One thing I’ve learnt over the years is this: understanding opportunity cost separates successful from mediocre investors. As does courage — which is increasingly in short supply these days.
Opportunity cost is what you give up when you do — or invest in one thing but not another.
For years, I had money tied up in rental property in Auckland.
It delivered a return of around 2%. The capital gain was reasonable — but I had to work hard for it. The properties were a constant source of worry. From repairs to tenant troubles.
Had I put that money into more focused opportunities in the global markets, the returns may have been stronger. With less anguish.
During inflationary times, Benjamin Graham’s Intelligent Investor reports that stocks have outperformed inflation 78% of the time since stock market records began in 1926.
There are very few other asset classes that can achieve that.
Some people have dead money
A holiday home that doesn’t pay its way. A piece of land with nothing on it. Bank deposits at interest rates going backwards when you count inflation. Or a rental property that delivers sub-3% and takes up your time.
A few more courageous investors have pursued hot opportunity. They have brokerage accounts full of speculative stocks. Holdings in cryptocurrency. Or angel investments.
But these opportunities are very risky because there is seldom a price floor, margin of safety, or any income.
Unless I’m being paid extremely handsomely for extreme risk taken — I won’t go into extreme opportunities.
Then there are opportunities that seem attractive, but aren’t really. They take away the opportunity of investing into more resilient options.
Airlines offered phenomenal growth in the 1970s and 1980s. Yet many weren’t profitable. And the stocks struggled.
Today, electric vehicle sales are growing at nearly 90% per year. But alternatives could emerge that offer better range in even cleaner ways.
Here in New Zealand, the power companies were recently slammed for distributing too much dividends and not investing in renewable energy.
But 85% of their production is already renewable. And the grid needs some versatility in supply for when rivers are dry, the wind doesn’t blow or the sun doesn’t shine.
With growing demand for electricity, they can expand — providing ideologues don’t stifle them.
Some believe there will be another Covid. And retail and office property will struggle going forward.
Yet this doesn’t make sense. Much of the Covid response has proven overbearing. And humans have always had a preference toward getting together in person to collaborate or trade.
Some say that any company involved with fossil fuels is on death row. But, as we’ve seen, oil and gas have enduring roles, at least for now, in providing the energy that economies need to function. And these companies have seen their stock prices rise, despite resistance from ESG funds.
Further, are they the sole cause of irreparable destruction?
The average commuter can absorb an entire year of vehicle emissions with around 22 trees planted in or around their property.
But the manufacture of an EV battery — mining raw materials like cobalt and lithium, to production in gigafactories and transportation — means the typical EV produces 30-40% more carbon than a petrol car just to get it onto the road.
Then there’s the question of where the burgeoning demand for electricity will come from. Powering your Tesla from a coal fired-station in winter is counterproductive.
What about hydrogen as a fuel and the companies with exposure to that? We’ll look at this in upcoming research.
So, you see, good investing requires extensive research. And deep thought.
If you follow the crowd or listen to those with vested interests, you’ll end up in the same crowded investment space with poor returns.
You need to concentrate on real value. Often going against the grain.
Once I have conviction on an opportunity, I don’t really care what other people think. Unless they can show me something I’ve missed.
So, with that, should you have any questions or comments (bouquets or brickbats), please feel free to reach out to us on [email protected].
Our opportunity for you
[ Click to watch Simon’s video message ]
These days, the easiest thing is to do nothing and wait and see.
But that has an opportunity cost.
This market situation is rare. Many stocks sit below their intrinsic value. That may not last. Once interest rates pare back — as they will at some point — many of those shares will jump. And it will be too late. The lion’s share of the opportunity will have passed to other more courageous investors.
We’re investing now in the portfolios we manage for our Wholesale clients. And we’re investing in our own portfolios.
Vistafolio is an opportunity for Wholesale or Eligible investors to discuss this further.
As a reader of Wealth Morning, you’ll likely be in this category.
If you’d like to discuss the economic outlook and the opportunities it could present for you, please get in touch by requesting a free consultation.
Editor, Wealth Morning
(This article is general in nature and should not be construed as any financial or investment advice. Vistafolio services are for Wholesale or Eligible investors as defined in the Financial Markets Conduct Act 2013. Please request a free consultation if you would like to discuss your eligibility.)