Hi everyone,
My two passions are investing in international real estate and in the stock market. I’m a stock and options market coach and I’ve been investing in the stock market for so long that it makes me think I’m old.
I had to cling on to my chair when reading this thread otherwise I’d fallen off several times.
Let me try to help and make sense of it all with a few essential points:
1. You don’t ask about stock market advice in a real estate forum. This is looking for trouble. For some reason, many people and their mother think they’re entitled to give advice about something they’re not mastering. It’d never cross my mind to do that.
2. If you think that the stock market is going to 0, you clearly don’t understand what a stock is, what the stock market is or how any investment is valued. And you’ll look like a complete fool when the market resumes its march higher.
3. Selling naked put options can be a good strategy at times if you know what you’re doing. Otherwise, it’s a very dangerous strategy and suggesting it to a novice is plain crazy. That’s why brokerages won’t allow people to do it unless they have the experience or prove that they know what they’re doing. Some people lie about it at their own risks and perils (oftentimes after having taken courses from an options guru, which generally doesn’t work for most people). Indeed, their potential loss is infinite in theory.
4. If, like me, you’re a long term investor (as opposed to a short term trader - kudos to those who are successful: they spend a lot of time on it and est to many of not most of them invariably end up losing money) there are two ways to invest in the stock market. Either you buy an index fund to match the market’s performance or you try to outperform the market by buying the best stocks.
5. If you invest in individual stocks, you’d decide to buy or sell a stock whether you think the price is above or below its value. It’s like in real estate as with any other assets. The problem is that most people, including many stock market investing veterans, don’t know how to do it, oftentimes because they don’t have the necessary market knowledge. Most importantly, valuing stocks takes work and too many people are looking for a get rich quick scheme. Anybody who buys individual stocks without knowing their value is speculating or gambling. As I always say, if you want to gamble, their is Vegas for that. It’s much more fun and it’s less of a threat to your wealth. The historical price of a stock generally has no bearing on its future value or price. The fact that a stock has dropped a lot doesn’t necessary mean that the stock is cheap. Likewise, the fact that a stock is at all-time high doesn’t mean that it’s expensive. Although it often does, in both directions.
6. If you invest in an S&P index fund, you’ll make 10% a year over time. For a comparison with real estate, see the point 7 below. Contrary to what somebody wrote, only 25% of that will come from dividends today. Kevin from Shark Tank might get 70% but that’s because he invests in high dividend paying stocks, which represent only a small part of the market.
7. If you wonder what is better between investing in the stock market or real estate, there is no answer to that as both have pluses and minuses and then it can come down to knowledge, risk and volatility tolerance, personal psychology and perception, which are different from each of us. Liquidity is a huge factor too.
However, if you look at whether you’d get the highest return in the stock market, it depends. And I don’t mean by that that it indeed depends on which stocks and/or real estate you buy. So, for a fair comparison, I’ll compare the S&P 500 with the average US property price.
On an unleveraged basis, there is no contest. The stock market beat real estate by a mile. Even if you didn’t see any comparison chart or have no idea about the numbers involved, you could know this.
Indeed, if you look at the evolution of real estate prices over a very long period of time, you'll see that they go up by the rate of inflation. Is that a coincidence? No. The rise in the price of US residential real estate in recent times is largely determined by the availability of mortgages. Indeed, you get as higher mortgage if you have a higher salary and salaries go up with the rate of inflation. Commercial real estate is valued as any other business though the CAP rate. The value will increase if you increase the rents and the amount of rent increases you can get again depend on wages and therefore the rate of inflation. Yes, you can also increase the value by reducing expenses but this is a one-off. You cannot decrease them every year over the long term. Same thing for supply and demand imbalances; they're temporary.
Stocks are valued as a multiple of corporate earnings and these on average increase much quicker than inflation. This is why the stock market outperform real estate by a mile on an unleveraged basis.
If you look at leveraged returns, the picture changes. Let’s start with the stock market this time.
You can use leverage with the stock market in two ways: borrowing (margin trading) or buying call options. If you borrow, your maximum LTV is 50%. Yet. I don't do it because it can be extremely dangerous because, while it can double your return, stocks can go to 0 and you'll face margin calls if they drop precipitously, which can result in higher losses. Buying call options is great if you know what you're doing. I've repeatedly made gains in the hundreds of percent in a very short period of time. However, you need to know what you're doing because 80% of the call options purchased end up being loss-making and the loss of oftentimes 100%.
Real estate is less volatile and therefore most people are comfortable borrowing against it with very high leverage. While that might seem unreasonable in many cases, you could borrow up to 100%. Therefore, on a leveraged basis, the situation is reversed: real estate beats the stock market hands down.
8. So, you might wonder in which one to invest then? What about applying the time-tested principe of diversification? Mind you, it has its limits as, over time, the stock market and real estate go up together since they’re both tied to the health of the economy.
I invest in both but I invest in real estate internationally and not in the US at this point.
I think the US is an awesome market to invest in real estate generally speaking but I think right now is not the time, for me right now, as I see a huge potential cloud on the horizon. Mind you, it could take a long time to materialize. If you look again at a chart of US real estate price over the long term, you’ll see that it has increased by the rate of inflation as it should have, as I discussed above. But that is until the end of the last decade. Since the turn of the millennium, real estate prices have rocketed much higher, even considering the higher fall during the Great Recession. Why is that? Because of ultra cheap debt, real estate prices have increased much higher than wages since then. This is unsustainable long term by definition, as per logic and I showed above. Is the US property market a bubble? I will let you answer that question. Also don’t forget that real estate is local in a large part.
Aside from the speculation resulting from people buying more because prices are going up, real estate prices have kept going up at an unnatural taste as there FED has brought interest rates to rock-bottom levels. Then, even though the FED brings the rates back up, real estate continues to go up as the economy recovers. The problem is that, every time this happens, the FED is less able to raise rates given the huge amount of debt in the system. So this game will end up not working anymore.
What could bring down the red hot real estate prices? Either much higher interest rate or the economy, the latter being more important. It looks like interest rates won’t go up high enough to bring real estate prices down any time soon. But if they go down into negative territory like they have in Japan and Europe, we could get a deflationary depression, which could be devastating to stocks and real estate alike over the long term.
Why do I invest internationally even though it’s more complicated?
Aside what I mentioned above regarding the US market, it’s a niche market and I have very little competition. I have the necessary knowledge and connections that most don’t have. I learn the techniques and strategies used in the US and apply them overseas when possible, where my competition isn’t that sophisticated because there isn’t any real estate investing culture as in North America.
Most importantly, I invest in markets where I have access to leverage but there is no or very little leverage in the market, whereby property prices are cheap and not overinflated by cheap debt. Basically, I’m get all the advantages of leverage without any of the negatives.
9. Finally, this thread is about the stock market. After suggesting that it’s not a great idea to ask for stock market advice on a real estate forum, I’m not gonna make a fool of myself by providing any stock market advice year like what I’m buying, holding our selling right now.
Yet, I’ll mention this. It almost makes me cry to see investors panicking and dumping their stocks at way below their value, as they have no knowledge of that value. The current situation will create unbelievable and life-changing opportunities for the long-term stock investor. Let’s not forget that the S&P 500 was up 410% between the depth of the Great Recession and just a few weeks ago.
Happy investing everyone, whether in real estate, the stock market or both.
