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Ben Kingsley Blog post by Ben Kingsley

Predictability Investing — My Essential Ingredient

So you have some surplus income coming into your household and you don’t know what the best use of this money is?

You’ve got choices:

  • Spend it
  • Save it
  • Put it on the Mortgage
  • Payoff debts

Use it to borrow more to Acquire another appreciating Asset (Gear or Leverage it).

The article is going to focus on the last point, but what to invest it in—Shares, Commercial Property, Industrial Property, Alternative investments, like Art, Coins, Stamps, and of course Residential Property.

Let’s start from the top—Whenever you are investing, your money is at risk, this is even more so when you are putting someone else’s money at risk too (I.e. the Bank’s money that you have borrowed in this example)

So if you are bringing $50,000 to the table and the bank is offering you $450,000 in borrowings, in very basic terms you can acquire assets to the value of $500,000 (not taking into account any entry costs or fees—for illustration purposes only).

So you can secure an asset worth $500,000, that’s really putting your $50,000 to hard work.  This risk here is in the performance of that asset you choice and the time it takes to mature in value.

The investment principles here you need to understand are volatility, control, historical performance (Returns), especially when you are going to have to pay interest on the money you borrowed.

Volatility is the big risk here—Let’s say you bought shares worth $500,000 and the share market had a very big correction, which on the stock market can occur in a little as a week.  So you bought shares worth $500,000 and the market drops 25% in a week—Your share are now only worth $375,000—By gearing into share you might have done your savings and far more in a very short period of time, because it is historically a volatile market and you don’t get to control the market, so taking a leveraged position can be extremely dangerous and certainly not for the faint hearted.

Residential Property on the other hand has been historical predictable, meaning when you extrapolate the performance of the asset class over an extended period of time, you get a reasonably predictable and steady performance and outcome, so it is far less volatile as an asset class

Furthermore, in terms of control, Residential property is a tangible offering, unlike shareholding in a company.  The control is important, as during slower performing times your control offers you the opportunity to impact on the property, such as a renovation or extension to add value when the market is flat.

I call the combination of low volatility, the control element and the historical performance ‘Predictability Investing’ and I would never leverage into any investment if I don’t have this combination on my side, as there is too much risk to one’s wealth base, well that’s my principle anyway!

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