Buyers should follow Warren Buffett's philosophy of investing when prices are low
Why Gulf investors should buy and hold UAE property
Probably the biggest conundrum for Gulf investors, after deciding what to invest in, is whether to buy-and-hold through market cycles or try to time their investments.
To clarify what this means: market timers aim to buy low and sell high as a way to maximise their returns whereas the buy-and-hold investor never sells, or at least not until they need the money back, perhaps to buy a pension annuity.
Warren Buffett is the world’s most successful ‘value’ investor as the buy-and-hold school is also often known. He developed his approach from his mentor Benjamin Graham, who wrote what Mr Buffet says is the best book on investment ever The Intelligent Investor.
It is indeed a brilliant book if a little daunting for the average reader.
But the message is pretty simple when distilled down: look to invest in excellent companies or bonds when they are cheap because they are temporarily out of favour with ‘Mr Market’ and then don’t sell or try to market time cycles because you will usually get this wrong.
What then happens is that over time the amount saved by the original cheapness of your purchase will compound, and what started as a very small advantage will multiply hugely.
This really does work.
To give a personal example, in my early years as a financial journalist I was forced into a company pension scheme that paid a very small amount into a fund, and I forgot about it for 25 years.
Then I noticed an article about new rules allowing the over-55s to cash out of UK pensions and wondered what it might be worth. My thinking was that ultra-low interest rates might temporarily boost the value of this pot.
While that was true indeed, the main growth had come from simple compounding, an amazing total 38-fold increase. If only I had invested more.
There is a lesson there: compounding will only deliver if you invest enough and early. I would add another: choose the holder of your investment very carefully as they will have to survive the course.
Warren Buffett recommends low-cost tracker funds for the S&P 500 from the likes of Vanguard.
But, of course, you don’t have to put all your eggs in one basket. Indeed, that would be another first principle to remember for successful investing.
Even MrBuffett has been known to opportunistically market-time investments. He doubled his money on silver bullion in the late 1990s with a trade that lasted a couple of years. Could that happen again now?
Likewise he bailed out Goldman Sachs in the global financial crisis and let them buy him out quickly in the recovery phase.
Mr Buffett is just being smart in recommending the no-lose tracker option for the ordinary investor, who probably will not have his super-smart skills in picking big winners at the right time and price.
There are, for example, a very wealthy group of North American pensioners who have made fortunes just by copying his every purchase.
When he was bailing out Goldman Sachs, for instance, the markets were frightening but the average investor was also free to buy this stock, though admittedly not for the same price as Mr Buffett secured for his new preference shares.
But you don’t have to copy him. Indeed, the S&P tracker beat his own performance over the past decade, although not in the previous three decades.
Over the years I have made enough bad calls in financial markets to give up. We can all learn the hard way.
But I have always found it far easier to get real estate markets right and that’s where I like to invest most.
However, it is never enough just to buy-and-hold whatever the market in real estate. You still need to follow through with the original Benjamin Graham maxim and buy when ‘Mr Market is having a bad day’ and when prices are low.
Luckily for UAE investors that time is now, or shall we say the window of opportunity is wide open. Things could get a bit better for buyers, with prices dropping a little further.
But then being greedy as a buyer can also catch you out as many others will be thinking the same and when they do all finally rush to buy then prices will surely go up.
Dubai-based Mylo Real Estate wrote to me recently saying that their summer sales were running at four times the level of last year. It will be interesting to see if this claim is substantiated by the official data from the Dubai Land Department.
But in over 30 years writing about housing markets I know the green shoots of an upturn when I see it, albeit there can still be some time before what’s happening is apparent to the general market and by then it will be too late for the best deals.
Prices are at a four-year low at the moment and you have plenty of choice but it is never that easy. The best times to buy residential property are almost always in periods of uncertainty and after lengthy periods when buying would have been a bad idea.
You could hardly call the Middle East a haven of peace, stability and security at the moment but at least oil prices have almost trebled from the lows of 2014 and Opec has just agreed a new deal on output including Iran and Russia.
Putting down a deposit and gearing up with a mortgage on a property going into an upturn in the local business cycle should not be your only investment, but I would hazard a guess that it might be your best option with a three- to five-year time horizon.
Peter Cooper has been writing about finance in the Gulf for more than 20 years