Author Topic: beating the market (housing vs. stocks)  (Read 15378 times)

clarkfan1979

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beating the market (housing vs. stocks)
« on: July 24, 2014, 08:09:19 AM »
It seems like many real estate investors have confessed to beating the market in housing. They don't look for an "average" house. They look for an undervalued house and then profit by reselling or renting out.

However, when it comes to stocks the consensus seems to be to look for an "average" stock by investing in the total market. Do not waste your time looking for an undervalued stock.

Why is it considered possible to beat the market in housing but not stocks? Feel free to punch me in the face, I have thick skin.

matchewed

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Re: beating the market (housing vs. stocks)
« Reply #1 on: July 24, 2014, 08:18:40 AM »
Levels of efficiency in the knowledge behind the underlying investment (a company or a possible rental house). Most if not all of a public company's information is available to nearly everyone quite quickly and efficiently, also all the potential risks and external impacts are known nearly instantly. Most of a rental house's information is still available but harder to access, often localized rather than general, and is "harder" as a certain amount of due diligence is required via understanding the local market.

iris lily

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Re: beating the market (housing vs. stocks)
« Reply #2 on: July 24, 2014, 08:39:28 AM »
It seems like many real estate investors have confessed to beating the market in housing. They don't look for an "average" house. They look for an undervalued house and then profit by reselling or renting out.

However, when it comes to stocks the consensus seems to be to look for an "average" stock by investing in the total market. Do not waste your time looking for an undervalued stock.

Why is it considered possible to beat the market in housing but not stocks? Feel free to punch me in the face, I have thick skin.

I think that the housing market is far less complicated and less volatile than stock picking. That said, I don't want to do either one.

My friend in his late 70's was downsized from his engineering job 20 years ago. He's heavily into stock picking in the market and he said that his net worth has gone up 4X since then. I suspect that having his 4 kids out of the house & out of college contributed to that net worth rise. But anyway, he's REALLY into stock picking, he checks his investments daily and trades often.

He and I were talking about investing and he posed this question to me: "Don't you want to be one of those people who beat the market? You don't want to just earn the average of the stock market, do you?"

And I replied " Yes! YES I DO want to earn the average of the market, I want to throw everything into an index fund and forgetaboutit, please don't make me look at charts and graphs each day, ugh, no."

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Re: beating the market (housing vs. stocks)
« Reply #3 on: July 24, 2014, 09:26:22 AM »
Information about specific houses and neighborhoods is much more easily accessible to locals/individuals. Stock market, generally not the case unless you have insider info of some kind (which, of course, is illegal). There's nothing illegal about asking the widow down the block if she wants to downsize, on the other hand.

The markets aren't really comparable either because (at least in the US) stocks are an appreciation play (mostly) and houses tend to be a cash flow thing.

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ect

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Re: beating the market (housing vs. stocks)
« Reply #4 on: July 24, 2014, 09:47:23 AM »
Why is it considered possible to beat the market in housing but not stocks?

Interesting question, but consensus opinion is sometimes wrong. Do we have any reliable data? For stocks, we can compare performance of active versus passive funds. For housing, I suspect we may be stuck with anecdotal information.

Stocks offer the advantage of low transaction expenses. I can flip a $100,000 stock investment for a cost of maybe $100, including commissions and bid-ask spread effects. but to buy and sell a $100,000 house, my transaction costs would possibly be measured in thousands of dollars. Am I wrong about that? I know nothing about houses, lol.

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Re: beating the market (housing vs. stocks)
« Reply #5 on: July 24, 2014, 11:07:49 AM »
Why is it considered possible to beat the market in housing but not stocks?

Interesting question, but consensus opinion is sometimes wrong. Do we have any reliable data? For stocks, we can compare performance of active versus passive funds. For housing, I suspect we may be stuck with anecdotal information.

This is an interesting point. I constantly see people state how many houses they have that yield 15%, making 30% flipping a house, or whatever. But how many loose money on their real estate investments? Or at least underperform stocks?

Similarly, I read some on seeking alpha every now and then (mostly for fun, yet to get anything useful out of it) and comments are often filled with people saying how they've made 30-40-50% or more. Rarely do I hear about losses..

It is of course also easier, and less risky (?) to use leverage when buying real estate than stocks. I'm comfortable with an 80% mortgage, but would not be comfortable using the same money to buy an index fund..
« Last Edit: July 24, 2014, 11:51:06 AM by Scandium »

sol

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Re: beating the market (housing vs. stocks)
« Reply #6 on: July 24, 2014, 11:31:33 AM »
I read some on seeking alpha every now and the (mostly for fun, yet to get anything useful out of it) and comments are often filled with people saying how they've made 30-40-50% or more. Rarely do I hear about losses..

Everyone's an investment genius when the markets are up.  It was hard to not make money buying real estate in 2009.

But similarly, you've more than doubled your money if you bought stocks in 2009, too.  Every schmuck with a pencil could write a book about how to get rich, using the past 5 years as supporting evidence.

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Re: beating the market (housing vs. stocks)
« Reply #7 on: July 24, 2014, 12:28:34 PM »
In my opinon it is all about trends. people make money buying and selling homes when the market is going up. It is very hard and way less people do well on the way down (unless they are scoping up rentals). Totaly diffrent game then stocks. Even in stocks there are several games to be played. Compairing a full time realsestate property manger to a buy and hold stock invester is not really fair. If someone put the same effort as a full time property manger into stock trading, it would be really profitable. My opinion from working for a commerical devloper and then a hedge fund. The effort and time these people spend on their crafts is amzing.

Eric

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Re: beating the market (housing vs. stocks)
« Reply #8 on: July 24, 2014, 12:34:02 PM »
Compairing a full time realsestate property manger to a buy and hold stock invester is not really fair. If someone put the same effort as a full time property manger into stock trading, it would be really profitable.

Good point.  I just bought some stocks.  I'm planning on upgrading the dividends through some hard work and increasing the share price based on adding some extra quarterly profit I found on sale at Home Depot.  Then I'm gonna sell at a large profit and beat the market.

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Re: beating the market (housing vs. stocks)
« Reply #9 on: July 24, 2014, 01:21:06 PM »
Here's 4 pages of arguments discussions on the topic over the last 2 years. Whether it's housing or stocks I guess it's all about finding that edge that comes from a certain expertise, and maybe some connections. Finding an in-efficiency and capitalizing on it.

http://forum.mrmoneymustache.com/investor-alley/article-why-real-estate-returns-are-higher-than-stocks-bonds-and-mutual-funds/

clarkfan1979

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Re: beating the market (housing vs. stocks)
« Reply #10 on: July 24, 2014, 03:34:32 PM »
Based on a few of the responses, I might not have explained myself as best I could. I was not trying to compare real estate returns to stock market returns.

My argument was that many people consider it possible to be better than average in real estate, meaning that their return on real estate is better than the average return in real estate. People look for an undervalued house to maximize profit.

However, when it comes to stocks the consensus seems to be that it's not possible to be better than average. People do not look for an undervalued stock to maximize profit. They buy index funds.




Cheddar Stacker

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Re: beating the market (housing vs. stocks)
« Reply #11 on: July 24, 2014, 03:38:55 PM »
However, when it comes to stocks the consensus seems to be that it's not possible to be better than average. People do not look for an undervalued stock to maximize profit. They buy index funds.

Not always true. Most people here bang the drum for index funds. Some don't. Go read the thread I linked and you'll see plenty of people claiming inefficiencies in the stock market that they take advantage of. I think I remember someone claiming 20% returns YTD a few months ago when the S&P had returned 5% YTD. People are finding undervalued stocks, or shorting overvalued ones.

matchewed

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Re: beating the market (housing vs. stocks)
« Reply #12 on: July 24, 2014, 04:10:07 PM »
However, when it comes to stocks the consensus seems to be that it's not possible to be better than average. People do not look for an undervalued stock to maximize profit. They buy index funds.

Not always true. Most people here bang the drum for index funds. Some don't. Go read the thread I linked and you'll see plenty of people claiming inefficiencies in the stock market that they take advantage of. I think I remember someone claiming 20% returns YTD a few months ago when the S&P had returned 5% YTD. People are finding undervalued stocks, or shorting overvalued ones.

Remember it depends on what you mean by average return or being better than average. There is some evidence that getting average market returns equals being an above average investor.

With that being said it still comes down to efficiencies. In real estate you have your hands on the underlying investment. You have every right to improve it, make it more efficient, and make it more valuable. You can't do that with a company. Real estate investment is more efficient if you put the time into it. There is no mystery here, just different types of investments. Comparing the two is a bit silly as they are different creatures. Might as well compare stamp collecting to the whole shebang too.

Jack

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Re: beating the market (housing vs. stocks)
« Reply #13 on: July 24, 2014, 04:34:26 PM »
Based on a few of the responses, I might not have explained myself as best I could. I was not trying to compare real estate returns to stock market returns.

My argument was that many people consider it possible to be better than average in real estate, meaning that their return on real estate is better than the average return in real estate. People look for an undervalued house to maximize profit.

However, when it comes to stocks the consensus seems to be that it's not possible to be better than average. People do not look for an undervalued stock to maximize profit. They buy index funds.

The difference is that for financial markets, many people believe in the Efficient-Market Hypothesis.

In contrast, it's obvious to everyone that the housing market is not efficient.

AssetGrinder

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Re: beating the market (housing vs. stocks)
« Reply #14 on: July 25, 2014, 12:33:45 AM »
Very possible to beat the stock market especially with a small number stock portfolio. It takes a lot of work and time to research each company in and out. I certainly beat the market for years following that approach. Is it a practice I recommend NO! You take on much more risk than the potential rewards in efficient markets.

There are certainly people who make a living buying undervalued stocks that beat the market. There is a little known investor named Warren Buffet that made a few bucks doing just that.

The board here is very biased toward index funds and one not to play the market. Sometimes you have to be bold to make big returns instead of following the herd on average returns. For every loser there is a winner in the stock market.

Value stocks pop up all the time and if you do your homework you can be handsomely rewarded.

Good Luck!

johnhenry

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Re: beating the market (housing vs. stocks)
« Reply #15 on: July 25, 2014, 07:39:29 AM »
However, when it comes to stocks the consensus seems to be to look for an "average" stock by investing in the total market. Do not waste your time looking for an undervalued stock.

I'd be willing to listen if you could tell me how you'd go about identifying an undervalued individual stock.  I doubt you'd convince most on this forum that is was worth the RISK.  Stocks are just (very liquid) portions of company ownership that investors use their savings to buy with the hope/expectation that over the desired interval, a good return is realized.  All return is correlated with risk and most investors on this forum know they will see the best returns(adjusted for risk) by investing in a diverse set of index funds that don't "waste money" (fees/expenses) trying to beat/time the market.  They also understand that stocks capable of producing high returns mean enduring high volatility, which is why they will gradually change their overall portfolio to include less risk (and less return) the closer they get to retirement (or other need for liquid funds).

It seems like many real estate investors have confessed to beating the market in housing. They don't look for an "average" house. They look for an undervalued house and then profit by reselling or renting out.

Why is it considered possible to beat the market in housing but not stocks? Feel free to punch me in the face, I have thick skin.

I don't think most real estate investors (I am one) on this forum would classify their achievements as "beating the market in housing".  What most of us will admit is: in the right markets (all real estate is local), investing in real estate for the purpose of generating income/cash-flow can produce higher returns than stocks. I am not necessarily concerned with whether my RE investments "beat the average" of other RE investors, only that they perform well enough to satisfy my demand of increased reward for the increased risk (and time of managing).

Most people who buy a used car for $1200 under book value wouldn't start proclaiming that they "beat the Honda Accord market".  And a man who says that 6 months after his purchase may be singing a different tune when his mechanic tells him the vehicle has been flooded, for example.  Such is the risk of buying individual assets like houses or cars.   I think most sensible buyers try to maximize their buying power by bargaining... and buying real estate, whether as a home or an investment is no different.  Likewise most small business owners don't think of their achievements as "beating the local plumbing services market".  They just think that the money they make is worth the time and risk they put into the business.

Owning stock (including index funds) is just a very hands-off way to own fractions of companies.  But investing in real estate is starting your own business, even if it's tiny at first.  And most of us (RE investors) probably think of it in those terms.  You can control how "hands-off" you are when it comes to running your RE business by paying someone to manage it... just like traditional business owners who may be very hands-on while they build the business and later hire managers to run their business operations for them.  You control how much insurance you carry, what rates/terms you use for financing if you don't pay with cash.  You control how you interact with tenants personally or thru a management agent.  You control whether your respond to requests in a timely manner.  You control whether you replace a roof a little early because it's in bad shape or wait another year and run the risk of a leak that incurs a big expense.  You control whether you raise the rent each year to increase your returns or reward some tenants by letting their rent fall below market rates in hopes they'll stay put because they are good tenants and it will cost you some amount if they move. 

It's true that everyone who owns a home gets to make those decisions as well, except the ones concerning tenants and rents.  After all, some people look at their whole life as a business.... and why not.  A penny saved is a penny earned.  Many homeowners on this forum "make money" on their homes by doing nothing more than buying at a low price and applying frugal sensibilities to rehab and maintenance projects.  Over the long haul that can add up, and it adds up even quicker if you get to multiply it by several properties. Folks on this forum may be more likely that most to possess those frugal sensibilities, and importantly, also have the savings or credit to buy property.  For those of us with those resources, starting out in RE investing is really just a small extension of what we already did as homeowners. 

And for all the tax benefits that homeowners(occupants) enjoy, the tax code is even more generous to owners of property for business use.

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Re: beating the market (housing vs. stocks)
« Reply #16 on: July 25, 2014, 10:00:21 AM »
Besides the ability to find deals in real estate (that is much more difficult, if not impossible to do, with stocks), I think a significant factor is the control you can exert. There are a ton of things outside my ability to control that can drag a company's stock down, even for otherwise strong companies. Stock prices are driven 100% by speculation. And those things are pretty impossible to forecast without illegal insider knowledge. The risk that you will make a bad decision trying to pick individual stocks is high, even if you've "done your research".

On the other hand, well chosen real estate is not generally vulnerable to all kinds of flighty, speculative, external factors. And even if some external factors might negatively weigh on a property (like a freeway being built nearby or the job market declining), you usually can see it coming a long way in advance to head it off.

hodedofome

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Re: beating the market (housing vs. stocks)
« Reply #17 on: July 25, 2014, 01:13:50 PM »
The reason the consensus says it's possible to beat the market in real estate vs stocks is that the voices of those who believe RE is the way to go - are the loudest on this site. It makes sense, because the guy who started MMM made his way on the RE side as well.

However it would be silly to draw a conclusion from people who are biased to one side of an argument. As a general rule, be skeptical of advice given from someone who's never attempted an endeavor. That goes for PhD economists as well.

johnhenry

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Re: beating the market (housing vs. stocks)
« Reply #18 on: July 25, 2014, 01:59:27 PM »
The reason the consensus says it's possible to beat the market in real estate vs stocks is that the voices of those who believe RE is the way to go - are the loudest on this site. It makes sense, because the guy who started MMM made his way on the RE side as well.

However it would be silly to draw a conclusion from people who are biased to one side of an argument. As a general rule, be skeptical of advice given from someone who's never attempted an endeavor. That goes for PhD economists as well.

As a RE investor (who also has large part of portfolio in index funds) I agree with most of that.  Stock investors can pick some common stock index (S&P, Dow, etc) and compare their returns to that to see if they "beat the market".  And I don't know hear many RE investors on this forum or elsewhere saying they "beat the market".... only invested resources and assumed risk that provided better returns than stocks usually provide.

Completely agree about being skeptical of those who talk about it, but haven't done it.  There are some great RE investing resources (members) on this forum and many provide examples and intricate details of their strategies, holdings, and how their investments have performed.  I don't see many of those forum members saying "sell all your index funds and put it all in RE".  As best I can tell, many of the regulars in the RE section recommend a diverse portfolio and have significant savings in other vehicles besides real estate.

I don't see the need to proclaim one investment (RE vs stocks) superior to the other.  But where practical advice is concerned, there is plenty of good material from RE investors on this site that, when taken as a whole, can provide a guideline for successfully investing in real estate.  I haven't seen that kind of detail hashed out on this forum (or anywhere else) when it comes to "beating the stock market" by analyzing individual stocks.  Maybe for saying that, some will throw me in the camp with all the RE advocates.  There are a few sporadic voices here and there (on this forum) that claim "it can be done", "it's not impossible", "with enough diligence and research", "many people make a living doing just that", and "I beat the market for several years".  But, taken as a whole, they aren't providing the numbers, the strategy, the details, to prove that their strategy is superior to investing in index funds. 

matchewed

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Re: beating the market (housing vs. stocks)
« Reply #19 on: July 25, 2014, 02:06:00 PM »
The reason the consensus says it's possible to beat the market in real estate vs stocks is that the voices of those who believe RE is the way to go - are the loudest on this site. It makes sense, because the guy who started MMM made his way on the RE side as well.

However it would be silly to draw a conclusion from people who are biased to one side of an argument. As a general rule, be skeptical of advice given from someone who's never attempted an endeavor. That goes for PhD economists as well.

That's just ignoring all the stuff that was just said to insert a claim that is a) silly because the investor alley portion of the forum gets much more attention and posts than the real estate portion, b) the guy who started MMM, namely MMM, made his way with a mix of RE and investing. It's a nonsense claim that doesn't move the conversation anywhere and makes no point.

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Re: beating the market (housing vs. stocks)
« Reply #20 on: July 25, 2014, 02:07:30 PM »
The reason the consensus says it's possible to beat the market in real estate vs stocks is that the voices of those who believe RE is the way to go - are the loudest on this site. It makes sense, because the guy who started MMM made his way on the RE side as well.

However it would be silly to draw a conclusion from people who are biased to one side of an argument. As a general rule, be skeptical of advice given from someone who's never attempted an endeavor. That goes for PhD economists as well.

As a RE investor (who also has large part of portfolio in index funds) I agree with most of that.  Stock investors can pick some common stock index (S&P, Dow, etc) and compare their returns to that to see if they "beat the market".  And I don't know hear many RE investors on this forum or elsewhere saying they "beat the market".... only invested resources and assumed risk that provided better returns than stocks usually provide.

Completely agree about being skeptical of those who talk about it, but haven't done it.  There are some great RE investing resources (members) on this forum and many provide examples and intricate details of their strategies, holdings, and how their investments have performed.  I don't see many of those forum members saying "sell all your index funds and put it all in RE".  As best I can tell, many of the regulars in the RE section recommend a diverse portfolio and have significant savings in other vehicles besides real estate.

I don't see the need to proclaim one investment (RE vs stocks) superior to the other.  But where practical advice is concerned, there is plenty of good material from RE investors on this site that, when taken as a whole, can provide a guideline for successfully investing in real estate.  I haven't seen that kind of detail hashed out on this forum (or anywhere else) when it comes to "beating the stock market" by analyzing individual stocks.  Maybe for saying that, some will throw me in the camp with all the RE advocates.  There are a few sporadic voices here and there (on this forum) that claim "it can be done", "it's not impossible", "with enough diligence and research", "many people make a living doing just that", and "I beat the market for several years".  But, taken as a whole, they aren't providing the numbers, the strategy, the details, to prove that their strategy is superior to investing in index funds.

The bold from above is my emphasis. I try to have a mix. My net worth is about 5/8 stocks and 3/8 real estate. I'm not comfortable being a landlord so I stay out of that business so I would be bias towards stocks. Put your money in investments that you are comfortable with is the key to managing your net worth.

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Re: beating the market (housing vs. stocks)
« Reply #21 on: July 25, 2014, 02:17:37 PM »
Yep, there's tons of down-to-earth, practical advice on how to make money in real estate on this site and elsewhere. And people actually do it, and have success.

The market-beater folks have a tougher row to hoe in terms of explaining their strategies but I'll agree that in general, we just get "do lots of research" type advice, along with claims of beating the market. I'm guessing survivor bias and a bit of internet anonymity contribute to the fact that it seems everyone manages to beat the market who professes any interest at all. But there is scads of research that even *professional managers* only rarely beat the market, so I'm guessing the 90+% of people who don't just don't post their results here.

Here's what I send people when they want to argue about this:
https://pressroom.vanguard.com/content/nonindexed/Updated_The_Case_for_Index_Fund_Investing_4.9.2014.pdf

So in summary: real estate is really granular and local and you can gain info advantages by just walking around town and talking to homeowners. More work will find you better deals and your skills can improve in terms of landlording/doing maintenance/selecting tenants. Stocks are not similar at all and the chances that you'll outsmart the rest of the investors in the zero-sum game are slim/none.

-W



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Re: beating the market (housing vs. stocks)
« Reply #22 on: July 25, 2014, 02:20:14 PM »
The reason the consensus says it's possible to beat the market in real estate vs stocks is that the voices of those who believe RE is the way to go - are the loudest on this site. It makes sense, because the guy who started MMM made his way on the RE side as well.

However it would be silly to draw a conclusion from people who are biased to one side of an argument. As a general rule, be skeptical of advice given from someone who's never attempted an endeavor. That goes for PhD economists as well.

That's just ignoring all the stuff that was just said to insert a claim that is a) silly because the investor alley portion of the forum gets much more attention and posts than the real estate portion, b) the guy who started MMM, namely MMM, made his way with a mix of RE and investing. It's a nonsense claim that doesn't move the conversation anywhere and makes no point.

It is IMO an accurate description of the beliefs of most people on this site (or at least the loudest ones). I fail to see how that doesn't answer the OP's original question.

matchewed

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Re: beating the market (housing vs. stocks)
« Reply #23 on: July 25, 2014, 02:28:08 PM »
The reason the consensus says it's possible to beat the market in real estate vs stocks is that the voices of those who believe RE is the way to go - are the loudest on this site. It makes sense, because the guy who started MMM made his way on the RE side as well.

However it would be silly to draw a conclusion from people who are biased to one side of an argument. As a general rule, be skeptical of advice given from someone who's never attempted an endeavor. That goes for PhD economists as well.

That's just ignoring all the stuff that was just said to insert a claim that is a) silly because the investor alley portion of the forum gets much more attention and posts than the real estate portion, b) the guy who started MMM, namely MMM, made his way with a mix of RE and investing. It's a nonsense claim that doesn't move the conversation anywhere and makes no point.

It is IMO an accurate description of the beliefs of most people on this site (or at least the loudest ones). I fail to see how that doesn't answer the OP's original question.

Because your argument seems to be that the reason that people claim to be able to beat the market in RE versus stocks is because RE investors voices are louder on this board. To which I ask WTF? What does that even mean? That is how it fails to answer the question, because it doesn't answer anything.

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Re: beating the market (housing vs. stocks)
« Reply #24 on: July 25, 2014, 02:30:19 PM »
The reason the consensus says it's possible to beat the market in real estate vs stocks is that the voices of those who believe RE is the way to go - are the loudest on this site. It makes sense, because the guy who started MMM made his way on the RE side as well.

However it would be silly to draw a conclusion from people who are biased to one side of an argument. As a general rule, be skeptical of advice given from someone who's never attempted an endeavor. That goes for PhD economists as well.

That's just ignoring all the stuff that was just said to insert a claim that is a) silly because the investor alley portion of the forum gets much more attention and posts than the real estate portion, b) the guy who started MMM, namely MMM, made his way with a mix of RE and investing. It's a nonsense claim that doesn't move the conversation anywhere and makes no point.

It is IMO an accurate description of the beliefs of most people on this site (or at least the loudest ones). I fail to see how that doesn't answer the OP's original question.

Well, it's hard to argue with that with arebelspy having some 10000+ posts :)  But then again he's one of the ones who has laid out quite a bit of detail on how he does his RE business.  And as I said, I don't think he and others who explain their achievements are here are bashing investments in stock or is saying, "RE is the way to go" as you put it.


clarkfan1979

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Re: beating the market (housing vs. stocks)
« Reply #25 on: July 25, 2014, 06:40:57 PM »
Thank you for all the replies. I have been struggling with this question for a couple months. All the contributions have given me a lot of different perspectives to consider.

I would like to conclude that it's possible to beat the market in both housing and stocks, "with work". Everyone's individual choice is dependent upon if the return on investment is worth the work. Some people like to remodel a house to maximize return on RE and some people like to stare at spreadsheets to maximize profit on stocks. To each their own.

Cheddar Stacker

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Re: beating the market (housing vs. stocks)
« Reply #26 on: July 25, 2014, 07:58:04 PM »
 So driving home I had a small revelation about this thread. A light bulb went off. Caveat: I'm not a saavy stock or re investor, so I don't really have a dog in the fight.

2 things:

1) Emotions. I think for the most part saavy stock investors aren't affected by emotion. And neither are publically traded companies. However, 90% + of home buyers and renters let emotions trump reason/finances when it comes to where they live. I believe this gives the re investor a huge advantage for bigger profits vs the stock investor..

2) Financing. Everyone can buy stock. EVERYONE! It's cheap, its everywhere, and the transaction costs are negligent. We all know re has some major hurdles from closing costs to financing to repairs...... there are many more entry barriers for the average person leaving less demand and therefore more supply.

I'm sure stock investors can do just as well or better than re investor under the right circumstances, but these two factors aren't helping their cause.

Roland of Gilead

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Re: beating the market (housing vs. stocks)
« Reply #27 on: July 25, 2014, 08:03:53 PM »
Your initial assumption is wrong which is why you are confused.

People DO beat the market, both in stocks and real estate.

People also lose their shirts, both in stocks and real estate.

I know both sets in both markets.

Personally, I have beaten the market handily for the past 14 years in my trading account, averaging about 30% per year compounded.  I suck at houses though and am slightly underwater on this one.

hodedofome

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Re: beating the market (housing vs. stocks)
« Reply #28 on: July 25, 2014, 08:17:40 PM »
So driving home I had a small revelation about this thread. A light bulb went off. Caveat: I'm not a saavy stock or re investor, so I don't really have a dog in the fight.

2 things:

1) Emotions. I think for the most part saavy stock investors aren't affected by emotion. And neither are publically traded companies. However, 90% + of home buyers and renters let emotions trump reason/finances when it comes to where they live. I believe this gives the re investor a huge advantage for bigger profits vs the stock investor..

2) Financing. Everyone can buy stock. EVERYONE! It's cheap, its everywhere, and the transaction costs are negligent. We all know re has some major hurdles from closing costs to financing to repairs...... there are many more entry barriers for the average person leaving less demand and therefore more supply.

I'm sure stock investors can do just as well or better than re investor under the right circumstances, but these two factors aren't helping their cause.

Emotions drive people in both the stock and RE markets. The fact that anyone can buy a stock makes the markets even more susceptible to emotional swings and madness - there are more idiots participating in the stock market because it's so easy to get in the game.

Professional poker players make their money on the number of amateurs flocking to the casinos. Professional traders can make even more money than professional gamblers as there are more amateurs out there buying and selling stock at the wrong times. Just ask Ed Thorp. He switched from the casinos to the world's biggest casino - the stock market.

Publicly traded companies have the same cognitive biases as anyone else. Very few humans have overcome this. The ones that do are the folks who make and keep the profits. CEOs buy back stock at the top of the market and sell stock to raise cash at the bottom of the market all the time.

Cheddar Stacker

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Re: beating the market (housing vs. stocks)
« Reply #29 on: July 25, 2014, 08:26:41 PM »
All good points hoded. Anything on the financing point?

defenestrate

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Re: beating the market (housing vs. stocks)
« Reply #30 on: July 27, 2014, 06:21:23 PM »
There are three main reasons retail investors can beat the market in housing and not in stocks:

1. information--You have collected huge amounts of information about your neighborhood and those around it just by living. You will be able to identify "deals" better than someone from a different city. Unless you are spending a lot of time on earnings calls, looking at balance sheets, and analyzing individual companies, it is unlikely you will have the same level of information to make an informed decision. If you had this time, you would be able to identify undervalued companies.

2. Leverage: In housing you have access to CHEAP leverage--unless you are a large institutional investor, you will not have the same access to cheap money--and given number 1. you will not be comfortable using the leverage even if offered.

3. As a homeowner you will put in sweat equity. When many investors claim they "beat the market" this probably underestimates the value of the homeowner's time.

Add these three elements together and you have a great likelihood of beating the market--of course, lets not forget that most investors who put money in the market between 2005-2009 are not claiming that they have "beat the market"--they are likely silently licking their wounds.

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Re: beating the market (housing vs. stocks)
« Reply #31 on: July 28, 2014, 08:25:02 AM »
Your initial assumption is wrong which is why you are confused.

People DO beat the market, both in stocks and real estate.

People also lose their shirts, both in stocks and real estate.

I know both sets in both markets.

Personally, I have beaten the market handily for the past 14 years in my trading account, averaging about 30% per year compounded.  I suck at houses though and am slightly underwater on this one.

If this is true you are one of the best investors alive. If you're not paid millions of dollars to work for on Wall st you're doing something wrong. Congrats to you.

Roland of Gilead

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Re: beating the market (housing vs. stocks)
« Reply #32 on: July 28, 2014, 08:55:12 AM »
Your initial assumption is wrong which is why you are confused.

People DO beat the market, both in stocks and real estate.

People also lose their shirts, both in stocks and real estate.

I know both sets in both markets.

Personally, I have beaten the market handily for the past 14 years in my trading account, averaging about 30% per year compounded.  I suck at houses though and am slightly underwater on this one.

If this is true you are one of the best investors alive. If you're not paid millions of dollars to work for on Wall st you're doing something wrong. Congrats to you.

It is 100% true but I started with less than $2000 in my trading account.  So the return, while impressive, is not life changing.  It does show that someone with bigger balls could really trade into a fortune if they are astute and a bit lucky.

hodedofome

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Re: beating the market (housing vs. stocks)
« Reply #33 on: July 28, 2014, 09:15:45 AM »
Your initial assumption is wrong which is why you are confused.

People DO beat the market, both in stocks and real estate.

People also lose their shirts, both in stocks and real estate.

I know both sets in both markets.

Personally, I have beaten the market handily for the past 14 years in my trading account, averaging about 30% per year compounded.  I suck at houses though and am slightly underwater on this one.

If this is true you are one of the best investors alive. If you're not paid millions of dollars to work for on Wall st you're doing something wrong. Congrats to you.

Not everyone wants to manage other people's money.

Roland of Gilead

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Re: beating the market (housing vs. stocks)
« Reply #34 on: July 28, 2014, 11:51:21 AM »
...
Personally, I have beaten the market handily for the past 14 years in my trading account, averaging about 30% per year compounded.  I suck at houses though and am slightly underwater on this one.

What level of risk are you taking to achieve those returns?

An example.  Earlier this year (in Jan) I bought 5 Apple Jan 2015 $500 calls for $30 and sold against them July $530 calls for $15 (it wasn't exactly this but close enough).  I thus had $7,500 at risk with the potential to make $7,500 profit (100% gain) or slightly more.  I wasn't expecting Apple to do the 7 for 1 split and when the stock shot up to $600 I bailed early, making only $6,000 profit.  In hindsight this was stupid and I should have waited for $7500 but I generally try to book a profit and move on to the next investment.   The next investment was Gilead, which I have made far more than $6,000 on this year.

A lot of risk, but had Apple dropped below $500, the July $530 calls would have expired worthless and I could have sold Jan 2015 $530 calls for another $10 to $15 and gotten most of my money back with still the potential for profit.   Had Apple dropped to $300 I would have been screwed.

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Re: beating the market (housing vs. stocks)
« Reply #35 on: July 28, 2014, 01:29:08 PM »
Woof!   Be careful man!   Lots of risk going on there

30% since 2000?!   I'd imagine That's unprecedented considering what's happened  in that time range.    If true, it's worthy of a dedicated blog with hard numbers attached.   Hats off!

I don't think it's very smart to be making those kind of risks with your retirement.....if that is what you are talking about here.....luck (your words) is not investing.   You're gambling bro :)
« Last Edit: July 28, 2014, 01:34:37 PM by surfhb »

Roland of Gilead

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Re: beating the market (housing vs. stocks)
« Reply #36 on: July 28, 2014, 01:49:21 PM »
Woof!   Be careful man!   Lots of risk going on there

30% since 2000?!   I'd imagine That's unprecedented considering what's happened  in that time range.    If true, it's worthy of a dedicated blog with hard numbers attached.   Hats off!

I don't think it's very smart to be making those kind of risks with your retirement.....if that is what you are talking about here.....luck (your words) is not investing.   You're gambling bro :)

I started with only $1700 and change in an IRA and made a commitment to never add more to that account.  Yes, today it is near $90,000 but it still was only a $1700 investment.  I have other IRAs and 401Ks that I do not trade in or take risks (other than index funds).

Even at $90,000 I can still take risks because I know I only started with $1700.   If I lose $15,000 one year it is psychologically different to me than if I had just earned $90,000 by working and then immediately lost $15,000 of it.  Call me lame, but that is how I am emotionally.

surfhb

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Re: beating the market (housing vs. stocks)
« Reply #37 on: July 28, 2014, 02:12:28 PM »
Dang!   Can I ask how you did in 2001 and 2008?

Roland of Gilead

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Re: beating the market (housing vs. stocks)
« Reply #38 on: July 28, 2014, 02:43:00 PM »
Dang!   Can I ask how you did in 2001 and 2008?

I would have to go dig it up but IIRC in 2001 I was all in XOM with the $1700.  I think after it split I bailed with about $2500? in 2004.  I then started doing very heavy swing trading on MSFT options, because Microsoft was stuck for an entire decade in the $20 to $26 range.  I went from sub $10,000 to over $30,000 just buying and selling Microsoft call options in the 2000s. 

2008 I think I went down 30% or so.  2009 - 2011 I made a killing, as did everyone.

I had my fair share of mistakes, and I had some potential million dollar trades that I exited WAAAAY too early.  Two examples:  I bought 6 month out GMCR (green mountain coffee roaster) call options at like $25 strike when the stock dropped to the teens and the executive had the margin call.   I sold them when the stock rebounded a tiny bit but they went on to 10x the price I paid.   I did even worse in Netflix, owning a ton of call options with a 1 year expiration when Netflix dove to sub $70, and I sold them when it got back to $80, only to see it go past $200 before option expiration.   Had I really took a gamble and held, I would have nearly $1,000,000 in that account now.
« Last Edit: July 28, 2014, 02:47:38 PM by Roland of Gilead »

Gone Fishing

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Re: beating the market (housing vs. stocks)
« Reply #39 on: July 28, 2014, 03:41:50 PM »
Don't forget how fuzzy the math can get when calculating returns.   Most mortals could not even come close to accurately comparing an RE investment against a stock unless they invested an exact amount in each for an exact period of time.  If you really want to get it right you have to throw in taxes (which are variable based on the person), trying to value time spent on management, sequence of returns, compounded returns vs simple returns, multiple purchase and sale points, additional investments, etc. As you can see, things get quickly out of control.  Best advice is to own some of both!

NorCal

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Re: beating the market (housing vs. stocks)
« Reply #40 on: July 28, 2014, 09:32:53 PM »
There is actually some fundamental finance theory behind the recommendation to seek "average" market returns, and some serious academic studies back up the recommendation.

The CAPM (Capital Asset Pricing Model) goes something like this.  Every active investor is trying to beat the market.  Whether you are value investing Warren Buffet style, or trading momentum stocks, your goal is to generate the highest return possible. 

Now think about what the "market average" return is made of.  It is simply the average of every investor trying to beat the market.  Every year, some will beat the market, and others will lag the market.  And "market" performance is the average of these.   This is why it is considered improbable to beat the market over the long term.  On average, the money spent on management fees for active managers will reduce your returns to below-market.

I am less familiar with real estate, but I will offer several possible explanations for the supposed ability of investors to get above-market returns in real estate. 

1.  Many people think they are getting above average returns (or at least tell you they are) when they really aren't.  Of course, this is also true of the stock market.  You just find fewer of them on this forum.
2.  Many people combine capital with labor (fixing a house themselves) to improve returns.  If you attribute a cost to their labor, the returns would look different.
3.  Leverage magnifies returns on both the upside and downside.  You hear a lot of people now talking about the great returns they're getting.  They probably weren't bragging so much in 2009.  The same will be true in the next downturn.
4.  There are some participants in the rental market that aren't trying to maximize returns.  Maybe they're renting to family, or just renting because they aren't ready to sell the place.  These people are also part of the average, but they're not spending time bragging about their great returns.

hodedofome

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Re: beating the market (housing vs. stocks)
« Reply #41 on: July 29, 2014, 08:13:25 PM »
Read this tonight:

In the early 70s, my father was worried about his health and inflation and suspected my mother would outlive him by a considerable number of years. He was never much of a believer in bonds. Bonds are trading sardines, but good stocks are eating sardines, was an expression he favored. So he constructed for my mother a portfolio of growth stocks (and cyclical growth stocks) such as Philip Morris, Caterpillar, Exxon, Coca-Cola, AIG, IBM, Citicorp, HP, Berkshire Hathaway, GE, Merck, Pfizer, and so on. Nothing very imaginative, but solid, long-term companies you would want to sleep with. When she died two years ago at 95, her cost on many of those positions was actually less than the current dividend.

My mother's portfolio compounded over 32 years at 17 percent a year, and her dividend income grew at about the same rate. I figure the purchasing power of her income stream had compounded at roughly 12 percent per annum. The only taxes she ever paid were on those dividends. Talk about tax-free compounding!

Barton Biggs - Hedge Hogging


This was an incredibly well-done and lucky portfolio. I wouldn't doubt that the Berkshire Hathaway stock was probably 50% of the gains alone. It also didn't hurt that her son was a professional investor and was able to sell off a few holdings over the years that looked like they were headed for the cemetery. But the fact that she could just hold on and live off the dividends the rest of her life...I'm sure her income near the end was incredible.
« Last Edit: July 30, 2014, 10:20:20 AM by hodedofome »

arebelspy

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Re: beating the market (housing vs. stocks)
« Reply #42 on: August 21, 2014, 09:47:18 PM »
It's all a spectrum of risk vs. return and passive vs. active.

Neither is better than the other, but what you invest in should be based on your goals and aptitude.

I personally feel a lot more comfortable analyzing real estate, and choosing properties that will generate me a double-digit return.  If I could analyze companies the way Joshua Kennon does, I may not be bothering with Real Estate.  He, however, has a passion for reading corporate annual reports that I don't.  That's a key part as well.

There is no best, there is just what is best for you.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
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bigchrisb

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Re: beating the market (housing vs. stocks)
« Reply #43 on: August 22, 2014, 01:24:40 AM »
Indeed.  I've been going through the process of RE at the moment, and having been used to the low transaction costs and truly passive nature of stocks, I'm rather aghast at how much time and transaction costs are getting consumed in RE.  I guess this gives an opportunity to value add, however I remain profoundly unconvinced that a portfolio of rentals suits my persona.

rmendpara

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Re: beating the market (housing vs. stocks)
« Reply #44 on: August 22, 2014, 07:14:38 AM »
It seems like many real estate investors have confessed to beating the market in housing. They don't look for an "average" house. They look for an undervalued house and then profit by reselling or renting out.

However, when it comes to stocks the consensus seems to be to look for an "average" stock by investing in the total market. Do not waste your time looking for an undervalued stock.

Why is it considered possible to beat the market in housing but not stocks? Feel free to punch me in the face, I have thick skin.

Physical property markets are far less efficient than publicly traded investments.

To name a few, property has:
- less information available
- high transaction costs
- subjective pricing
- readily available debt/leverage (sort of...)
... and many more risks/opportunities that are different.

The short answer is that it's easier to be an expert in RE and find good values than it is to be an expert in public investments and find good values.

FWIW: Almost anyone who bought property almost anywhere in the US from 2009-2012 saw substantial gains because short sales and foreclosures drove down prices so far.
« Last Edit: August 22, 2014, 07:18:33 AM by rmendpara »

Roland of Gilead

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Re: beating the market (housing vs. stocks)
« Reply #45 on: August 22, 2014, 07:29:55 AM »
FWIW: Almost anyone who bought property almost anywhere in the US from 2009-2012 saw substantial gains because short sales and foreclosures drove down prices so far.

FWIW:  Almost anyone who threw a dart at a stock board and picked a stock or index from 2009-2012 saw substantial gains because stock prices were driven down so far.

Jags4186

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Re: beating the market (housing vs. stocks)
« Reply #46 on: August 22, 2014, 09:12:04 AM »
I think the real issue here is that bad RE investors get flushed out immediately while bad stock market investors can continue on indefinitely.

If you bought a 100k piece of property and wiped out and lost 40% you probably would be dissuaded from buying more property.

If you had 10k to buy into the stock market and you picked 10 stocks at 1k each, and 3 bombed and dropped to $400 in value 5 remained relatively stable, 1 went up to $1100 in value, and one went up to 3k in value after 6 months might get "hooked" on that one that 1 winner and look to chase more...even if at the end of the day you only made 3% on your total investment.

It's like people who brag about cleaning up in Vegas or Atlantic City.  You only ever hear about their wins you never hear about the losses...or 1 big win erases lots of losses and they think they are "up" when they are really lucky.
« Last Edit: August 22, 2014, 09:14:28 AM by Jags4186 »

Roland of Gilead

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Re: beating the market (housing vs. stocks)
« Reply #47 on: August 22, 2014, 09:17:41 AM »
I think the real issue here is that bad RE investors get flushed out immediately while bad stock market investors can continue on indefinitely.

If you bought a 100k piece of property and wiped out and lost 40% you probably would be dissuaded from buying more property.

If you had 10k to buy into the stock market and you picked 10 stocks at 1k each, and 3 bombed and dropped to $400 in value 5 remained relatively stable, 1 went up to $1100 in value, and one went up to 3k in value after 6 months might get "hooked" on that one that 1 winner and look to chase more...even if at the end of the day you only made 3% on your total investment.

It's like people who brag about cleaning up in Vegas or Atlantic City.  You only ever hear about their wins you never hear about the losses...or 1 big win erases lots of losses and they think they are "up" when they are really lucky.

There most likely is survivorship bias too.   We are not hearing from people who bought at the peak of the market in Detroit and had to sell for a $150,000 loss.  It is great for those who bought a condo in NYC in 2009 for $400,000 and it is now worth $1.5m.   Someone also could have purchased Netflix at $70 a couple years ago and be sitting on it now at $470 a share.

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Re: beating the market (housing vs. stocks)
« Reply #48 on: August 23, 2014, 09:06:38 AM »


Personally, I have beaten the market handily for the past 14 years in my trading account, averaging about 30% per year compounded.



I see you have not forgotten the face of your father.....

I do not aim with my hand; he who aims with his hand has forgotten the face of his father.
I aim with my eye.

I do not shoot with my hand; he who shoots with his hand has forgotten the face of his father.
I shoot with my mind.

I do not kill with my gun; he who kills with his gun has forgotten the face of his father.
I kill with my heart.


so much epicness in those books