I used to invest in houses. Quite a lot of them—for myself and for other people who liked my business model and were keen on securing a passive income with excellent returns. And one of the things that I always said (and the reason I invested) is that property prices double on average every ten tofifteen years or so. So if you’re looking for a long-term play, property is it.
During the last recession when house prices went, relatively speaking, into freefall, you would have been hard-pressed to find somebody who would buy into the sentiment of prices rising at all, let alone ever doubling. With the media then full of credit crunch rhetoric, and doom and gloom scenarios, it was almost impossible to get anyone but the most die-hard of visionaries to realise the bad times would pass, the recession would come to an end and house prices would resume their inexorable uphill march.
At that time, nobody had a clue what quantitive easing was—most of the people I spoke to thought it was a euphemism for some sort of laxative!—and nobody had ever seen the sort of insanely low-interest rates that had bankers’ knees knocking thinking they’d have to start paying out mortgage holders on their loans, rather than the other way around! For a short time, the notion of negative interest became a real possibility.
With the collapse of Lehman Brothers and the near collapse of Northern Rock, along with the progressive devaluing of money, faith in the financial system was at an all-time low. Due to the Herculean efforts of successive governments, however, that faith has been largely restored, and we have had an unprecedented stock market bull run and good stability.
Yet still, you don’t have to look far afield these days to find places where faith in government and financial institutions—and money—has totally collapsed.
Zimbabwe springs to mind; a country in which hyperinflation led to the issuance of $100 trillion bills. It’s worth pausing for a moment to consider this ludicrous figure outside of a fiscal context. To begin with, in the adult human body there about 100 trillion cells. And get this…if you laid 100 trillion ten pound notes end to end they would reach Saturn and back—six times! Most people don’t have enough tenners in their wallets to hand to get to the end of the drive and back.
Ironically, the now obsolete Zimbabwean note is something of a collector’s item, fetching upwards of £70 on eBay. In circulation, it was worth around 30 pence. Visionary investors back in 2009 bought stacks of these notes and have since built businesses around them. And who could argue with 20,000%+ returns? It’s the sort of appreciation I could only conceive of if I’d invented a chemical solution that turned bricks and mortar into blocks of pure gold.
For the record, and in case you were wondering, I’m not about to turn my back on hotel investments to become a numismatist. I’m pretty happy with 10%+ returns, and I know my investor partners are, too. But what these real-life hyperinflation anecdotes highlight is some crucial pointers about investment, and about money…
- You never know when something that seems worthless will rise in value
- Holding diversified assets is the number one consideration when it comes to successful investing
- Holding too much ‘paper money’ rather than assets is a seriously risky business
Today, following decades of oil prosperity, Venezuela looks much like Zimbabwe did a few years ago. If you wanted to buy a chicken in Venezuela today, the physical cash you’d need (notes not coins) would weigh more than five times the chicken itself—perhaps six or seven by the time this article is published.
And dining out? If you’re paying in Bolivars, it’s nothing short of a gamble. Your meal will cost more by the time you eat your last mouthful than it did when you took your first bite. So certainly worth paying in advance. These are the type of scenarios you can expect when inflation runs at nearly two million percent. Moreover, it highlights the precariousness of cash when an economy, due to corruption and mismanagement, spirals out of control.
The worst part is, nobody ever sees these fiscal train wrecks coming.
Nobody ever thought we’d see near-zero interest rates in the UK. We’d never seen them before, and we weren’t expecting them. Remember, this was at a time when savers were making money on their moneyby leaving it in a bank. Today, leaving your money in the bank is pretty pointless. It’s the reason we’ve had a full-on decade of buy-to-let madness. People wanted money in assets that provided a return. But with rates the lowest they’ve been in, according to an article in The Business Insider, a staggering 5,000 years, banks are good for one thing—borrowing.
My point? That the well-worn aphorism ‘cash is king’ really only holds true in the context of an economy that’s stable and secure, and in which politics and financial mechanisms such as quantitative easing aren’t chewing out value. Tell a Venezuelan today that ‘cash is king’, and they’ll protest by setting fire to a mountain of Bolivars.
Don’t get me wrong, we all need cash in our pockets or liquidity in our accounts. Walk into Waitrose and show them your investment portfolio in lieu of cash for goods, and someone will most likely call security. But having too much cash in a repository like a bank, especially today, doesn’t make much sense. Not least of all because, in the event of a bank default, the FSCS only protects the first £85,000 of your money. So if you’ve got a cool mil on the balance sheet and you get a Lehman-style crash, you can kiss goodbye to 90 percent of your dough.
Now, I started out by saying that I used to buy a lot of houses, 474to be precise. And if you’re reading this and know a thing or two about bricks and mortar, I don’t need to tell you what property prices have done over the last five years. Just look at the chart below, which covers the last 67 years. See those blips and dips we call recessions? They don’t look like much, do they? Overall, it’s a very steep ramp. Up, up and away.
So…cash or property? I say both. Other assets, too. A few years ago, I shifted from houses to start investing in hotels. Partly because I wanted to scale up, partly because I find hotels more exciting than your average semi-detached, but mainly because of the sophisticated deals I can structure around them, not to mention the additional revenue streams they offer as overall capital security. But with bricks and mortar of any sort, if you get it right, and you’re in it for the long-term, you can’t go far wrong.
That’s it for this month. Right then, I’m off to book a holiday. Venezuela? Zimbabwe? Maybe I’ll plump for a staycation, and go and look for a few more deals while I’m at it. Until next time.
If you’re looking to make a sound, passive business investment in hotels, get in touch with us at Shepherd Cox today, and we’ll show you how.