Help for First Time Buyers

The Benjamin Graham Guide to Property Investment. April 2008

For those who are new to investing, Benjamin Graham is perhaps one of the most influential investors of all time. His seminal work, The Intelligent Investor, has sold millions of copies, while Warren Buffett, who is perhaps the most successful investor of all time, said it was ‘by far the best book on investing ever written.' The Intelligent Investor principally makes recommendations for creating an effective investment portfolio out of common stocks and bonds. It does not concern itself with property. However, Graham's investment approach can really be applied to any market, and much of what he writes seems particularly worthwhile for anyone who wants to get into property investment.

Effectively the property market in the UK seems to be mirroring many of the cyclical markets that have featured throughout history. High demand gives way to feverish optimism and soaring prices, soon followed by a sudden and quite unpleasant ‘price correction' – which usually means a fall in prices.

In the stock market, an optimistic market with accelerating optimism is generally referred to as a ‘bull market.' A similar mentality has seemed to enter the public psyche over property. However, Graham warns us to approach the optimism of the crowd with caution.

In stock market investment, too many people buy when a stock is rising, and then sell if it is falling. Not only does this accelerate the rises and falls of certain stocks, but it also throws up an interesting paradox. If you buy when a stock is rising, then you are more than likely buying on the premise of its past performance, and you'll probably be buying when it is expensive. How can you tell if a stock going to continue to rise based purely on past performance? In short, you can't. Instead you should be basing your purchases on what you believe will happen, not what has already happened. By contrast, if you sell when a stock is declining, then you will probably be selling at a time when it is becoming cheap. With that in mind, you probably won't make a whole lot of money.

The Graham approach to this is to watch bull markets closely, and then when they momentarily run out of steam, which is normally inevitable at some stage, assess their likely future performance and buy when they have fallen considerably. This improves your likelihood of purchasing a bargain, and over the long term you are more likely to make money.

You can apply the same rules to property investment. The buy-to-let property market has particularly been seen as a money making no brainer since around 1996, and there are now over 1,000,000 of these mortgages in circulation: You buy a house with a mortgage, put a group of tenants in the house to pay that off, and then wait for the house to rise in equity – then you make money. It's simple, until the boom slows and equity reaches an unpleasant ceiling.

While house prices have now reached a record, it looks like they're going to slow down, and possibly fall. If you went into buy-to-let property investment now, then Graham would probably be turning in his grave. However, it's well worth waiting to see if there is a drop in prices. Some areas, such as around London, are also seeing sustained growth, so it's possible you can still have a safe bet if you're looking to invest. A Channel 4 article – Where Best to Invest – gives some good recommendations. Also, take a look at Alliance and Leicester for buy-to-let mortgages.

If you're looking for a sound investment or just a great way to save, then take a look at Alliance and Leicester's ISA. Time is running out for you to get this year's allowance!