For more than 20 years, residential property markets have generally been rising around the world. They also recovered more quickly than many expected from the global financial crisis in 2008. In the third and final part in this series, the investment author and former hedge fund manager Lars Kroijer explains why investors should nevertheless be careful to avoid too much exposure to real estate. He also discusses the risks involved in investing in cryptocurrencies such as Bitcoin.
Lars, we’ve seen a steady rise in house prices globally since the mid-1990s. What’s your view on buying residential property as a financial investment?
My view is that most people shouldn’t be involved in property investing at all. For the vast majority of people who invest in an apartment or a house, it is by far and away the biggest investment in their lives. Not only that, it’s geared; in other words, they have a mortgage. If you look at real-estate investment as a proportion of their overall wealth, it’s almost as if everything else they do is insignificant, financially speaking.
Now that’s great if property markets continue to go up, but if markets go down, you’re in real trouble. Particularly when you have a culture of property ownership, and it’s seen as an achievement in its own right to own property, I think there’s a risk that people over-extend themselves, without taking into account their massive concentration risk. Where you own your property is likely to be highly correlated to the value of your job, or your job prospects if you lose your job. Maybe it’s the same with your partner. All of those things are tied to the local economy.
If you have some reason to know that a particular market is going to double, by all means, go ahead and buy, but most people don’t. I’m not saying house prices are going to plummet; I’m saying I don’t know which way the housing market is going to go, in the UK or anywhere. But, from the premise that I don’t know better than the overall market, many people are over-invested in property.
There’s plenty of publicity around cryptocurrencies at the moment, and especially Bitcoin. What do investors need to know about this subject?
Bitcoin, and also most of the other currencies, went up dramatically in value in 2017, and that’s why everyone’s taking about them. But just because the blockchain is a powerful technology, that doesn’t necessarily mean that underlying currencies like Bitcoin, Ethereum and Ripple are going to continue to go up in value. That’s really anyone’s guess.
Should we consider cryptocurrencies as an asset class at all?
That’s a good question. Cryptocurrencies are interesting as a transactional tool. They’re much cheaper than fiat currency transactions, and the blockchain is a super interesting technology. It’s the future, there’s no doubt. There’s something here that’s not going to go away. I certainly think that you shouldn’t expect that the technology will go away. So I would say that anyone who is interested in this space would do well to understand the underlying technology. What is a blockchain? Why is not breakable? Why is it not relying on central government and fiat currency systems that we’ve seen in the past? That knowledge will probably serve you very, very well.
Now, there are a certain number of Bitcoin in circulation, and a certain number that it can grow to. In other words, there isn’t someone who can suddenly issue a bunch of Bitcoin at $10,000 a pop. But what is the total value of the Bitcoin system or the other cryptocurrency systems? I have no idea, and I haven’t met anyone yet who can convince me that they have an idea, other than the current market price. You’re going to see lots of people trying to get their name in the paper saying Bitcoin is going to 10X up, or that it’s going to be worth nothing.
Another disadvantage with cryptocurrencies is just how volatile they are. Yes, you can make money, but you can also lose it very quickly, can’t you?
By the standards of regular financial markets, the volatility is insane. Bitcoin will easily go up or down 10% in a day. That’s highly, highly unusual for regular financial markets. It would be on the news at the top of each hour if the stock market were up or down 10%. In Bitcoin markets, that’s just another day. Anyone who ventures into that market, I would certainly encourage them to expect, or at least allow for, big losses.
Lars, you’re sometimes interviewed as an expert on television or quoted in the financial media. What’s your opinion of financial journalism?
It’s interesting because I know a lot of the journalists. They’re providers of a product, and there’s no doubt there’s a real demand for that product. But do I think that they think they can beat the market? No, I don’t think they can, and I don’t think that they think they can, otherwise they would be out there opening hedge funds and getting far richer than they do by writing newspaper stories. They’re producing entertainment products that are eagerly consumed by a lot of investors. I do think they can help to move markets, because they do get CEOs and highly regarded research analysts to come on their programmes.
But if you do everything that Jim Cramer on CNBC does, you’re not going to do any better than the market. One thing’s for sure: if he did do better than the markets in any one year you would hear about it, and if he didn’t, you probably wouldn’t hear about it. This is why you should never use samples of one. If there’s one thing the news media is guilty of it’s to find the one star who’s done well over the last three years and say, here is the proof. It’s proof of absolutely nothing. You have to look at it ex ante. Could you predict it that this person, fund or institution was going to outperform? Otherwise you have to ask, in aggregate, did all of the funds in the news media outperform? And the answer is almost certainly no.
One of the main problems, of course, is that the financial media is largely funded by industry advertising.
Of course, that’s what pays for it. The fund industry effectively pays for those TV channels. I don’t think you can blame anyone in the industry — they’re doing their job — but you as an investor don’t have to contribute to paying for it, which is what you are doing through your trading and your active management fees and so forth.
It’s almost conventional wisdom that you need to outperform the stock market. That feeds into this whole mill. Someone’s providing you the information, someone’s providing you the product. It’s still in our culture that you are somehow a winner if you partake in that game. We all tend to remember when we do well, and forget when we don’t do well. There’s bias of our memories, if you will. But I think it’s a huge shame because, on average, people lose out. They would be far better off not partaking in that circus and simply putting their money in boring, long-term, index-tracking products.
In your view, do people need a financial adviser?
Not everyone does, but I think most people do, absolutely, yes. In the past, one of the issues with the financial advice industry, if you can call it that, has been that they took a cut out of the advice that they gave. So they advised people to buy funds that may not have been in the investor’s interests but were in the adviser’s interests because they got a big fee. But that’s changing. That’s a good thing for the adviser, and certainly for the investor.
It might sound as if I’m saying, why do we need the financial industry at all? Just go buy an index tracker and a low-risk investment, combine the two and you’re done. For some people I think that is the case. But for a lot of people I think having an adviser is tremendously helpful, to help you think about risk and about tax, and to help you think about the changing world around you. Advisers can help you to think about your holistic financial situation. Is your house too big a component? Do you have concentration risk in your overall portfolio?
So there’s tremendous value in having someone who’s on your side in everything and who can guide you through the financial jungle.
How should you go about choosing an adviser?
That’s a tough question. Ultimately you’ve got to feel very comfortable with your financial adviser. You’ve got to believe that they have your interests at heart. A good place to start is this. If they tell you to invest in equities, which they probably should tell you, they shouldn’t be telling you to trade stocks yourself or buy expensive active funds. If they’re telling you to buy cheap index trackers, the overwhelming likelihood is that they have your best interests at heart.
So ask yourself, do you feel comfortable with this person? Do you feel they’re competent? Do they have good references? It’s an incredibly important decision that a lot of people to think long and hard about.
How important for you is the behavioural coaching that an adviser can provide?
During crises a lot of people panic — understandably, because the world is changing around them — and I think that’s exactly when an adviser can prove their worth. People always say there’s a tendency for retail investors to sell at the bottom and buy at the top. I don’t subscribe to that because I don’t actually think that retail investors are dumber than the market; they are the market. But an adviser can prove incredibly helpful at times of tumult. That can mean many things. It can mean a declining or panicky market, but it could also mean a change in the tax situation, or you could lose your job, or your mortgage rate could go up a lot. In all of these cases there’s tremendous value to having someone on your side. That I think is well worth most people paying for.