Why I HATE the Stock Market

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When I compare investing into real estate verses the stock market, I truly do feel the way I suggest in the article title. Don’t get me wrong, the stock market is a great vehicle for the big fish companies to raise cash, fund operations, make acquisitions, etc., but from us little minnow investor’s perspective, there are definitely better options out there. (I know what you’re thinking, “Well I know real estate is an option, but I just don’t have the time to be able to devote to such a task as a rental property.” If you just thought that, KEEP READING).

I should also note that I’m not suggesting you do not diversify, but the thought of having my funds in solely stocks and bonds makes me quiver. You should definitely practice diversification (which includes stocks), but let’s call a spade a spade: the mainstream financial media greatly deceives people by “herding” people towards stocks, bonds and mutual funds as their only investment options.

Don’t believe me? Call up your financial adviser who is in charge of your IRA and/or 401k. Tell them you want to diversify into some private mortgages. Down in the comment section why don’t you tell us their response. I’m only kidding. Assuming you have not set up a truly self-directed IRA/401k, I already know what their response to you will be: that isn’t possible or why don’t you buy some stock of (insert symbol) since they are into real estate.

Why is this the case? Why won’t your adviser sit on the phone and tell you how you can get involved at real estate at vastly discounted prices? Easy. They don’t make any sort of commission or get any kickbacks. Why tell you about something where for them the answer to the “what’s in it for me?” question is “nothing”.

Maybe I don’t hate the stock market, maybe I just hate the way the financial media “herds” people around like cattle, but at this point, I’m not changing the article title, I think it has a nice ring to it ;-)

There are many reasons why the real estate market is superior to the stock market, but for this article’s sake, I am only going to talk about one of those reasons for now. In my view, this reason is really the ONLY reason that matters (again, just my opinion), but I’ll concede there are other great reasons.

Loan-to-Value Ratio (LTV)

This is the great concept that separates real estate from the stock market.

In the stock market, you are ALWAYS buying at 100% LTV. If stock xyz currently has the price of $25.18, then THAT is the exact price the market perceives it to be worth.

What if I gave you the opportunity to purchase this same exact stock for $17.63 while others were buying it still for $25.18. Wouldn’t a 30% “cushion” be nice just in case the stock declined in value a bit after you bought it?

The bad news unfortunately is this opportunity does not exist in the stock market (excluding Options; however, while being high reward, they are also high risk).

The good news is that this opportunity DOES exist in the world of real estate. The even better news is that you can STILL BE completely hands-off like you are in the stock market.

How is this possible? If I get involved in real estate doesn’t that mean I need to become a landlord and/or flipper?

Let’s use an example that I personally use within my real estate company.

Example: My company buys an ugly house, fixes it up and then sells it on land contract (owner financing, installment sale, contract-for-deed… all the same thing). To keep things simple, let’s just use nice round numbers:

My company buys it for $45,000 and rehabs it for $25,000 with our line of credit. That puts our total investment at $70,000. We then go on and sell it on land contract for $100,000.

This is where the hands-off person comes in to get involved in real estate. Put simply, you act as a bank does and “buy debt”. You would loan my company $70,000 and be given a mortgage attached to the property in 1st lien position. You would be paid an interest rate on the $70,000 for a predetermined amount of time.

Are you keeping track of the math though? Did you notice that you ONLY loaned 70% of what the asset was worth? $70,000 / $100,000 = .70 x 100% = 70% LTV.

You now have a 30% “cushion” should the real estate market shift. Not to mention, a physical asset (whereas the stock market only gives you a piece of paper).

Upfront Time Required

It would be deceiving if I left you with the impression that there is absolutely zero time involved. You should spend time upfront making sure that the real estate investor and/or company you are working with knows what they’re doing. Don’t blindly hand over a check.

Just as you would research a financial adviser or fund director, do the same for a real estate investor. Ask to see some of their previous deals, ask how long they’ve been in the business, ask if they have a “rainy-day” fund for those rough times. Or to cut straight to the chase, ask to speak with others that have loaned them money. Have they always paid on time?

Do your homework. It should be no different than doing your homework when you are deciding what adviser to hire or what mutual fund to buy.

A Multitude of Options

The example I used with my company assumes you want to take the hassle/headache free path to get involved in real estate. By no means is this the only way to get involved though. If you want to get more hands-on, there are a ton of ways to do so. The two default options that pop into most people’s minds are becoming a landlord or flipper, but you can do wholesaling, become a real estate agent, etc.

If you want to stay “kind-of” hands off, becoming a hard money lender is another option.

Research
Start at BiggerPockets. There are people on this site that are completely “hands-on”, and there are people on this site that are completely “hands-off” as all they do is invest in debt. Find a way that suits your personality and time constraints, and begin to diversify. Stop putting all your hard earned money to work at 100% LTV’s!!!

Note from the Editor: Over the past weeks we’ve had several posts that looked at the value of real estate vs. stocks and other equities. These were not commissioned pieces; our authors write on the topics that interest them. We allow our contributors to share their opinions, and although some may feel that this site is biased against equities, it is not. That said, do note that this is a site of real estate investors, who are obviously going to have their own personal bias towards those investments that they prefer.

Photo: Herval

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About Author

Clay (G+) is a licensed real estate agent and the owner of Huber Property Group, LLC, a real estate investment company located in Grand Rapids, MI. His company purchases distressed properties with the main exit strategy of fixing them up and reselling with owner financing, particularly, land contracts.

20 Comments

  1. 2 years ago I would have completely disagreed with you. However, after reassessing my 401k performance over the past 5, 10, 15 & 20 years and deciding that including real estate in your retirement plans I agree with you 100%. If you read personal finance magazines like I did for years you realize all of the ads in there are from mutual fund companies.

  2. Oh my another article based on wrong information.
    I have to laugh about the basis of these articles; the stock market is not a good way to invest, because to make consistent profits with little or no risk one has to move from a novice to an expert. That is, one must invest the time to learn an investment strategy they know nothing about or they could lose a lot of money.

    Where have I heard this line before? Oh, yes real estate investing. As we have now seen REI is just like any other investment strategy; if you do not invest the time to learn this business you could loose a lot of money. Would that fact allow one who has no education in REI to claim “Why I hate REI” and make an intelligent argument to support this thesis?

    First I own several REI properties, yes they have great cash flow, but did I spend thousands of dollars to learn the REI business? Yes in direct cash spent towards education and indirect cash from lost opportunities or better know as failures on my way around the learning curve.

    Let’s first take your charge that people are herded towards the stock market and your charge their is a sinister game being played against the general investing public. Kind of funny when you think about the bulk of folks on BiggerPockets herding newbies towards their local DIG or other investors groups. Here they will be constantly bombarded by all forms of REI guru’s who give a hidden
    COMMISSION to those guru’s as a means of filling the coffers of those organizations. This when the long time members of these organizations know full well these guru’s are con artists. Kind of like the advertising Bigger Pockets accepts from the same guru’s all the while the members tell the newbies to ignore the advertising.
    Explain to me why if I asked a Realtor advice of whether I should take my new found inheritance from my great uncle I never knew into the stock market or into REI they would herd me to REI? Hmm, maybe because this is how they make a living? Maybe because they make a commission or possibly a kick back!?

    Oh, yes good advice diversify, but only diversify into REI? I don’t know how that is possible.

    Quote:
    In the stock market, you are ALWAYS buying at 100% LTV. If stock xyz currently has the price of $25.18, then THAT is the exact price the market perceives it to be worth.

    What if I gave you the opportunity to purchase this same exact stock for $17.63 while others were buying it still for $25.18. Wouldn’t a 30% “cushion” be nice just in case the stock declined in value a bit after you bought it? End of Quote.

    Addressing the above: What determines what anything is worth? What the market RE of stock will pay for it, what determines what your old car is worth? How about it do you go out and pay a more for a REI property then the seller is asking, or what the area sells for or do you pay the fair market price or less?

    You mentioned stock options, but obviously know nothing of how they can be used to get a discount of stock or make money without buying the stock. Example xyz company stock is trading at $500 a share, I have seen in the past the stock has a support or market value based on its technical analysis of $490, but I want to get a discount and would buy xyz at $487. I sell to open the December put option with a strike price of $487 and get paid the Bid price of $3.12 a share, options are sold in increments of 100 shares so I receive a credit of $312 for each contract. The danger here would be if the stock market crashed and the stock tanked to $400 as I have a short option requiring me to buy at $487. This how uneducated folks loose everything in options. But those of us who have invested in the learning curve and traded many times in paper only, know to also Buy a Put option just a few dollars below the $487 maybe the December $485 Put Option which will cost less then the Put I sold so I get to keep the $312 credit I received for sell a Put minus the maybe $150 to buy the second Put. I am betting XYZ is going to trend higher, which would allow me to keep the $312-$150 or $162 so what in the worst case could I lose here if my bet was wrong? I would get XYZ for $487-$150 credit or $487 a share also minus $1.50 a share $150 credit divided by 100 or $485.50 a share.

    What if XYZ tanked to $400? Well what are we all betting on grabbing for cheap foreclosed homes at less then their build value?
    That the housing market will rebound to a higher level maybe back to where it was, correct? Well look at the stock charts, when a good company’s stock tanks because the Lemmings panic like in 2001 and 2008 all of the good companies go right back to their market values. Markets value all investments, XYZ will go back to $500, if it didn’t I could use a different strategy if I thought the market would not rise. I could sell what is called a Covered Call or an option requiring me to sell my stock at a Strike price which I would set at a higher number then the market price or maybe a long term option at $488 a share each time i sold a Covered Call option against my stock I get paid a credit which I could use to recoup the money I paid out for the stock and if one knows what they are doing could easily recoup the entire $485 a share paid in the example above.

    Just like in REI it is just so easy to make money in the stock market selling options or stock, but in a down trend it is harder unless you have an advanced knowledge of options trading.

    Your hands off methods sound just wonderful, but buying REI hands off (hiring a management company) is not a bed or roses most of these companies are run by idiots, and they do at best a mediocre job, most as a point of business rip-off their clients for bogus repairs and other fees. if these management companies are seeking tenants for your rentals the best tenants are referred to their properties or best clients.
    As to hard money lending, how many lenders got crap half finished properties dumped in their laps? They were betting on REI just going up and up, and it did a reversal. The hard money lenders who did not get burned knew the market and got out or took precautions. So these few must have invested in knowing their business?

    In the stock market you cannot lose money unless the underlying stock goes down in price and you sell. Just the same for REI except a loss of a tenant or two or a major repair issue can remove all profit from your property for a few years, maybe forcing you to sell or worse causing a loss of the property and the entire investment.

    Your LTV scenario looks sweet and I have profited by using leverage in REI presently all of my properties where bought for 40 cents on a dollar with 100% OPM including repairs. My return is infinite on paper, but in reality is just a fraught with pitfalls as the buildings are encumbered with mortgages that have to be paid each month along with repairs, utilities, etc. Currently I have about $5000 gross with $2000 in expenses, not a bad return, but still all are for sale with no takers so much for liquidity.

    My Options however represent an ownership interest in the underlying stock but for pennies of the actual stocks value. The liquidity is unlimited as millions of shares and also millions of options are sold each day unlike REI which as we have found out is as about a liquid as a block of ice in the wrong market. I can get of out my stocks in a second, with a small commission while REI gets hit with 6% plus a whole host of taxes and fees.

    The end game for me is retirement, my REI needs to be managed by someone else for me to actually be away from the investment and call myself retired. I could spend a few hours a week from a laptop managing stocks or options, I can tell you I can easily get 6% return monthly in the stock market when things are going good, when bad probably 2-3%.
    Taxes do not come into play as part of my portfolio is in a self directed Roth IRA, which can have limits as to what kinds of options I can deal in. In the Roth IRA I only deal in premium stocks that pay dividends so how bad is it to have to buy a dividend paying stock at a discount, and then sell Covered Calls against the stock, Buying to Close the Options before they can call the stock away?

    Let me just leave you with this if you had invested just $10,000 with a few of the big traders in Wall Street in the early 1980’s or with some of these guys in the early 1990’s you would be sitting on millions without as so much lifting your finger.

    My advice is to diversify, but first learn as much as you can before diversifying into an investment.

    Please stop writing these nonsensical Blogs just to increase your SEO or fill the pages of Bigger Pockets with misinformation.

    • Thanks for the comments.

      Not sure where all the anger is coming from as I addressed everything of your concern.

      1) Never once did I say people should avoid the market entirely. You completely put words into my mouth, where did I say diversify “entirely into real estate”? Besides, that would contradict the meaning of “diversify”. I said the stock market SHOULD be used, but to also diversify into other things as well, like real estate, such as you have done.

      2) Never once did I say “no time is involved” when investing into real estate. (In fact, I had a section titled, “Upfront Time Required”). Obviously, the more involved you get with real estate, the more TIME will be required.

      3) This is a real estate blog, not a stock trading blog. I mentioned options very broadly, but as you just demonstrated in your comments, they are very complicated, and again, being this is NOT a stock trading site, I didn’t want to waste the readers time going that much into detail. Bottom line, Options allow you to buy for discounted prices but are high risk as they can expire worthless. I understand there is ‘more’ to it than that, but that is the nutshell version of how they work (whether you’re talking about calls or puts).

      Again, thanks for the comments.

      • Clay, if you did not submit a claim against one of your insurance policies last year, then that “option” expired worthless. You had to renew your “option” by renewing your insurance policy … perhaps for a higher price.

        • Apples and oranges.

          Stock options literally expire worthless with no cash flow received.

          A real estate “option” does expire (true), but it is in place to insure the cash flow you are receiving.

        • Clay. millions of people will file claims on their homeowners, auto and other insurance policies as a result of Hurricane Sandy. Something bad happened (Sandy) and the value of their assets (homes, cars, etc) declined dramatically. If they had insurance on those assets they can file a claim and “force” someone else (the insurance company) to purchase those assets from the claimant for a (somewhat) predetermined price. Homeowners and car owners in Kansas and elsewhere who were not affected by Sandy, they can file no claim. These homeowners will let their “option expire” worthless.

          If I own Apple stock and also own a put option on Apple stock, if something bad happens (earnings drop, stiff duties on imported goods … whatever) and the stock price of Apple drops, I can likewise force someone else (whoever sold the put) to buy it from me at that exact predetermined price. No claim forms, no deductibles, no copays, no waiting.

          Most financial options do expire worthless.

          Most property insurance policies also expire worthless. The insured has to renew the policy … usually annually.

      • Clay,

        What anger? You want us to diversify but title the blog with HATE and stock market together. You accuse financial advisers the media of herding people into the stock market, taking kick backs and commissions, as if you were upset for them doing so. All the while as a Realtor herding investors into REI when investing in RE is probably one of the worst things they could do as complete novices.

        I am aware this is not a stock investing site, but you brought up the subject, yes?

        And yes about 80% of all options expire worthless, but that does not mean that 80% of those buying and selling options are also losing their money? Quite the opposite if Kevin buys a Put option to protect the value of his stock a seller is on the other side making money selling the Put. As a Put seller I provide an insurance policy against his possible loss of value, while collecting a credit for doing so. I might also be on both the selling and buying side as I explained in my earlier reply, and profit by doing so. In those cases I want the options to expire worthless, that is the point. Kevin on the other side would also desire his Option to expire worthless as he does not want his stock to decrease in value, but increase in value.

        I have fire insurance on my home, and I hope I never have to make a claim. Was purchasing fire insurance a bad investment? I suppose if you could know the future you could say yes, but then no need to have insurance of any kind if you can do that.

        As far as the complexity of what I explained earlier, well I have done many deals in REI and the same with the stock market, and only hold a high school diploma from a mediocre public school. Education in the early years of my life was the last thing of importance, but some how later in life I was able to master REI and I’m on the road to mastering the options market as well.

        Someone once said when the student is ready the teacher will appear.
        Another said there is no teaching, only learning, you cannot teach if one does not want to learn.

        One of my good friends a Realtor rolled his eyes when i said I was moving from REI multi units to stock options. Will he be rolling his eyes when my income in options exceeds that of the multi units? If you think about it REI is very capital inefficient, with taxes, maintenance, vacancies, etc. Without those expenses I could receive a better return on my capital, while making a lower percentage return, as I will have much less costs of holding a portfolio of stocks over RE.

        i believe the future holds inflation, which will increase the prices of my properties, but wages will not increase as fast as inflation so rents will not keep up with inflation. A fixed payment interest rate will be a boon allowing my RE to be paid for with cheap dollars.
        But some day all of this debt is going to be paid back with higher taxes and interest rates. Those thinking their REI is going to be liquid or have gained in value might be surprised when the interest rates hit 10% as we all know people buy everything based on what it costs a month.

        For the most part the folks who lose it all in REI or the stock market are the uneducated speculators who are trying to get rich quick. These are the folks who take on the highest risk and most times crash and burn. I like speculators I would like them to come back to REI and the stock market.

        • For the most part the folks who lose it all in REI or the stock market are the uneducated speculators who are trying to get rich quick.

          I’d love to see any data you have on this, Dennis. Can you poing me to a study in either equities or real estate that points out that ‘uneducated educated speculators who are trying to get rich quick’ are the folks who more likely lose it all? Thanks.

  3. I understand all that. You are hedging your stock position by utilizing options. (great strategy of diversification).

    Again. Where did I ever say people shouldn’t diversify?

    From the first sentence of the 2nd paragraph:

    “I should also note that I’m not suggesting you do not diversify, but the thought of having my funds in solely stocks and bonds makes me quiver. You should definitely practice diversification (which includes stocks)”

    I’m advocating diversifying funds into real estate (while also still including stocks).

    Your’re advocating you can use diversification in the stock market via options.

    Sounds to me like we’re both in agreement about DIVERSIFICATION.

    Cheers!

  4. I can bring some perspective. I am a financial consultant and a real estate investor. You need to account for the fact that the vast majority of people are FINANCIALLY IGNORANT. They have never been taught how to handle money and investments, insurance. They have no model for intelligent decision making. So to pretend that the answer for financially ignorant people is buying discounted notes on real estate is silly. This is riding a motorcycle before they can even ride a bike. And in ten years of practice, I can tell you that most people aren’t willing to put as much time into financial education as they are in planning their vacations. For people that DO invest in their financial IQ, they become ready intellectually for serious Investing. But they do it after establishing good habits of saving and insurance planning so the foundation is laid for investing and the guardrails for losing are in place. But again this is not one size fits all, and this is what the gurus don’t get.

  5. “So to pretend that the answer for financially ignorant people is buying discounted notes on real estate is silly.”

    Who is “pretending” anything? I had a whole section entitled “Upfront Time Required”. As I mentioned, it would be misleading to suggest that the person does not have to put any time into this.

    “For people that DO invest in their financial IQ, they become ready intellectually for serious Investing.”

    I agree with you 110%. And THOSE are the type of people I’m trying to reach so I can assist them in their “financial IQ” quest and alert them to real estate investing being an option.

  6. Clay
    I’m just saying that those who are financially ignorant, and even those of average financial intelligence and those who make lots of earned income abd don’t want to be bothered with investments need solutions too, and the financial services community brings options to them that, while not having the upside potential, can give them financially security. So I think your use of hyperbolic terms Iike ‘hating’ the stock market and dissing financial advisors in categorical fashion isn’t helpful. I will turn my clients on to real estate if I think they are up to it, but the fact is most aren’t and don’t care to be.

    • “I will turn my clients on to real estate if I think they are up to it, but the fact is most aren’t and don’t care to be.”

      Honorable on your part. Good stuff!

      But again, those who “aren’t” or “don’t care to be” involved in real estate probably won’t be surfing the internet or BiggerPockets with terms like “real estate investing”. So while that MAY be the case, I want to reach those who “are” and “want to be”, hence, the point of this article.

  7. Are people getting “herded” into mutual funds? Considering that my company (and my previous one) has someone advocating investing in 401K-wrapped mutual funds but NOT someone who can advise me on real estate investments, would leave me with a resounding “yes.” For years, I have had the perception that 401K-wrapped mutual funds were the only thing out there. My 401K doesn’t offer stock options either. I’m not the only person who felt like, in the past few years, that “I’m going to put some money into my 401K and pray it earns money.”

    I believe in prayer, but not when it comes to building a solid financial plan. Advisors sell what is on their shelf, and nothing else, so being told that we need to hire a financial advisor to tell us what to buy is an inadequate solution. It keeps supporting the basic premise that we need to find the “right” person to delegate our financial responsibility to, a fallacy indeed.

    It wasn’t until I met my in-laws that I started to understand rental properties. Finding BiggerPockets was even better. But none of this came through the “usual” channels, like corporate financial groups, meetings, etc. If you look at the Federal Reserve bulletin, it becomes evident that a majority of Americans don’t know about rental property. I don’t mind ALSO owning some stocks that I have thoroughly researched, but I don’t get my information from Money Magazine.

  8. I have been in real estate, NNN property is available at 1.05% of purchase price, but return is negative. So your choice to decide how much down, and return?
    As a hands off guy, and a retiree, happy with 4.5% COC, and 12% total, if principal payment is included. Check LTV at CTL loans on google.

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