What’s the difference between investing in a property and investing in a share? In essence there isn’t one. We buy both in the expectation that a) they will produce an income and that b) the market’s expectation that the income will rise will bring capital gains. In the case of the buy-to-let flat, the income comes as rent. In the case of an equity it comes as a dividend. There are all sorts of minor complications around the edge of course, but investing in both is basically a bet on a rising income.
So here’s the question. Would you buy a buy-to-let flat right now? Of course not. Why? Because you know that property is in a serious bear market and that prices will keep falling. You might think you see value all over the place – in the sense that a buy-to-let that might once have set you back £250,000 could now be yours for £150,000. But that doesn’t tempt you back into the market because you know that as a whole it remains overvalued. You know that confidence across the board is shot. And you know that markets always overshoot to the downside anyway. If you think you see value now, you know you’ll see better value next year.
So why, if you wouldn’t buy a house now, would you buy an equity? After all, conditions are much the same. Global equity markets are clearly in the grip of a nasty bear driven by a perfectly reasonable collapse in confidence in economic growth and in corporate earnings. This could last 10 to 15 years (it often does), and like all bear markets, it’s bound to overshoot. Individual stocks might look like they offer value, but if the market as a whole keeps falling, why would their prices rise?
Yet Warren Buffett, a man usually referred to as the “world’s greatest investor”, is buying. He tells The New York Times that he will soon have his personal wealth (such as it is – remember how he is always going on about his modest paycheck and lack of non-Berkshire Hathaway assets?) tied up 100% in US equities. Commentators on both sides of the Atlantic have rushed to praise Buffett for his “brave contrary move” and have advised the rest of us to pile in after him. I won’t. Instead, suspecting, as I do, that all the cherry Coke he claims to drink has finally addled Buffett’s brain, I’m going with advice from Eclectica fund manager Hugh Hendry instead. In long-term bear markets, says Hendry, pretty much everything goes down for a long time. So what do you do? “Just don’t buy any equities at all.”
That said, I know that many of you would rather go with Buffett’s gut feeling than mine (which seems reasonable…), so this week we look at equities that on conventional measures look like they represent real value.