term value to the world and our financial infrastructure.
I certainly have my doubts about the longevity of it – but I’m holding neutral position because I tend to keep an open mind.
I also believe that everyone should have a small portion of money in a higher return / higher risk type of investment as part of their overall investment strategy – but it should only represent a tiny portion, and only what you can afford to lose. It certainly shouldn’t be money you rely on for your livelihood.
While I don’t plan to invest in bitcoin any time soon, I will continue monitoring and researching cryptocurrency. And if I do decide to put money into it, I’m in the lucky position where I can afford to lose it. I don’t want to bet my future on bitcoin!
My investment strategies – property, shares, bitcoin
Everybody wants everything yesterday – so it’s easy to see why bitcoin is tempting to so many people. With property, you are looking at 10 – 20 years at least to see the return on your investment. But there are good reasons for why I believe Australian residential property should be the foundation of my investment strategy.
Firstly, the golden rule of investment is that you should never lose your principal – so it’s not so much the return on your money, it’s the return of your money.
Most people don’t even keep the money they have. But if you have a few million dollars’ worth of property assets, that’s unlikely to ever go away, because, based on historical performance, we’ve seen that property is a very stable investment here in Australia. It also offers a strong return for the money you invest.
When the media talks about returns of say 5% capital growth, they’re not looking at the bigger picture. For example, to buy residential property, you can borrow 70-80%. So, for a million-dollar property, you put in $200K. And if there’s 5% capital growth and 5% rental return, they’re looking at the return based on the entire million dollars. So, in that context, it doesn’t seem like much. But what people don’t consider is that it’s actually $50,000 in growth and $50,000 in rental returns on your own $200K investment, which makes it more like a 50% return. And once you understand that, it’s very powerful. Not to mention that there is no tax payable as long as you don’t sell the property, so it’s tax deferred, which gives you compound returns.
Investing with your own money
I also invest in shares as well as property, but I have found that it’s difficult to build the same kind of wealth over time, as you need a lot of expertise in knowing when to buy and sell. For example, I bought NAB shares in the 1990s for $29 a share and they’re now worth about $30 per share today.
Most people also tend to invest their own money in shares, in which scenario, it’s also hard to build enough wealth for the last few decades of your life, unless you are investing a lot of money. If you borrow money to invest, there’s a lot more to gain, but also a lot more to lose, which I’ve learned from experience.
Just before the GFC my stockbroker rang me to suggest that I borrow some money to buy shares. I told her that I don’t do that because it’s too risky. She said to just borrow 50%, and it would be safe enough with blue-chip shares. So, I followed her advice and built up a good portfolio of well over a million dollars – BHP, Westpac, Macquarie Bank and so forth.
But then the GFC hit. For those few months, pre-GFC I probably made a few hundred thousand dollars of capital growth. But after the GFC, almost all of my blue-chip stock lost 80 – 90% of its value. At that point I was faced with a margin call by the bank – to either put in more cash or sell the shares. Given the market uncertainty, I ended up selling. Which meant that I lost 99% of that portfolio, ending up with only $12,000. So that was a big lesson for me!
Now, I still invest in shares, but I use my own money, and only with companies I know a lot about.
Buying property with bitcoin
There has been a lot of news lately about vendors deciding to sell their property in exchange for bitcoin, so there’s a lot of hype around how to do it.
If it were me, though, I’d be thinking the other way around. If I were one of those people who had made some money with bitcoin, I’d be taking it out now and putting some of that money into property, and some into shares.
My take is that it’s all about mindset. It’s ok for younger people to lose a bit of money, to fall down a few times, make some mistakes. But do you want to bet your whole future on that?
I believe it’s important to have the awareness that you need some assets to support yourself later in life. To work harder and work on improving your income, and to invest in property, so you can still have a bit of money to pursue some more speculative options like bitcoin, but with the confidence of knowing you have a secure future and solid foundation.
At the end of the day, everyone needs to have something to fall back on!
Joseph Chou is the CEO & Founder of Ironfish, a seasoned property investor and qualified financial planner.
He shares his thoughts on the Ironfish blog at the end of each month and also travels regularly across Australia speaking at various events, workshops and property investment seminars.
To book your seat at his next speaking engagement, visit our property investment seminars page.
* All views expressed in this blog are the opinions of Joseph Chou. Investors are expressly recommended to do their own due diligence in relation to any investment decisions they make and/or seek independent financial advice.