Five investing lessons you should never forget

This year is turning out to be a good one for property. The cycle is moving on and, as growth returns to our property markets, memories of the last few difficult years will fade.

However, it would be a pity to have lived through the challenging times we all experienced in the last few years without learning some lessons so that we are not destined to repeat the pain.

So what did you learn from the downturn?

Probably the most important lesson we can all learn is to never get too carried away when the market is booming or too disenchanted during property slumps. Letting your emotions drive your investments is a sure-fire way to disaster.

To ensure you never get caught again, let’s look at five big lessons from the last few years.

1. Neither booms nor busts last forever

During a boom, everyone is optimistic and expects the good times to last forever, just as we lose our confidence during a downturn. Our property market behaves cyclically and each boom sets us up for the next downturn, just as each downturn paves the way for the next boom.

Let’s face it: while the news is much more positive today, we know that over the next few years the buoyant market conditions will be followed by a property bust and then another boom. And over the next decade or so we’ll probably have a recession and we’ll most likely have another depression one day.

The lesson from all this is that even as you take advantage of our rising property markets, you should get prepared for the next phase of the property cycle. During the last cycle, most investors didn’t really have their downside covered or their upsides maximized.

2. Beware of doomsayers

For as long as I have been investing – and that’s close to 40 years now – I have heard people with excuses as to why property prices will stop rising, or even worse, why property values will plummet. However, in that time, well located properties have doubled in value every eight to 10 years.

Fear is a very powerful emotion, and one that the media use to grab our attention. Sadly, some people miss out on the opportunity to develop their own financial independence because they listen to the messages of those who want to deflate the financial dreams of their fellow Australians.

3. Follow a system

Smart investors follow a system to take the emotion out of their decisions and ensure they don’t speculate. This may be boring, but it’s profitable. Let’s be honest, almost anyone can make money during a property boom because the market covers up most mistakes. But many investors without a system find themselves in financial trouble when the market turns.

Warren Buffett said it succinctly: “You only find out who is swimming naked when the tide goes out.” In other words, if you aren’t following a system that works in all market conditions, you will be caught naked when the market changes.

If you prefer to have consistent profits and reduced risk, follow a proven system. Make your investing boring so the rest of your life can be exciting.

4. Get rich quick = get poor quick

Real estate is a long-term investment, yet some investors chase the “fast money”. You’ve probably met people like that – they look for that deal that will make them fabulously rich. When you see them a year later, they’re usually no better off financially and still talking about the next deal that will make them rich.

They are often influenced by the latest get-rich-quick artist with a great story about how you can join them and become stupendously wealthy. Their stories can be very compelling, even hard to resist. They often pander to the wishes of people who would like to give up their day job to get involved in property full time, but in reality it takes most people many years to accumulate sufficient assets to do this.

Patience is an investment virtue. Warren Buffett said it right when he explained that: “Wealth is the transfer on money from the impatient to the patient.”

5. It’s about the property

You’re in the business of property investment, yet during the last boom many investors forgot the age-old property fundamentals of buying the best property they could afford in proven locations.

Instead, they got sidetracked by glamorous finance or tax strategies, and some lost out.

Smart investors do it differently.

They make educated investment decisions based on research and buy a property below its intrinsic value in an area that has above-average long-term capital growth and then add value creating some extra capital growth.

These are just five of the many lessons that I trust you learned from the recent property downturn.

We know that in some regions the pendulum swung too far into the positive during the last property boom, driven by greed, and then swung too far into the negative during the downturn, driven by fear.

Learn the lessons that this downturn has taught us and the rollercoaster ride will not be as dramatic next time because you won’t let emotions drive your investment decisions. Both fear and greed will drive you down the wrong path.

Promise yourself that as the property market rises you won’t get too excited, then when the next downturn hits (and you know it will) you can just confidently smile because you learnt the lessons that this downturn has taught you.

Decades from now you will be able to tell your children and grandchildren that you survived the Australian property slump following the Global Financial Crisis and it taught you well.

Michael Yardney is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog. Subscribe today and you’ll receive a free video training: The Golden Rules of Property Investment.