If you have money to invest and are under fifty, read on, writes The Motley Fool.
Last weekend I had the pleasure of attending a wedding. At the intimate reception afterwards I met a wonderful couple. I am sure they'll have a prosperous future, despite the horrendous mistake they are about to make.
I believe many Australians could be making the same mistake. So with forecaster's trepidation I'll offer advice backed by the wisdom of one of Australia's funds management greats, Peter Morgan.
Hunting for another way to lose money
The couple in question had spent Saturday hunting for an investment property. To cut a long story short, they had lost a bundle in the sharemarket after following share tips from friends and brokers.
Apparently this couple were surprised that a capital intensive company like OneSteel Limited (ASX: OST) was not a good investment. So here's my first tip: If a company's return on capital is less than its cost of capital then run away…fast.
Done like a dog's dinner
I realise that advice may be gibberish to some of you, so here is another tip from my own investing archive. I bought my first shares days after the '87 crash. Their subsequent performance was disappointing, underperforming the rising market. I had been stockbrokered – done like a dog's dinner – and realised I must learn to manage my own money.
There is only person you should trust to manage your money. That person is you. I know you're busy. I know retirement might be a long way off and I know finance can be a tad boring. But if you want to maximise your wealth, a little investing education is essential.
Mistakes are valuable lessons in disguise
Rather than learn from their mistake, I believe the couple were about to repeat the same mistake. They were sick of the sharemarket and self-pleasuring – their language was more colourful – analysts like me. Consequently, they felt it was time to swap horses and invest in real estate.
Therein lays their big mistake, and one I hope you won't repeat.
The couple's savings had been savaged by a sharemarket falling 40% in a couple of years. At the same time they had seen friends profit handsomely from real estate investment. So they believed it was an easy decision. Lose money in the share market or make money in real estate.
Look forward not back
Unfortunately hindsight bias is disastrous to your financial well-being. Just as driving forward by only looking in the rear view mirror guarantees you'll crash, investing based on past performance guarantees a nasty accident.
Real estate in Australia is overpriced. There are no ifs or buts about that. Buying an overpriced asset guarantees you'll underperform going forward. Buying high does not work. Please, please, please don't do it!
Economists and real estate agents will cloud the picture by pointing out the strong demand for property. Financial planners and accountants will highlight of the benefit of negative gearing. That is all peripheral noise and should be ignored. Buying high only gives you time to cry!
Until tomorrow
The time to buy property will come again. That will likely be in five to seven years when people are sick of losing money on their negatively geared properties, while their friends boast of share market gains. Real estate in Australia will be relatively cheap again and that will be the time to buy.
While the global financial markets have many pressing problems, those able to look beyond tomorrow's headline should profit.
Next up, I'll outline one strategy that both I and the funds management star, Peter Morgan, believe will put you in front.
In the meantime, consider this one large company we think has some serious long-term potential. Get this free special report from the Motley Fool – The Best Stock For $100 Oil. Click here to sign up now.
Dean Morel is The Motley Fool's Investment Analyst. Dean dislikes capital intensive companies and has never owned shares in OneSteel. The Motley Fool has an asset light disclosure policy.
