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Investing in property has been a popular move for many people over recent decades, particularly in Hong Kong where property prices have skyrocketed. Globally, it has produced high returns that have boosted the wealth of landlords across a range of geographical regions.
However, now may not prove to be the right time to buy property. Not only does it face an uncertain outlook, it continues to be difficult to obtain a diverse portfolio of property investments due to its cost. This could lead to high risks for investors.
As such, investing in stocks through a value investing strategy adopted by Warren Buffett could offer less risk and higher returns than buying properties.
Although Warren Buffett is not known for having a large amount of companies within his portfolio, he still benefits from the reduced risk that diversification provides. Even owning a relatively small number of companies within a portfolio can lead to an investor having less risk than they would have when investing in property.
One of the key reasons for this is the large amount of capital required to buy a property. Certainly, debt can be used to pay for the majority of a property’s price, but a significant amount of cash is still required in order to buy even one property. This could leave an investor with a highly concentrated portfolio that is therefore far riskier than owning a variety of stocks.
Value investing potential
Value investing is a simple, but highly effective, means of capitalising on the cyclicality of the stock market. It seeks to focus an investor’s capital on the best-quality companies while they trade on low valuations. As such, it can produce more favourable risk/reward opportunities for investors who are able to wait for the most appealing opportunities to appear as a result of stock market weakness.
At the present time, the uncertainties facing the world economy could provide buying opportunities for value investors. In many cases, stock market valuations include wider margins of safety than they did a number of months ago, as investors have priced in potential risks from events such as Brexit and the global trade war.
This could mean that a range of stocks offers superior risk/reward opportunities versus property, which may still be relatively overvalued in many regions.
Buying a property can be an expensive and time-consuming process. Furthermore, it lacks liquidity and can take many weeks to sell. By contrast, investing in stocks can be done in a matter of minutes, with it being inexpensive and simple to buy and sell a range of companies across a variety of stock markets.
Therefore, adopting a value investing strategy similar to that used by Warren Buffett could be a good idea. The stock market’s recent volatility could provide value investing opportunities, while its lower risks and simplicity compared to property investment could make it a relatively appealing idea.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.