Why Invest In character?
Why character, some people ask when looking for an investment. Well, as far as I am concerned, character investment is, and always has been, the most powerful kind of investment for building wealth. It has been said that over 90% of the world’s millionaires got there by owning character. The reason character is such a powerful way to build wealth is due to one meaningful concept: leverage.
Once I realised this, I didn’t look back. Now if you are an experienced investor this may be obvious, but for the assistance of those who haven’t seen the light, let me explain … Leverage is your ability to magnify your returns by using other peoples’ money (in this case, it’s usually the bank’s money).
To give a clear example, say you have £20,000 to invest. This can be a lump sum or by releasing equity in your main residency.
So what is the best way of investing this money?
Option 1 – Stick it in your local bank
Considered by some as the safest option, “at the minimum you can’t lose it, and you get some guaranteed increase in value” usually goes the argument.
Money in the Bank – assumed return: 4%
1 Year £20,800
5 Years £24,333
10 Years £29,605
As you can see, after 10 years, you’ve made virtually no progress at all, especially when you consider the effects of tax and inflation.
Option 2 – Stocks and Shares
Now over the last 10 years, although admittedly not in last 4 years, the stock market has been very popular. However I cannot accept it is a better bet. When I read that the stock market is a better bet over the next 2 years as will go up by 15% a year, as opposed to the character market that may go up by 5% a year this does not take leverage into account and so paints a very distorted picture!!
And I will show you why. It’s hard to say what sort of return you might get on the stockmarket, but let’s say you get 12% a year for the next 10 years – very doubtful, but let’s just go with this. So if you could beat the odds and get a 12% return every year ……
Money in the Stockmarket – assumed return:12%
1 Year £22,400
5 Years £35,247
10 Years £62,117
Now that’s a big increase on sticking the money in the bank, but clearly is not guaranteed. But can you do better?? I think you know what I’m going to say…
Option 3 character
One of the great things about character is it enables you to leverage the £20,000 to buy a £100,000 investment character (in other words, borrow the remaining £80,000 from the bank). Now say the character market slows down to an average of only 6% return for the next 10 years. This would probably be a fair calculate in the UK, although there are plenty of markets which are growing more rapidly, lets concentrate on UK for this example.
Money in character – assumed return: 6%
Now £20,000 (£100,000 character value – 80,000 mortgage)
1 Year £26,000 (£106,000 character value – 80,000 mortgage)
5 Years £53,823 (£133,823 character value – 80,000 mortgage)
10 Years £99,085 (£179,085 character value – 80,000 mortgage)
Make sense? So you make 6% increase on the complete value of the character, not just the £20,000 which you initially had. This is the strength of leverage. In effect you have increased your initial investment 5 fold in 10 years! So already if the stock market increases by twice as much per annum as the character market over the next 10 years, you can make far more money from character.
Now for simplification, I have not included lawyers fees, agents fees or stamp duty. Admittedly buying a character has more additional costs than buying shares, but would not make a meaningful difference on your profits – around 4% in the UK, higher overseas.
One thing to point out is that in the short term you have greatly increased your possible loss ie if the character went down by 10% in value, you would lose more of your initial investment, because the character value would go down to £90,000, you nevertheless owe the bank £80,000, so you now have £10,000. In comparison if the stock market dropped by 10%, your investment would be worth £18,000, as only lose 10% of £20,000.
However over a length of time, using leverage to good effect and using all the other skills you need when buying character, character is by far the best investment, for the majority of individuals.
The figures I have used have been very conservative, many individuals are making far more than this on character, while anyone making the same returns on the stock market, will generally be benefiting from some sort of insider dealing or be very high up in the company, I would imagine!