The Truth About Real Estate vs stock

Real Estate vs. Stocks

Whenever Certified Financial Planners discuss investing, they rarely focus on anything other than stocks and bonds. I contend that their investment philosophy is so biased it is either naïve or dishonest. If they are not familiar with the points below, they are simply naive, but if they do know about these ideas and fail to share them with their clients their motives are dubious at best and dishonest at worst.
These “experts” tell us things like diversify, stay in it for the long run and use options to control risk, but all of those are merely tools that flatten out your returns. Consider these points:

• Diversify – As far as I am concerned, “diversify is a lie”. Did diversify help investors in 2008? Lon Jefferies does not think so. Whenever I diversify it diminishes my successes and exposes me to more opportunities to lose. If I have 30 stocks in a mutual fund and one of them goes up, the benefit is diluted; frequently to the point that it be.”comes insignificant. Obviously, I would have been better off with all my money in that one good company (if by some miracle I could have identified it; but, how do I do that without inside information?) vs. spreading it around so much.

When we discuss “risk”, I have plenty more of it when I diversify. In the above example I have 30 different chances that somebody in that group is going to screw up and cost me money. When I am exposed to so many opportunities to lose my money, the laws of probability work against me. If just one of those stocks drops in value, and it probably will, that one bad actor can easily wipe out the small benefit I enjoy on my already diluted successes. Theoretical “expert” Michael Miller of Dallas Morning News says, “I would never recommend that you have all of your eggs in one basket,”

• Stay in it for the Long Run - Once again, I have my own rebuttal: “Any plan to stay in it for the long run, is the wrong one.” The Long Run philosophy is used to discourage investors from selling when the market goes against them. As you would expect, a blog called “The Long Run” takes the traditional position. The theory is that there is no actual loss until you “recognize” it…by selling; but, that assumption is also flawed. The truth is you already lost the money, whether you recognize it or not. Unless you have some compelling reason to believe that the company who just lost your money is somehow poised for a remarkable recovery, it could easily be wiser to take the loss now, enjoy a tax deduction and put your money somewhere that offers some genuine promise.

It would be foolish to ignore the true beneficiary of the “Stay in it for the Long Run” philosophy. If investors were cashing in their investments whenever things went against them, financial advisers would soon be out of investors. As long as the expert has control of my dollars he or she is the one who has the greatest benefit for keeping me in it for the long run: namely they remain employed.

Clinging to past problems in hopes they miraculously improve is like watering weeds and hoping they produce fruit. Although radio personality and Certified Financial Planner, Bob Rall would not agree,

• Use Options Puts and Calls…Yeah, right! And, find out how quickly your portfolio stalls. In theory, these tools are used to generate income and control losses, but once again the devil is in the details. If you already own a specific stock, you may be able to SELL covered calls against the stock which is a means to generate some income off your investment. Essentially, you get a fee for granting some other investor the right to buy your stock in the future at a predetermined price, regardless of what the actual market price for that stock might be at that time. The problem with this concept is you still lose if the stock goes down and the investor who bought the option from you gets all the profits above the option price when your stock goes up. So, the best you can hope for is that your stock holds steady or only increases slightly so nobody will call your winners away from you. That puts you in the ridiculous position of cheering against yourself.

You can also BUY calls, which enables you to pay the fee for the option to acquire a stock in the future at a predetermined price; but, if the stock goes down or holds steady you lose your money. If the stock goes up enough, you can make a profit, but either way you lose the option money which you paid. One report I read said 85% of the time the person who buys the call option loses his money.

“Puts” are similar to calls, except that the parties are betting on whether the stock price is going to go down rather than up. Once again there is a small fee. You can buy the right to put a stock to somebody or sell the right to somebody who would want to put the stock to you.

As far as I am concerned the investor who “plays” with these investment tools is really just gambling. It is true there are a few experts who do well with it, but who among us is a real expert? When the fund managers and stock brokers use these puts and calls to reduce your risk, it comes at a price: the premiums and commissions you pay.

“Puts and Calls Blog” actually says that these instruments are “fun” and for “enjoying”. That sounds to me like a desperate attempt to salvage a reason to gamble.

The bottom line is options are somewhat complicated, they lend extra opportunities to lose money, they usually don’t work out and they require a lot of time to stay informed on all the choices. Nobody has ever been able to convince me the random profits of the stock market are worth all that aggravation.

In my next post, I will give you another handful of reasons why real estate is a better investment than stocks.

For example, did you know you can buy real estate and watch the value drop in half and still make a profit? I will explain this next. Come back soon.

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email me at Dave@Uncledavesrealestate.com