How many people do you know that made their fortunes in the stock market, and can live off the income their stocks and bonds generate? I don’t know any, but I do know quite a few successful real estate investors who have managed to quit the rat race, and can live off of their real estate portfolios. As a real estate investor, this is something that we all can intuitively grasp. It is not that complicated – a good income property is like a machine for printing money. Stocks, unfortunately, seem a lot more like putting money down at a casino in the best of times. In the worst-case scenario, they resemble nothing more than a crooked Ponzi scheme where the early investors make out like a bandit, and the last sucker in gets burned. Enron, WorldCom, Madoff, need I go on?
Despite our intuition, for reasons that continue to escape me, the media seems to portray stock investing in a different, and altogether more positive light than real estate investing. Here are a couple of recent examples. Compare these two headlines:
“10 years…no gain in home prices” (CNN)
“Will stocks’ ‘Lost Decade’ usher in another bull market?” (USA Today)
Notwithstanding the rosy outlook of the stock market article, if you go back and compare the actual returns on stocks versus real estate over the past decade, as discussed in the two articles, you’d see that real estate handily outperformed the stock market, even without taking into account the inflation-beating leverage and tax advantages that are unique to real estate.
For instance, the Money/CNN article leads off with the words “Taking into account inflation, home prices are actually lower than they were 10 years ago . . ..” Drill down a bit, and you’ll see that the author is only saying that there was “no gain in home prices” in inflation-adjusted dollars. There was, in fact, a gain of 25% in nominal dollars in home prices over the decade. In contrast, the stock market article in USA Today nowhere accounts for the effects of inflation, and suggests that the market is ready for a comeback. In fact, if you read the article, you’ll see that the S&P 500 was down by almost 25% during the decade.
Let’s recap if you will: real estate was up 25%, and stocks were down almost 25% over the decade. Even without factoring leverage and tax advantages into the equation, anyone can see that real estate was a far superior investment. But, the net effect of articles like these is to leave the average reader thinking that real estate must be a lousy investment, while the stock market is now primed for “another bull market.” A more careful reader may conclude that such a conclusion is a lot of “bull.”
What do you think?