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Friday, July 9, 2021

Five reasons investors should treat stocks as if they were buying a house - Financial Post

Peter Hodson: If investors started viewing their next stock purchase like a house, they might soon find they have more net worth to go around

Author of the article:

Peter Hodson
You can make money on stocks by treating them as if you were actually buying a house, says Peter Hodson.
You can make money on stocks by treating them as if you were actually buying a house, says Peter Hodson. Photo by Tyler Anderson/National Post files

Making money on your house yet? Sure you are, everyone is. House prices only go up, remember?

Don’t worry, this column is going to be about stocks, but with house prices up so much in the past couple of years, we needed to grab your attention. Besides, we’re going to discuss how to make money on stocks by treating them as if you were actually buying a house. Confused? Hopefully the following five points will clear things up.

Assessing your current and future needs

We get a lot of questions about small-cap stocks from our customers at 5i Research, and cryptocurrencies, electric vehicles, lithium miners and tiny health-care companies are also popular topics. But many of these types of investments are not appropriate for an average investor.

Just as you should never buy a house that is too big for your family, or too expensive or too far away, think about all your stock purchases and whether they actually, truly, fit your investment goals.

If you think about some of your positions honestly, you will likely find that many of your investments were not bought with your future and current needs in mind. It’s time to get rid of your speculative, inappropriate investments.

Taking a long-term point of view

The vast majority of prospective homebuyers have a long-term viewpoint. Most are looking out a minimum of five years for various reasons such as transaction costs and allowing time for the property to (hopefully) appreciate in value.

Very few would expect to turn a house around in six months and sell it at a gain, as there is simply not enough time. This is exactly the same for stocks. Companies, just like houses, need to be given time to allow their strategies to gain traction, and your money needs time to compound and grow.

Investors who expect to turn a profit year in, year out may need to adjust their expectations. In both the housing and equity markets, time is your friend.

Do some due diligence

A significant amount of due diligence is conducted during the homebuying process. Buyers make sure that their finances are in order, research the city and neighbourhood, and even tour the house to make sure the plumbing works.

We wouldn’t expect every investor to phone up company management to ask if the toilets are flushing properly at headquarters, but a little due diligence can go a long way. Ensuring the proper allocation to a stock exists, setting an appropriate budget before investing, checking that the valuation makes sense and, finally, examining the financial statements (the plumbing) can save a lot of headaches for investors down the road.

Holding on through downturns

The illiquidity of houses (as well as what a hassle moving can be) sometimes works to a homeowner’s benefit. If the economy is slowing down and housing prices are dropping, very few homeowners will think it’s a good idea to sell immediately at whatever the going rate is and move back in with friends or family.

Most would wait for the turmoil to pass and things to improve, with the idea that the lower prices aren’t justified given the due diligence performed and long-term focus of the homeowner. Things might be bad today, but they will pick up again and the house will reflect that over time.

We have never heard of a homeowner selling their house just because their neighbour did, but many stock investors will sell in fear when they see others selling. Investors sometimes do the exact opposite of what they do with houses. At the first sign of bad news, we immediately move to sell a stock even though the problem has likely already been priced in.

To add to the problem, those who were confident enough to hold on to the investment now have to stare at that red, unrealized loss day in, day out, which only adds to the likelihood of getting fed up and selling in the short term.

Don’t check prices daily

Do you pick up your phone every morning to check MLS to get an update on what a house might be valued at? How about checking every hour? Or minute? If you don’t do it for potentially the biggest purchase you make, why do we do it for stocks?

The readily available pricing of stocks can sometimes be an investor’s worst enemy. It leads to a great deal of anxiety when prices decline and only adds to the problem if you have a short-term focus on portfolios. We ignore the day-to-day volatility in real estate, and we should do the same for equities.

  1. A sold home in Calgary.

    Canada ‘way overextended’ in housing: David Rosenberg

  2. Some stocks are very expensive but worth it. Conversely, some companies are very expensive and destined for a sharp fall if the market breaks. How do you know the difference?

    Peter Hodson: These are the stocks you should hold on to, even if the broader market stumbles

  3. None

    Five summertime stock picks to set and forget so you can enjoy some time off

  4. Companies such as Nikola Corp., which rolled a truck down a hill to impress the electric-vehicle crowd, still trades millions of shares each week. Why?

    Five things that leave even investing vets shaking their heads in bewilderment

Understandably, there are other considerations that go into the decision to purchase a house versus a decision to purchase an investment or stock, but it almost seems counterintuitive that we are most patient and calm with one of our largest assets (houses) and yet are willing to flee from a more liquid investment that is likely to only make up a fraction of our total net worth.

If investors all started viewing their next stock purchase like a house, they might soon find that they have more net worth to go around than ever before.

Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also associate portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned).

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In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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