Why You Should Use Data, Not Emotion
When you’re investing, put your emotions away and look at the numbers instead, says JUNO economist Ed McKnight.
18 October 2021
JUNO Autumn 2021
Have you ever thought: “I like that property down the road … maybe it’d make a good investment”?
Or, what about: “Maybe we’ll retire in Tauranga. Let’s invest there, so we have somewhere to go to, if we need it.”
You’re not alone. So many Kiwis make investment decisions and, in particular, property investment decisions based on what they like.
And that thinking is understandable, right? If you’ve only ever bought properties to live in yourself, then it makes sense that in the absence of other information, you’d look at investments the same way you always have.
That’s why the logic many first-time property investors use to justify a purchase is: “If I’d want to live in it, then surely tenants will, too.”
The trouble is, while this line of thought is understandable, they could almost be the opening lines for nearly every property investment horror scene ever seen.
It’s a business
Emotions have no place in investment. And the reason for that is when you become a property investor, you go into business for yourself.
Your goal is no longer the enjoyment of the property, or long-term family stability. Instead, your goal is long-term profitability.
That’s not to say that your tenants’ comfort doesn’t matter, simply that you can’t look at property the same way you used to. Your mindset has to shift.
When you’re looking at a property as an owner-occupier, you think about how it’ll feel to walk into the kitchen early in the morning, with the underfloor heating warm and toasty. You imagine creeping over to the counter to hit the ‘long’ button on the Nespresso machine.
Put yields over pride
But, as you move to become a property investor, your marker of success has changed. Now, you’re looking at budgets, yields, growth projections, and ensuring that you consistently have tenants and avoid owning a house with no one paying rent.
Let me give you a small but simple example of how your mindset might need to change.
Let’s pretend that when you search for properties to live in yourself, you look for modern wooden benchtops.
Whenever you have friends over for a glass of wine in your kitchen, you love how these wooden benchtops look like they’ve come right out of a magazine.
And because of this, you take exceptional care of them.
Beauty versus work
If you then go searching for an investment property and see one with beautiful wooden benchtops, you might think: “This is perfect, who wouldn’t want to live here?”
But then tenants move in. Perhaps they don’t take as good care of the house as you would. When you inspect the property, you find the wood has been damaged. Maybe it’s been marked, scratched or discoloured.
The property isn’t as well maintained as you would like when it comes to renting out the property next time.
What you missed is that, in this situation, a low-maintenance, durable steel or stone benchtop might be more appropriate for tenants. That’s because a more durable material is harder to damage and more straightforward to replace than wood.
Cool shares versus growth
The same mindset shift needs to happen when you start investing in shares.
Instead of thinking, “I like this company” or “I like Moa beer, wouldn’t it be cool to own part of a beer company?” you instead need to ask questions like:
Does the stock feel under or overpriced?
What’s the mix of capital gains and dividends the stock has achieved in the past?
And do I think the company will be in a more profitable position in the future compared to today?
The good news is that just by reading this magazine you’re showing that you’re committed to becoming a more switched-on investor.
Whether you invest in property, shares, managed funds, bitcoin, or something else, that commitment will help ensure those horror-scene opening lines are never uttered.
JUNO’s content comes from sources that JUNO magazine considers accurate, but we do not guarantee its accuracy. Charts in JUNO are visually indicative, not exact. The content of JUNO is intended as general information only, and you use it at your own risk.
Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.