Let's play darts!

After nearly two full weeks of hot, sticky weather, Britain has officially moved into heatwave Category 3 territory - it was 32.2 degrees in parts yesterday.

If Britain is supposed to be heading for a triple dip recession, then nobody seems to have told those in the populous south-east of England - the pubs and restaurants seem to be more packed than I've ever seen them. With the long, warm evenings, establishments are packed out with people indulging in the usual British traditions: drinking warm, bitter ale with twigs in the bottom, playing darts, sitting in beer gardens.

I've always enjoyed a good game of darts. Although the configuration of numbers on the board appears to be random, the layout was actually designed in the 19th century with a view to punishing inaccuracy. Thus the high numbers such as the 20 are immediately surrounded by low numbers (1 and 5). Similarly if you look down to hit the 19 as a fall-back shot, you'll instead introduce the risk of hitting a 3 or 7.

Darts is so popular in Britain that it regularly features in TV scheduling. Back in the 1980s there was even a really naff primetime quiz show with a darts theme (ITV's Bullseye) which culminated in two players - a darts player and a non-darts player who was supposedly good at things like spelling and trivia - needing to score "101 or more in 6 darts to win'Bully's special prize", which for some reason was nearly always a speedboat (weird really, as the competitors were usually portly, red-faced chaps from pubs in places like Leeds and Sheffield, not exactly places known for their glistening coastlines or playboy yachtsmen).

Usually what happened was the non-darts player, in order to appear confident and professional, would aim for the 20 and score very poorly by hitting a succession of 1s and 5s. Occasionally, though, you'd see an amateur contestant swallow their pride and aim for the left side of the board, where there is something of a safe haven of higher numbers 16, 8, 11, 14, 9, 12 - and as a result, they often did quite well. 

I guess the victorious contestants just used to sell the speedboat.

Parrallels with investment

It's a bit like this in the stock markets sometimes. Beginner investors seem to show a disproportionate level of interest in the 'penny dreadful stocks' - often speculative mining exploration companies with no track record of generating revenues or profits and with shares prices of just a few cents. They hope that they will strike it rich when the mining company finds the modern equivalent of Lasseter's Reef and see the share price quadrupling quickly, but usually what happens is that the company runs low on cash and needs to raise more capital, thus diluting away the little existing value in the company's share price.

In darts terms, you've aimed for a 20 and got a 5. Or worse, if the company becomes insolvent, you may even have aimed for a 20 and hit the dreaded 1 - you've lost you're entire investment.

Investing in larger, profitable companies with a proven track record (or, better still, a portfolio of them) is a bit more like aiming for the left hand side of the dart board. Commonwealth Bank's share price was never going to quadruple overnight, yet it has represented a tremendous income-producing and compounding investment over the years. Ditto Westfield. A bit like the cautious darts player, in some years you might have hit a 16 or a 14, and in others perhaps only an 11, but over time, you would have profited very handsomely.

The buy-and-hold approach isn't the only strategy which can work in the stock market. Plenty aim to time the market, a strategy which requires the effective use of sell-stops to limit downside risk.

Property darts

Around the turn of the century in Australia there was a theory doing the rounds that it was "impossible" to forecast where property prices would show growth, so instead property investors should just find a property located virtually anywhere which generated a positive cash flow, and simply hope for capital growth over time. Gratifyingly, you don't hear that viewpoint too often any more.

So many unlikely parts of Australia have been tipped as potentially hot regions for property price capital growth over the years that it does feel sometimes like those tipping them are throwing darts at a map of Australia blindfold.


Positive cashflow investor Margaret Lomas once said that all investors are likely to have at least one 'lemon' in their portfolio - it's all a part of the learning process. It's definitely true that the best investors are those who resolve to learn from their mistakes over the years and do better next time around.

Being a 'boring-but-safe' investor over the years in Sydney's inner 5km ring suburbs, and city suburbs around London, I've never had a 'lemon' in my portfolio, glad to say, though of course some properties will always perform better than others. 

What I do have, though, is a property which I bough in Sydney's eastern suburbs years ago which to this day I remain convinced I could have negotiated to pay $10,000-$15,000 less for. It's common for agents to say: "Don't worry, over the long-term $15,000 is nothing!". That may or may not be true, but I can tell you it still very much irks me that I could potentially have one of my mortgages with a lower balance. 

Getting it right

As the statistics show that most investors for various reasons do not go on to own very large property portfolios, this makes it doubly important to attempt to 'get it right' first time. If you are only going to own a handful of properties in your lifetime, it's crucial that you attempt to choose them wisely rather than simply learning from painful mistakes the hard way.

Something we have seen increasingly in recent times is a region being tipped as a 'hot investment market', only for commentators to completely reverse their viewpoint within a year or two due to cancelled or mothballed mining projects, median rental prices collapsing by a third or spirally vacancy rates. This is of no use whatsoever to property investors - you can't buy and sell property so quickly and expect to regularly finish with a good result.

Expect to see more of this in coming years as the Baby Boomer generation starts to think a little differently about real estate as an asset class. Many have been conditioned to believe that property prices only ever go up, which clearly isn't the case. With household debt levels running to record high levels by 2005, property prices in some regions could remain flat or falling for many years, and plenty already have.

This is one aspect in which property investment differs from share market strategies. While you might decide to dispose of a poor share market investment quickly at a moderate loss, this is far harder to do in the property sphere, for various reasons. 

Real estate is a more illiquid asset class (particularly out in the regions where demand can be lower), it has high transaction costs (such as stamp duty and legal fees) which makes trading properties frequently tremendously inefficient, and the use of leverage means that an asset which falls in value by, say, 20%, can leave the investor facing negative equity and devastating losses.

Ultimately, you can't disaggregate a property market from its local economy, which is why I'll always be discinclined to head to the regions where employment and economic activity is necessarily focussed on one or two key industries. As noted above, for buy-and hold investors (as opposed to property flippers and renovators) property is far better viewed as a 20-30 year investment than it is as 12 month investment. 

With the migration of the British population to the south-east of England, property prices are continuing to break through all-time highs. In Australia, while nobody knows what will happen to property prices in Sydney's inner 5km in the next 12 or 24 months - although it's been forecast that prices will move upwards to new record heights given the sky-high auction clearance rates and properties selling incredibly quickly at present - with the population of the city set to increase to 7 million people by 2050, I reckon it will do alright over the life of a mortgage.

Definitely a better investment than a speedboat.

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