Are You Still Picking Stocks? You Are Ridiculous. Here’s Why.

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Prior to learning about real estate investing, I thought that the best way to satisfy my need to take control of my finances was through investing in stocks. Specifically, I thought that I could improve my finances by researching and analyzing individual companies and placing careful bets on select stocks, with the expectation of beating the market.

In this article, I want to explain how foolish stock picking is, especially for a young person worth less than $1 million. I want to describe how incredibly outmatched young investors like me are in successfully picking stocks, and how even an investing prodigy like Warren Buffet would be wasting his time picking stocks at a low level of net worth.

Instead, ambitious investors worth less than $1 million should focus on actively managed assets like real estate or small businesses, while less ambitious investors should simply put their money into passively managed index funds.

There is just no point in expending energy researching individual stocks for 99% of the population.

Below, I’ll illustrate two reasons why stock picking makes no sense and follow with an explanation as to how a similar effort directed at real estate CAN generate outsized returns for the beginning investor.

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Two Reasons Why Stock Picking is Ridiculous

Reason #1: The Competition is Out of Your League

Let me tell you about a friend of mine who invests in the stock market. We’ll call him Matt.

Matt manages a pretty sizable fund at a well respected firm in New York City. He spends perhaps 80-100 hours per week studying his industry (technology stocks) and has done this for over a decade. He reads annual reports, market news, and press releases from his Bloomberg terminal, and studies investor decks the moment they become available.

He also attends annual shareholder meetings, networks directly with executive officers at the Fortune 500 companies that he invests in, and meets with other large stakeholders from all over the country. Matt is one of the most well-informed people in his entire industry and is therefore in perhaps the best position imaginable to predict the future success or failure of these companies.

After hundreds or thousands of hours of careful research and methodical number crunching, Matt leverages his research and his decade of experience to purchase tens of millions or hundreds of millions of dollars of equity in the companies he selects.

Matt’s target is to be correct just 60% of the time. If he hits that target, his fund will make hundreds of millions of dollars, and he’ll take home a fat bonus. He’s well incentivized to squeeze every additional basis point in return he can each year for his investors.

Matt is every bit as smart as you, and as an alumnus of an elite business school, he is better educated than you. He’s willing to work hundreds of hours per week and to do everything in his power to get access to critical information as soon as it becomes available. He studies the market all day long and goes home to dream about it at night. He is training young analysts (also smarter, better educated, and working longer hours than you) in his approach to perform ever more thorough due diligence. Because of his training, expertise, resources and results, thousands of wealthy investors give Matt hundreds of millions of dollars to invest for them via his fund.

Matt’s fund has well over $500 million in assets under management. He buys and sells enough shares of multi-billion dollar companies that he can single-handedly change their market price with individual transactions.

Because of his efforts, resources, training and expertise, Matt has beaten the market by about 1-2% per year throughout his history as an analyst. He charges high fees for this extraordinary performance, and his happy investors end up slightly better off than if they had invested in a passive fund investing in technology stocks. They are very lucky to invest with Matt because 85% of his competitors failed to beat their benchmark last year, after fees.

You will have to get up pretty early in the morning to match the performance of Matt’s fund with your own stock picking. Best of luck to you.

Reason #2: The Alpha is NOT Worth it!

Ok, you don’t believe me. Maybe you think Matt (who closely resembles one of my relatives) doesn’t exist. He’s a fairytale I invented to scare you. Even if he does exist, you can beat him. He’s TOO informed, TOO smart, TOO big. You’re better than him. You get what the small players are doing; you see the stuff the Wall Street guys can’t, or won’t. You are a prodigy.

I get it. I was the same way. I thought I could beat the pros, too. I thought I was the next Warren Buffet, only better!

I respect your ambition and confidence. But you’re just as ridiculous as I was. That’s because, like me, you aren’t mega-rich. Even if you are a stock picking prodigy — the greatest of all time — it is only worthwhile to devote a serious effort towards beating the market if you have well over $1 million to invest.

Related: 9 Reasons Why Investing in Real Estate is Awesome (And Better Than Stocks!)

Ninety-nine percent of us don’t have a meaningful amount of capital to invest. Without a meaningful amount of capital, chasing above-market returns, especially those in the stock market, is a total waste of time.

Here’s a reality taken from my personal life:

I decided to try my hand at stock picking early last year when I had saved a nifty $5,000. I spent hours reading the annual reports of so-called “micro-caps” (companies with less than $100 million in market value). I read annual reports, got in touch with key executives, called up stores that sold or used their products, and performed all other types of crazy due diligence.

And guess what? In 2014, a year when the S&P shot up 11.4%, I managed to lose money. There are three possibilities as to why I lost: I’m either really unlucky, really dumb, or stock-picking is just really, really hard. It’s probably all three.

Let’s suppose that things had gone differently. Let’s suppose that I was a stock picking prodigy like Matt or Warren Buffet. Let’s suppose that instead of losing money, I earned a 25% return on my $5,000 investment and brought home a cool $1,250 in 2014. Let’s also suppose that I was able to beat full-time investors like Matt, Warren Buffet, and the rest of the market on just 10 hours of research per week in my spare time.

I might feel like a badass for getting that 25% return, but the reality is very far from badass. In this scenario, I would have beaten the market’s return of 11.4% by 13.6%. That additional 13.6% return (which, again, was a truly extraordinary achievement) is what investors like to call alpha. On a $5,000 investment, my alpha of 13.6% equates to $680.

Over 500 hours (50 weeks at 10 hours per week in my scenario) of research went into that alpha last year. That’s roughly $1.36 per hour.

I’d have been much better off working a minimum wage job, building a passive asset, or focusing on saving more money. Picking stocks was an utter waste of time from a profitability standpoint. I got hosed! Even if I’d done the same with $50,000 to invest, my returns in this scenario equate to just $13.60 per hour!

And let’s not forget: Realistically, even great investors only dare to hope for 1-2% above market returns over the long run.

Stock picking, even for a prodigy, is just a complete waste of energy for anyone with low net worth. Chasing alpha in the stock market only makes sense if you have millions, or better yet, hundreds of millions of dollars to invest.

But even with hundreds of millions, you still have to face off with Matt.

So What Should You Do With Your Money?

If you aren’t interested in working on your investments, then go with a passively managed index fund. It’s the simplest and probably the most powerful truly passive investment you can make over the long term.

If you are interested in being an active investor and want to make the most of your money, then real estate is probably one of the better ways to go.

Here are some of the reasons why I invest in real estate instead of stocks at a low level of net worth:

Reason #1: The Competition is Less Fierce

Remember Matt? Matt’s in New York. Matt’s also got $500 million to invest. He could probably beat me here in my local Denver market if he wanted to, but investing his $500 million fund $250,000 at a time in small Denver multifamily residences is not a good use of his time. Matt doesn’t have time for small fish like that. He also can’t be bothered to learn about the new parks being built near my neighborhood, the light rail that will have a stop 5 blocks away, or the vacant lot that’s going to be built up next year. Those things give me an upper hand against the big money like him.

The investors I compete with are all smart, educated, and intelligent folks. But they’re also friendly faces, people I’ve met through BP and local networking events. They don’t have hundreds of millions to invest, and even in the hot Denver market, there is opportunity to go around. It’s no picnic investing in real estate, but at least there aren’t many Matts around.

Reason #2: Unlike Stocks, Added Work Equals Added Returns

In the stock market, more research does not correlate with higher returns. As often as not, the investor who does his homework loses just as much money as the fool that throws his money at companies blindly.

In real estate or business, taking on the work yourself can and does result in increased returns.

When I bought my duplex, I spent weeks making the place look pretty with new cabinets, appliances, paint, plumbing, and drywall repair. Just this past weekend, I spent my Sunday putting up new shutters, planting bushes, reseeding the lawn, and cutting out overgrown branches. These projects cost me time and money for materials. But I saved thousands of dollars by doing this work myself instead of hiring a contractor. For someone with a low net worth (like me), these savings are HUGE as a percentage of my overall wealth. A far greater per hour return than I could get researching stocks.

You can argue that my time might be better spent hiring and managing others to do work on my property for me, and you might be right. Handyman work may or may not be the highest use of my time. That said, I firmly believe that given the option of picking stocks and working on my property, working on my property produces a higher total return for me every single time.

Reason #3: Leverage

While it is possible to use leverage as a stock investor, it’s very difficult to do so consistently over the long term. That’s because stocks are so volatile. Banks don’t want to give you their money to play with for the next 30 years when there is a very good chance that the market will correct enough for your equity position to fall to zero at some point.

Real estate is much less volatile. While you can still lose money, real estate historically has been much more stable an asset class than stocks. Because of that, it’s possible and common to leverage. In my case, as an owner-occupier, I put down $12,500 to control a $250,000 asset. I am leveraged at 20:1 or 95%. While this creates risk for me, it also allows my work to have a far greater impactPutting in the work to improve my property’s value 5% is worth thousands of dollars to me. Improving the return on a $12,500 stock investment by 5% is worth just $625. A vast difference.

Related: Why Warren Buffett’s Stock Picking Methodology is Outdated (& Real Estate is the Best Investment)

Conclusion

There is nothing inherently wrong with investing in stocks. Buying a little bit of Apple, Google, Facebook, or anything else doesn’t make you a fool. It’s fun to talk about and buy the big names, and heaven knows that people do far more foolish stuff with their money.

The foolish thing isn’t in buying individual stocks. It’s in thinking long and hard about investing in individual stocks and spending valuable time trying to pick the winners. Expending that thought, doing large amounts of research, and attempting to earn outsized returns is an enormously difficult and emotional task. Even if you are in the tiny minority of folks who succeed, you won’t reap the benefits of your expertise until you have well over a million dollars to invest.

Forget about it. Put your intellect, education, and your back into something more tangible.

Like real estate.

Are you weighing your options and choosing where to invest your money? Do you have experience investing in real estate, stocks — or both?

Let me know your stories, opinions, tips and input in the comments section below! 

About Author

Scott Trench

A longtime fan of BiggerPockets and a Real Estate Investor managing his first property, Scott is the company’s Director of Operations. BiggerPockets is a BIG website, and Scott’s background in finance and big data analysis will be instrumental in the next phases of company growth and in helping to bring the resources of BiggerPockets to more investors worldwide. Scott is passionate about helping others build wealth and serving his community in whatever ways he can. In his spare time, Scott enjoys skiing, biking, and cooking, and he is a lifelong rugger.

90 Comments

    • Darrell D.

      Excellent article. Thanks for posting and taking the time to write it. My kids are young adults and I find articles like this perfect for them. That’s not an insult either. If I send an article to my kids I don’t want to waste their tIme. They taught my son about stocks in high school, but not real estate. Now my son is renting and he’s doing ok for turning 19, but I hope to turn him into a chip off the old block. 🙂

      • Scott Trench

        I was referring in my article specifically to fundamental analysis, along the lines of what is suggested in “the intelligent investor” by Ben Graham. I think that this theory of “I’m going to get superior returns to the market” is flawed though in every aspect of trading, fundamental or technical analysis, long term value investing, and so on. I have yet to meet the fellow who has consistently beaten the market for decades on a large number of securities. Lot’s of folks have the apples or googles, but I don’t see many people producing alpha regardless of which approach they take.

    • Stock investing is just like real estate. There is no fast, easy money. Majority of money is made over a long consistent time frame sticking with it through the ups and downs, booms and busts. You don’t need to be a “Matt” to do well in the stock market and become a multi-millionaire.

      Plenty of well know companies over time would have made you a lot of money over the last 10-20 yrs WITHOUT being “late”. GOOG, MSFT, SBUX, AAPL, IGT, CSCO, HD (Home Depot), Netflix, Priceline, etc.

  1. Andrew Syrios

    I read Daniel Kahneman’s book Thinking Fast and Slow, and he mentions that he did an analysis of how well a bunch of investment bankers did in relation to each other. The overall correlation of success from one year to the next was 0.1%. No, that’s not a typo.

    Even the experts aren’t doing much more than guessing, so what hope would anyone else have.

    • Scott Trench

      Thanks for this tidbit Andrew! That’s an amazing stat. The problem is that close to 50% of the time the pros are going to do better than the market, and 50% of the time they’ll do worse. That means that after two years, there are still close to 25% of the fund managers that have beaten the market for two straight years. That’s not indicative of their prowess, that’s just an outcome that’s bound to happen. Those two years of success then have no bearing on the third year, and so on.

  2. Stephen S.

    I agree with your overall point but if you think Warren Buffet is a stock picker you must not have any idea of what he actually does for Berkshire.

    Also; your fund managing friend may be willing to do it but feel strongly that he will always fall somewhat short achieving the goal of “working hundreds of hours per week”. Because there are only 168 hours even In an average week.

    • Scott Trench

      Stephen – thanks for the feedback. I reference Warren Buffet and my relative’s work ethic to demonstrate a point. The point is that no matter how hard you are willing to work, there are almost always folks willing to work harder on Wall Street – for $400,000 per year, a lot of folks are ok with the occasional, literal 100 hour week. Also, you can call Warren Buffet what you want, but I don’t think that “stock picker” is totally off. He values companies and either buys them outright or buys shares – like coca-cola for example. You can call that simplistic, but I don’t believe that I used the term “stock-picker” incorrectly in describing him.

      • Sean Gray

        I would have to agree with Stephen, to call Warren Buffet a “stock picker” is way off base. He is a purchaser of businesses as distressed assets – just like most real estate investors tout to do. There is a big flaw in your argument, nothing in the history of the US has created as much individual wealth than the stock market. Flat out, Real Estate is small time compared to Wall Street. That point cannot be argued. Money is more liquid in the market, a “small time” investor can move money in and out quicker than a big investor. You fail to discuss derivatives in the leverage scheme – so when you say ridiculous, I believe you are talking from an inexperienced point of view – I made 304% return on money in 4 months trading the market… I have a note I can’t close on in 2 years in Real Estate. There is a fundamental difference in the two, and real estate investors seem to have the “we are better” mentality when the truth is all the facts and figures point to Wall Street. I did notice you didn’t mention where you got any of your facts as well… watered down argument.

        • Scott Trench

          You missed the point of the article if you think that I’m saying that real estate returns are superior to stocks. Your reply is off topic and you have created a strawman in framing my article as the stock market vs real estate.

          I do NOT ARGUE That stocks are worse than real estate. I argue that there is NO ADDED value in picking stocks compared to what can be added to a real estate investment for low net worth investors.

          I’ve already responded to the debate about Warren Buffet below in another comment. We’ll just have to agree to disagree that Warren Buffet doesn’t pick stocks. That is not a primary point of the article, and I will go on being incredulous that there are those that argue that a man who has spent the better part of 50 years buying publicly traded securities cannot be described, at least in part, as a stock picker.

          Congratulations on being an exception to the rule as a trader. Your achievement is a rare feat and you should be proud of it. For the remaining 99% of the population that wish to actively manage their assets, real estate is likely a better outlet with which to seek to turn energy and hard work into added returns. If you can achieve similar returns to 300% every 4 months over the long run, then I think you will be the wealthiest human being of all time very shortly.

          Please ask me about any facts that you think I invented. I’ll be happy to cite sources and send along pictures of my work. I will aggressively defend myself from attacks on my credibility.

      • Zachary Kurtz

        Actually Stephen S. is far more correct than you. Berkshire Hathaway generates more revenue from it’s businesses than it does from it’s stock positions. Geico, BNSF railways and a large list of wholly owned companies are the lions share of their revenue and profits. All you’ve done is slant your article towards real estate through rose colored glasses. Dividends, dividend reinvestment, and how that compounds over time has been completely left out. Their are many companies out there that have paid dividends for over 100 consecutive years, many that have been raising them most years even through the occasional recession. I find your analysis flawed and uneven. Every investment has risk and reward. Let’s not pretend real estate doesn’t also take a lot of work, and can at times lose people money. Truth is people should invest in what they will enjoy keeping an eye on and be diversified. You can use your stock portfolio as collateral to buy real estate, so your point about stocks not having leverage is false. Good day and good luck.

        • Scott Trench

          One of the nice things about using Warren Buffet as an example is that he writes down everything he does and publishes what he does and how he does it for all to see. I’d encourage everyone without a good grasp of what exactly Warren Buffet does to read this work – straight from the legend himself:

          http://www.amazon.com/The-Essays-Warren-Buffett-Corporate/dp/1611634091

          1) Warren Buffet got started and continues to invest by rigorously analyzing the market, individual companies, their financials, management, and a variety of other factors. He then selectively buys shares of those companies, and in some cases (as with Geico) the entire company. Call that what you want. I’ll call it stock-picking. The rest of us can’t purchase the GEICOs of the world and run them as better businesses. To that end many investors study Warren Buffet’s famously successful theories on stock picking and investing in individual corporations over the long term based on fundamental analysis. I also think that this corner of the debate is odd because I am very perplexed as to how folks can argue that Warren Buffet does not pick stocks. I don’t even understand how that’s in dispute at all in this thread.

          2) I clearly and openly state that real estate takes work and comes with significant risk. My argument is that with real estate, unlike stocks added work can and does regularly result in added return. I believe that my work on my duplex was necessary for it to succeed as a rental. I could have either done the work myself, or hired a contractor. I did a large portion individually. That saved me money. Call that rose colored if you want. I’ll continue to believe it.

          3) I state in my article very clearly that it is possible to use leverage as a stock investor. I also state that it is very difficult to do so over the long term successfully. It’s fine to disagree with that. I personally know of very few folks that consistently leverage their stock portfolios over the long term with success. I’d be very interested to see data showing that this strategy yields widespread positive results for young investors – to the same degree that real estate does for young investors.

          4) My analysis of the 2014 S&P 500 return includes dividend return and in all stock market analysis that I EVER do for both my personal finances or publication, I assume that dividends are immediately reinvested.

          5) “Truth is people should invest in what they will enjoy keeping an eye on and be diversified”. This is a fantastic point and I wholeheartedly agree. If you hate real estate, stocks, or any other form of investment and don’t want to do the work of actively managing the investment don’t do it. Thanks for bringing that up.

          Good day to you as well.

        • Sean Gray

          Scott I couldn’t reply to your response – but it’s not Buffett’s investment guide. He actually learned from Benjamin Graham from Columbia University whose theory on discounted (undervalued) companies and the opportunity to purchase these regularly do present themselves on the market. Warren didn’t have a Donald Trump bringing up, but he also went a different route to invest – I’ll take Warren’s (Graham’s) way over Trump any day of the week. Trump’s worth $2billion (Forbes mag) Warren’s worth $43billion (Forbes mag) – and he didn’t inherit nearly as much as Trump.

        • Scott Trench

          Sean – I’ve read the intelligent investor and am very much familiar with warren buffet, his background, strategy and techniques. At no point do I indicate that his essays are where he developed his strategy – but you’ll find quite a bit of information on how he “picks” his stocks and companies to purchase…

          I find your comments very frustrating because once again, I feel that they question my credibility and label me as someone who suggests taht the stock market is inferior to real estate in aggregate.

          The stock market achieves higher returns than real estate, all else equal.

          That is a fact.

          Seeking alpha, or additional return beyond a passive index fund, is almsot always a zero sum game for the majority of investors. Even if alpha can be acheived through superior analysis, the effort required to generate consistent alpha is hardly worthwhile for most investors worth less than $1Million.

          That is my argument.

          Let’s stay on topic please.

        • Tim Porsche

          “I’ll take Warren’s (Graham’s) way over Trump any day of the week. Trump’s worth $2billion (Forbes mag) Warren’s worth $43billion (Forbes mag) – and he didn’t inherit nearly as much as Trump.” – Sean Gray

          One thing you have to remember though is that Buffet is 16 years older than trump, and has had 16 extra years for compound interest to work. I’ve heard Trump’s net work is actually closer to 5 billion, so if you give him 16 more years, and he earns say 20% returns, he would be worth 92.4 billion (not adjusted for inflation). If he is worth 2 billion now, in that same amount of time he would be worth about 37 billion, assuming 20% returns.

  3. Christopher Moran

    Amen.

    Again.

    I gotta meet you someday, since we share aloooot of similar philosophies.

    As proof of the main point in this article, that research does pay off in real estate investing (unlike with public stocks), my first real estate investments were buying tax liens on vacant land in Pueblo West. For several years, out of maybe fifty people bidding at the treasurer’s auction each year, I was the only one who actually looked at each and every lot. This enabled me to outbid the Denver guys that came down and would bid up to $5,000 on every lot blindly. I could bid more on lots with lake views, or other benefits, that no other bidders researched.

    On average, lots that I was buying for $6,000, I was able to sell, after quieting the titles, for at least $12,000. And I knew this going in. But nobody else wanted to drive around for hours, looking at hundreds of lots in what was then mostly vacant prairie.

    If I spent the same amount of hours researching stocks, which I used to do, it would still be a crapshoot.

    • Scott Trench

      Thanks for the support Chris! You should make your way to a bp meetup here if you’re ever in Denver, or just stop by BP HQ ;). I think you make a great example about how research and the extra effort can make a real difference in real estate. That’s 100% a great example. Research and education make a big difference in real estate, and I’m unconvinced that it makes any difference at all in stock picking.

  4. Chad Carson

    Well written, Scott! I think a big point you made is that if you are still a low net-worth individual, you need to be primarily in business, not be an investor. Being in business means you need to hustle and squeeze money out of every bit of your time. As capital accumulates, then you can worry more about return on investment.

    I also agree that new entrepreneurs should not be that concerned about what their rate per hour is. Your duplex work put money in your pocket. Just hustle, hustle, hustle and make dough. Work the 80 hours that your friend Matt is putting in, and make your main compass which activities translate to money.

    As long as your don’t have a hole in your pockets as you put all that money in them (i.e. you save), wealth building will take care of itself. You will also be learning so much, accumulating cash, and gaining momentum. Time optimization comes later.

    Thanks for the awesome topic, Scott.

    • Scott Trench

      Thanks for the support Chad – I think that’s a great way of looking at it with the being in business aspect. It’s far more powerful to be in the business of landlording and house hacking than to be in the business of stock picking or trading.

      The education that I receive from being an owner-occupier investor is very eye opening. It’s also (and I might get blasted for this comment) one of the easiest businesses to start. I’m not saying its easy in that its no work, but its a house that I live in, tenants right next door, repairs are done on my schedule when I get home from work, and I’m immediately aware of problems. I think the owner-occupier multifamily is the best small business money can buy. I can’t think of another business widely available for purchase that can increase your cashflow in life so dramatically per the effort involved.

  5. joseph ball

    Let’s look at your characters more closely. Let’s further assume Scott Trench is the best stock analyst in Wazoo, Georgia.
    Matt has this $500 million trust fund he manages in New York, and Jim (new character) also manages a large trust fund in New York.
    Scott is analyzing away with the best tools he can obtain.
    One fine day, Matt and Jim go to lunch. Matt says, “You know, I think I am going to take a position in General Feeblewetzers, because I like their projections.”
    Jim sips his martini, quietly. After lunch, Jim looks at Feeblewetzers, sees nothing wrong, and decides to also take a position.
    This is repeated the next week.
    Scott, studying charts, trends, and sophisticated tools sees a move in Feeblewetzers. He decides to take a position, with his precious $5,000.
    The following week, Matt and Jim have lunch and Matt says, “Well, Feeblewetzers had a pretty good run. I think I’ll take my profits.”
    Later, Jim does too.
    Down in Wazoo, Georgia, Scott knows nothing about this. Using the very best tools available, he cannot see Matt and Jim having lunch.
    So, Scott takes a bath.
    Think this is fiction?

    • Scott Trench

      Interesting – I will say that I am somewhat confused.

      Are you saying that the big dogs talk to each other and liquidate their positions or make similar moves because of their close camraderie? And that these moves result in the little guy like me getting hosed for no reason other than the big boys got together and decided to sell?

      • Michael Shahan

        Correct. He is saying that because the big boys in New York got together and decided to sell, you are out of the loop in GA and are going to take a loss by the time you figure out the big boys have sold.

        That being said, I believe in the value of real estate investing in an overall portfolio and you made some pretty good points in your article, however I don’t feel it was necessary to call people “ridiculous”. There are ways of making money in the stock market (look up Stage Analysis) and it’s not impossible to do so. Your argument should be able to stand on its own merits and denigrating people for doing things differently than you do is unwarranted and excessive imo.

  6. Jeremy T.

    I apologize for the tenor of my comment, but I wrote for a while at one of the most popular ‘indie’ trading websites on the interwebs, and security trading was one of my earliest passions. While I almost completely agree with you regarding allocation of funds when ‘under-capitalized’ (and I realize the point of being dramatic for effect and eyeballs), to suggest that it is black/white regarding this topic is a bit short-sighted.

    Let’s talk about your pal in NYC. He is correct 60% of the time? That statistic means very little. Trading stocks (which is what you are talking about here, not investing), is all about Risk vs. reward. How much does he win on those 60% versus how much he loses on the 40%. I have had wildly profitable years where I was right only 35% of the time because I was able to maximize reward vs. risk/loss.

    Trading securities and real estate are apples and oranges, imo. Your post fails to mention liquidity (almost infinitely more available with stocks vs RE), costs of doing business (I can trade, round-turn, 10’s of thousands of shares of stock with Interactive Brokers for a couple bucks, 5-10% of sale price is not uncommon for RE. Additionally, to buy a share of stock I do not require the services of an attorney, accountant, personal assistant, VA, etc ), and the legal ramifications of acting unethically/improperly (unless you have connections that 99.9% of us do not have…and in which case you aren’t who this article is directed at anyway, it’s virtually impossible to break the law trading stocks while most RE guru’s openly flaunt ‘side-stepping’ the law, if not openly suggesting one break the law. Hell, anyone who has ever conducted a sub-2 deal is most likely in violation of the DOS clause.)

    I love stocks and I love real estate…my question is: why can’t we do both?

    • Scott Trench

      Jeremy – I don’t think the tone of your comment is wrong at all. This article has a very provocative title and I absolutely expect strong debate from folks like you.

      I agree with all your points about the advantages of stocks over real estate in terms of liquidity, simplicity, fees, and costs of doing business overall.

      I have no problem with stocks and in fact, I invest passively in a Vanguard S&P 500 index fund in my Roth IRA. I do so for all of the reasons you outline here.

      What I don’t do, is select individual stocks, thinking that I am smarter than the market and can beat the market with my superior analysis skills. I direct that effort towards real estate, as I believe that I have a reasonable chance at generating superior long-term results in real estate. I spent 5 minutes selecting my passive index fund. I plan to spend 50 years selecting the best properties in my area.

      For me, I honestly do believe it is black and white. I believe that it is ridiculous to attempt to put time and energy into picking stocks individually (as I once did). Your time and energy (if you decide to put that effort into your investments at all) should go towards an investment like real estate or a small business where you have a significant likelihood of receiving a reward on your efforts in the form of increased return. Not stocks, where extra effort is almost always wasted, and any superior returns to the market are usually attributable to blind luck for 99.9% of investors.

  7. Mike F

    I think you’re confusing trading with investing. “Matt” needs to show a profit every quarter or every year or he gets fired. I don’t need to show a profit on any given year and my profit or loss isn’t realized until I sell. You don’t have to be a genius stock picker to be successful in picking stocks, you just have to be patient. I follow buffets example, be fearful when others are greedy and be greedy when others are fearful. I’m not a big investor in the market, I have a total of about $50k of my money invested over 20 years. I’ve grown that to over $500k. When I see big up or down trends in any given sector I get interested. I look for good solid companies that get pulled by the trend. Sometimes I’m a little early pulling the trigger and sometimes I’m a little late. But in a lot of cases it’s like horseshoes, you just have to be close, and then be patient. Could take 2 years, could take 10, could take 15.

    • Scott Trench

      Mike, thanks for your reply. I do not feel that I am confusing trading with investing at all. Growing your $50K initial stash into $500K over 20 years equates roughly to a 12.2% annual return. From April 1995 to April 2015, the S&P returned 9.2% annualized, if you were to reinvest your dividends.

      Congratulations on being an extraordinary exception to the rule when it comes to investing. Your 3% alpha is an extraordinary achievement.

      Here’s the thing. I don’t think that your prowess added any meaningful net worth in the first 5-10 years of your investment approach. When you started with your initial $50,000, that added 3% was worth just $1,500. Personally, I’m not interested in putting in lots of extra effort, or gambling on random stocks (which is what you are doing if you aren’t willing to put in the many hours needed to carefully analyze markets and do real due diligence on individual companies). I’m not interested in that level of work for $1,500. If I had $500,000, or perhaps a million to invest, now that 3% alpha is worth $15,000 or $30,000. While still not a great wage, one could conceivably quit their day job to chase alpha if they were willing to live frugally at that level of wealth.

      • William Morrison

        I agree with Mike you are confusing two.

        And worse you use well defined due diligence/investment practice in your evaluation of real estate and a very poor approach to stock investments.
        You have confused so called “High Flyer” stocks with long term buy and hold conservative stocks which are more like real estate. And worse there are still a lot of leveraged real estate deals made before the 2008 time frame that are still under water.

        Even your Total Return numbers for S&P 500 are just wrong.
        Finding Total Returns are tougher to find if you use standard media outlets.
        I have real Total Returns from just one of the many S&P 500 funds after expenses. I know it real, I have money in it. And it’s just one of many ETFs/funds using the S&P 500 as their standard. $1,000 invested in your pick of 1995 is now $5,740.85. That’s up 5.74 times. And if in a Roth it’s tax free when withdrawn. And if in a margin account if is an easy place to borrow money to fix a roof or HVAC.

        By the way I have both real estate and market based investments. And they both do well. One liquid with no distressed pricing if I need it now the other hard to sell quickly but over time has good cash flow. Both build wealth.

        By the way the S&P 500 or the Dow (back to 1896) has never been down 50% when you include dividends. That’s a little tougher if your real estate is leveraged at 20%, 5% or even one of the zero down strategies with no reserve spoke often here on this site.

        S&P 500 Fund Total Returns after expenses “Actual”
        1988 11.80%
        1989 31.00%
        1990 -3.20%
        1991 30.80%
        1992 7.70%
        1993 10.10%
        1994 1.30%
        1995 37.40%
        1996 22.80%
        1997 33.20%
        1998 28.40%
        1999 21.00%
        2000 -9.10%
        2001 -11.90%
        2002 -22.10%
        2003 28.50%
        2004 10.80%
        2005 5.00%
        2006 15.80%
        2007 5.50%
        2008 -37.00%
        2009 26.70%
        2010 15.10%
        2011 2.10%
        2012 16.10%
        2013 32.50%
        2014 13.78%

        Bottom line you should be doing both.
        If you are keeping a 5 or 10% long term reserve on your rentals for major repairs, what kind of return are you getting? And can you borrow it from yourself and it continue to grow?

        • Scott Trench

          You are correct of course in your debate of S&P 500 returns. I can either use your numbers here, or what the vast majority of investors use. I chose to go with the total return numbers that 99% of the rest of the media uses to avoid confusion. I feel that calling me “wrong” to do so is to do the same for publications like Reuters, the New York Times, Yahoo Finance, and Bloomberg.

          If you want to exchange my return numbers for the total return umbers you list here, then you must also do the same with real estate total returns and immediately reinvest cash flows there as well. I’m not going to do that today, but that may make for a very interesting future post.

          I like to think that I’m not discriminatory when it comes to my disdain for stock picking. I don’t like the “conservative” picks any better than those “high-fliers” you describe. The conservative picks always seem so in hindsight, but what’s conservative today? Long established brands with a history of solid dividends? Hindsight is great, but what about companies like that such as Xerox, RadioShack, and JC Penney?

          Further, retirement accounts can be used to invest in real estate, just as they can with stocks in the Roth IRA. The tax advantages of real estate over the long term are well documented here on BP.

          I do not fundamentally disagree with your points, I am simply going to respond to your assertion that I have “confused” myself with a topic that I have researched and that I poured time and thought into.

          Stock trading, as I define it, is a truly ridiculous pastime, where the vast majority of players will lose to the market because of the fees associated with trading. Even with new technology that allows trades to take place with close to zero fees, stock trading is an absurd practice that is a zero sum game at best and in my opinion, contributes little to society.

          Stock picking, as I define it (what others refer to as “value investing” or “fundamental or technical analysis”), is the act of thinking that you are smarter than the market over a longer period of time, usually more than 2 years, often in the ballpark of 20 or 30 years in the case of value investing. You believe that you can achieve a higher total return over a long period of time than the market, and thus spend time and energy selecting those stocks that will outperform their benchmark index fund’s returns. Most often, stock pickers merely perform as well as the market, or very close. Their efforts to select winners that beat the market, per my consideration, are less wasted than the stock traders, but only because their transaction costs are lower because they invest in a more structured or less frequent manner.

          I do not believe I am confusing the two.

        • Jack Eyer

          AGREE WITH YOU WILLIAM MORRISON and I to say “WHY NOT DO BOTH” as I have always done- 38yrs at least.
          KEEP YOUR CASH and Invest and BUY RE With OTHERS MONEY – mostly the Bank for me. Two Piles is better than one- think that is a famous quote?
          Real Estate is a great Tax Reducer but slow GROWER.. Very illiquid but a meaningful part of long term wealth accumulation. I LOVE BOTH but rather keep my money liquid and invested mostly in ETF’s..
          READ Investors Business Daily and follow their guide on trends – Uptrend, Trend under pressure- reduce to 50%, or Market in Correction which suggests 100% out.. Invest 50% in SPY and 50% in QQQ. But for me I like 1/3 each in these two and WARREN BRK.B. Let him crunch the numbers for you..

          Bottom Line : DO BOTH… I Even Like my CASH VALUE building insurance policy- a steady 5-6% return tax free. I USE IF FOR MY BANKING- works beautifully in the form of safe leveraging.. BEATS most Bond Investing and KEEPS my Real Estate liquid for my wife through buying the time for my estate to sell it – not to us discounting Investors either. Heck I pay a 2% premiums on a $1,000,000 plus policy.. Frankly I am not sure in the end, if this will not net more tax free dollars for my estate & cheaper than the other two on a net net basis!

          I take it back on above : 3 PILES is BETTER THAN 2!… Add as much of this as you have in values of Real Estate or as much as you WANT of this WM..

        • Scott Trench

          Jack – I definitely think you should be doing both. This article never says not to invest in the stock market. It says that picking individual stocks is a waste of time.

          I do both. I have stocks in my retirement fund, and real estate outside of it.

      • Mike F

        You are confusing the two, first you picked micro cap stocks to invest in. Those are gambles. They are small companies with pretty poor track records. I’m not surprised you lost money. Second, you stayed in for a year. That’s not nearly long enough. These are small companies that need to grow, that takes time. Why did you pick those companies to buy? Do you know the business? Do you use their products or services? Or were you just looking for a quick jump?

        • Scott Trench

          Trading results in huge losses over time for 99% of investors. That is due to transaction costs.

          “Investing” or stock picking over a longer period of time, regardless of the baseline analysis, or how “purely” you adhere to fundamnetal or value analysis, can possibly produce marginally superior results to the market, if you are willing to put in hundreds or thousands of hours of work to capture alpha.

          That is the point of my article. The secondary point is that while that is possible, it is simply not reasonable to attempt to do so at low net worth. It’s like working for one tenth of miniumum wage to get a good feeling about yourself as an “investor”. If you are going to bother to do work on your investments, dump half into real estate, and half into stocks. Spend 5 minutes buying a passive index fund in stocks, and years mastering real estate – where your added effort can add some return.

      • William Morrison

        Scott the numbers below come from Black Rock who manages the S&P 500 portion of my 401k.
        Black Rock manages the IVV and ours is modeled after it.
        The IVV is the only S&P 500 index that reinvested dividends daily and credit the fund quarterly.
        So their number are a little higher in Bull Markets and a little lower in Bear Markets than others like SPY and VOO.
        You indicate in another post below you are familiar with Van Guard so I assume you know VOO holds the dividends in a non interest bearing cash account until payment (SPY does as well). They pay about a week after record date. So some are there for up to three months. SPY is about a month worse. They pay about a month after the record date.

        The numbers I listed below are a little higher than the IVV because my 401k has the lowest management fee in the industry and has over $500 billion under management with $141 Billion in just the S&P 500.

        The media sources you referenced had consistently given different answers to Total Dividend Returns and once given they become gospel and are referenced again. You can check yourself, they have many answers for the same question.

        The S&P site gives a different answer, over time more than 42% of the S&P 500 Total return is from dividends. Now that’s from their site.

        If you were not just a blog you would have to check your sources, sources.

        You don’t need to respond. These are real numbers.
        I will post a separate post on how I do both and avoid the Xerox, RadioShack, and JC Penney’s.

        And I think you’ll appreciate it more than our discussion about the S&P500 Total Return with dividends.

    • Charles Worth

      Fine in hindsight but Apple had real issues. A year ago it looked like the company was failing to innovate and it was hard to see why people would pony up another $400 or more for phones that had almost nothing new. Further for international growth people have to pay a fortune for a phone while competitors are making really good phones for exceptionally cheap in those markets (where the growth is).

  8. Nick Alvarez

    Scott, I enjoyed your article & reading the discussion that it provoked. Thats what I love about Bigger Pockets, the content and dialogue it spurs. I think it’s important for younger individuals to understand that investing in the stock market isn’t always about screening, picking & choosing individual stocks and going long. Young investors should understand there are so many different choices when investing in the stock market (ETF’S, funds, options, futures etc..) just as there are multiple ways to invest in real estate. I agree with Jeremy T. when he proposes, “why not both”…

    For those that recognize diversification is key, instead of throwing all of one’s available capital into RE, one should consider their own risk tolerance and need for liquidity. You made a great point when talking about the time it takes one to pick investments, time is scarce and we should use it wisely… For the young investor, passionate about real estate & interested in equities (but has limited time to research extensively), analyzing industries and larger macro trends & investing in say, ETF’s, while then focusing a majority of your remaining time on picking killer real estate properties, sounds like a balanced approach & an overall healthy strategy for long term wealth building.

    For example, one could have spend a few hours a week looking at the healthcare & bio-tech industries, noticed that we have an ever-aging, large population of baby boomers, saw that the government healthcare reform would make waves in the industry & read reports about dozens of bio-tech companies making huge advancements in medicine. Such an investor, with minimal research could of seen this industry on the rise, bought the XBI ETF and make over 90% return since the start of FY2015; all the while, focusing his remaining time and capital on real estate investing.

    At the end of the day, its a poor use of time for a low net-worth investor to seek alpha from screening individual stocks. But a strategy of diversification, investing in multiple asset classes such as equities, RE, debt instruments etc. would be a smart move for many investors.

    • Scott Trench

      Nick thanks for this well thought out response!

      All around, I agree with what you are saying about diversification, but I still think that even the macro trends that you point out are super hard to pick with regularity over the long term. What if healthcare reform results in much needed de-regulation on the part of the FDA, and new and exciting drugs are able to enter the marketplace with more regularity? That could KILL biotech stocks, instead of helping them. I’d feel just as inadequate predicting the future of that market, as I would in picking the future of Apple Stock.

      Also, I think diversification is great, but for the young investors in my target audience for this piece, I think that diversification in the way that you talk about may be unrealistic. When I bought my property, I was worth about $25,000 in total. In order to properly diversify with 25% of my wealth in stocks, Real Estate, debt, and another asset class, I’d have had to wait several more years. Instead, I put all my money into my duplex. I’m not diversified, but I can take that risk as someone just starting out in a career with plenty of earning potential left. I’ll feel more pressure to diversify when I get to a meaningful net worth of $100,000 or $1,000,000.

  9. Walker Hinshaw

    Scott, great article. I think your point is incredibly well made. Like you showed, if you break it down by hourly wage, actively investing in individual stocks just does not make sense unless you have loads of money. Keep pumping out these articles. This blog is becoming the bible for young, ambitious people looking to increase their net-worth in the most logical and effective ways.

  10. zac stuart

    Great article Scott. You make great points especially when you break down the per hour earnings of your investment. I think it wise for young investors like you and I to keep that in perspective. “time is the friend of the great business and the enemy of the mediocre” warren buffet. I believe long term average of the s&p 500 index is 8% . what I also like about cash flow positive buy and hold in real estate is that due to the higher transaction costs it has a way of smoothing out volatility in home prices. Lets say that over 10 years you are up 25% on a home purchase. But in the first five you were down 10% or more. If you had a buy and hold strategy and could remain cash flow positive then you are set. Obviously there are risks in these above ideas but scared money don’t make money!

    • Scott Trench

      Thanks Zac! I completely agree with your points here. I don’t care about going underwater on my duplex investment. I know that over the long term, I can reasonably plan for long-term historical appreciation rates to continue along with inflation, for my cashflow to keep me up to date on my debt payments, and for my leverage to compound my return. Overextending can and does produce risk for many investors and can result in HUGE losses, but a well capitalized, conservatively managed real estate investment can and does allow for the owner or investor to put in work and energy that result in higher returns, unlike with stocks.

      I think I’m going to tweet “scared money don’t make money” !!

  11. Jay C.

    Maybe its an age thing where these posts come up where the REI investor feels this need to show how Real Estate can go head to head with stocks. History has shown us what the better investment has been over the long haul and at the finish its not even close. The market has blown REI away. Now in your own case it appears frankly……..your just no good at it and don’t understand it and that’s all well and good. I gather that from your post. You were not flipping houses as well when you were 9 years old. It took time to learn. Same goes for the market. I honestly found your post so far off I can only guess your young…..really young. As you get older you will understand alot more about the market and REI. You will learn in the market you have no competition………….none nada zip unlike REI. Stocks as well are instantly liquid……REI is not. You don’t get sued for stocks or get dirty……….REI you can but enough of that. You have to know tenfold about your investment then you do on REI and know when to pull the trigger and when to sell. The learning curve is longer and more costly. REI the other hand can be picked up quick a hard working High School dropout with good trade skills can excel at it. I am getting a bit off from the original article but let me finish at don’t down play what you don’t know or understand. The name of the game in the big investment world is diversification. To simplify don’t drop all your eggs in one basket. Have multiple income streams from diverse investment products.

    For the record this subject has been covered to death on BP. Since we have historical data the conclusion will always be the same.
    https://www.biggerpockets.com/renewsblog/2013/07/17/real-estate-vs-stocks/

    • Scott Trench

      Thanks for this comment. It’s hard to argue that I’m not young and stupid, so I won’t 😉

      This article does not state that real estate is better than stocks. I totally agree with your points about the stock market being a better total return than real estate, on average. This article says that there is no ADDED value to picking individual stocks, vs investing in the market, and should you wish to devote time to increasing your total return on invested capital, spending time to select individual stocks is an utter waste of effort.

      I don’t intend to put all my eggs in one basket and hold shares of a Vanguard S&P 500 index fund in a retirement account. I spend 5 minutes checking and adding to it once per year and devote the remaining time I allot to investing to real estate – an asset class which has all the disadvantages you describe, yet allows my added efforts to contribut to the bottom line. I am lopsided in my asset allocation currently towards real estate, but I believe that if you only have one egg, you should put it in one basket – the basket that gives you the most control over it..

    • William Morrison

      Thanks for posting the link.
      I’m in both worlds and maybe they cross some because of where I keep my reserve of long term repairs.
      I have found both to have great returns.
      By real estate I mean buy and hold landlord.
      That thread was not as good at reinvesting rents, but still pretty good.

      I have found that if your rents are 120% of your normal monthly costs on a leveraged rental and you have a 5 to 10% reserve you will see similar returns to the S&P 500 maybe better. But it’s not hands off, even though I use a property manager.

  12. William Allen

    Scott, great article and probably one of the articles I have enjoyed reading the most here on BP. I am a total Boglehead when it comes to index fund investing as I don’t believe that timing the market, stock picking, or allowing someone to actively manage my account is right for me. I use a simple 3 fund portfolio of Vanguard index funds / TSP and the only thing I do is rebalance as needed. The only input I have is what my asset allocation is and how I change it as I get older.

    However, the other half of my net worth is in Real Estate and I love that portion of my portfolio because it is something I can add value to. It allows me to be more active as an investor and it is something I have a lot of passion for. Eventually the passive rental income (it isn’t really completely passive but close enough for me) will replace my current income to allow me to retire early before I can get at those retirement funds in the IRA and 401ks.

    I am tempted to dump more into real estate at times because I enjoy it so much, that is the hard part.

    • Scott Trench

      William – thanks for this comment. I share a very similar mentality to you. The only difference for me is that I have very little net worth at this point – I’ve only been accumulating wealth for a year and a half. I basically dumped all of my net worth into my duplex back in December and thereby put all my eggs in the one basket. I understand the risk with that, but I felt that it was the best possible use of my funds to increase cash flow (by having tenants pay rent). Since then, I’ve contributed to my Roth IRA (passive vanguard index fund) and I plan to contribute to additional retirement accounts when that’s maxed.

      As I grow older and accumulate more assets, I intend to rebalance to a portfolio extremely similar to what you describe. It is fun to work on the real estate though!

      Thanks again!

  13. What is Matt doing? Shooting for appreciation? Because studies have shown that the most consistent way to make money in the stock market is through buy and hold with dividend paying stocks. For examples, go visit Dividend Mantra and Dividend Growth Investor. The thing is, I’m not going toe to toe with Matt. If Matt wins I don’t lose. If I buy a stock that has been paying increasing dividends for 25 years my odds are pretty decent that I’ll do alright. But most fund managers don’t profit from the same approach as that.

    Things like index and mutual funds have a terrible history. They diversify away your gains but not systemic risk. People that buy mutual funds have a consistent history of not making better than 4% annualized return. But I don’t see many people on BP clamoring for funds.

    I have real estate rentals, discounted performing notes, and an EIUL. I had a dividend paying stock but I mrepurposed that capital when the opportunity arose to buy a discounted first position note. Taking advantage of OPM and leverage while getting away from 401K wrapped funds has done more to grow my net worth in the past three years than ever before.

  14. Joseph M.

    Great article for sure ! When looking at the stock market on a more short term basis with a low net worth as you mentioned , it’s not very appealing .
    I think pointing out the return on $5,000 even if you beat the market is a great point .
    Of course people like buffet or “Matt” can make fortunes on tiny fluctuations , it translates into hardly nothing for the average retail investor.

    Leverage is really a huge benefit in real estate. Of course you can leverage in stocks but it’s different for many reasons . Hardly any of the mainstream business articles take leverage into account when comparing stocks with real estate , even though almost even real estate buyer uses it .

    The people making real money in stocks are the ones that buy their stocks before the companies go public . Venture capitalists or angel investors …
    By law these investors have to be ” accredited ” and high income or high net worth . Jobs act was supposed to change some aspects of this but it looks like non accredited still can’t invest in startups .

    They invest in a number of companies and hope that 1 of them will be the next big company and pay for all the losers.

    There is risk of course , but the rewards are huge too .

    It’s all about buying wholesale and selling retail . Just like buying a house ” retail” buying a stock retail is not usually a great deal.

    I do think real estate is the lowest risk / highest reward platform for people looking to create wealth from nothing or little .

    You hear all the time of ” regular people ” that were able to build wealth through real estate , but I haven’t heard too many that bought the right stocks and now can retire early .

    All those articles that say ” invest like Buffett — buy these stocks!” Are kind of pointless because buffets primary business is owning a fund , like Matt.
    Even though he’s had amazing returns, if he only did this by Leveraging and taking on other people’s money .
    This is not possible for most people especially with another job .
    With real estate regular non rich non expert people do this all the time .
    You can walk into a bank and get a loan for a house for 3percent down (fha)
    Imagine if you walked in and told them instead of a house I want to buy $100,000 of stock in Apple , I have $3000 to put down .
    I’d pay to see the reaction on the face of the banker !
    That being said I could see how someone with a high net worth they are trying to maintain or grow with low interest would want to invest in the stock market , but they could also invest in real estate pretty passively with higher returns in various ways . Owning notes is one or owning larger apartment buildings with professional management is another . Of course both of these might not be as passive as wiring finds to a brokerage account .. But the returns can be much higher with less risk .

    • Scott Trench

      Thanks for this very thoughtful comment Joseph! One thing I want to point out is that if your objective is to be completely passive, then most of the time folks are probably going to see a higher total return in stocks – and I recommend buying a passive index fund.

      On the other hand, if you are willing, able, and eager to achieve high returns on your invested capital, then I believe that real esate offers you far more opportunity to allow effort to result in better return. Like you state in your article, you hear about a lot of average joes that are succeeding with real estate after putting in some hard work. I rarely hear about the guy who successfully and non-randomly picked stocks and is able to retire early because of that expertise alone.

  15. Winston Spence

    This article shows just how little you know about the stock market. Anyone, and I mean ANYONE who thinks this way is an absolute idiot. I don’t even do real estate anymore because the stock market is easier! This is the first time I’ve been on Biggerpockets in weeks or months because this article is so misinformed and I don’t want any small beginning investor getting mislead about how real estate is the best vehicle for wealth. If I would have know about the stock market months or maybe even years ago, my life would be SET. I chose real estate because of people like you and it was the worst decision ever. My dad and I used to be wholesalers a few years and it is beyond difficult. We only gotten three deals because of competition, home pricing, skeptical cash buyers, etc. And you say the competition is easy, yeah right…

    And you think for a “young investor” which has little money and mostly likely a lot of debt, leaves college with no job, and living at home with parents that real estate is the way to go. HORRIBLE advice and if I can rip this article down I would be it in a heartbeat, I’ll explain why:

    You:

    Reason #1: The competition is out of your league

    ME:

    VERY small of people spend over 80 per week studying stocks. You’d have to NOT know what you are doing to spend that kind of time researching. And if this was you, I could understand why you never made the money you were supposed to. Not to mention the fact that jobs as a floor trader or at a firm is being reduced at a rapid pace in place of automatic trading and machines, Google- High Frequency Trading.

    And who in their right mind as an individual investor would attend shareholder meeting, networking with executives, etc to invest $5,000.

    You’re trying to use a person at a firm as an example and compare it to the small time real estate investor, which is apples and oranges. And the details of the example is even more erroneous.

    You:

    Reason #1 (for real estate): The competition is less fierce

    You must live under a rock to think the real estate is less fierce than trading. First off, buying stocks is not the only tool in the stock market. In RE, you have rentals, wholesaling, lease option, fix and flip, etc. In the stock market, you have buying equitable stocks in companies like Apple and Google, Forex which is currency trading, the futures market, investing in markets in different countries, and options trading which is what I do and I am good at making money at it!

    In RE, to deal a home you have to compete with cash buyers, wholesalers, first-time home buyers, etc. And not to mention location, so if you live on the west coast or east coast, competition is insane! Horrible advice there

    You talk about ROI:

    In RE, I have to spend $50K plus to get a home cash or put a mortgage in my name which is not likely since I have bad credit. And when you rent the property you only get $1,000 for rent. Terrible investment! Nobody mentions after you get the home you have to rehab it that’s more money. Then you have to find a good tenant which is tough because people today have bad credit (thanks to the real estate collapse) and little money because of no jobs. Then once you put that tenant in the property, you have to hope and pray they don’t destroy or steal anything. Then you have to worry about the tenant missing payments, spend even more money going to courts to evict the tenant. Spending money on property maintenance, insurance, property taxes, end of the year taxes. I don’t see where you get a return.

    And if you decide to sell the home, unless you live in a place like NY city, or the west coast, you might have to wait months to sell your home in this current market! In the trading, I could pull all of money out within 48 hours. Easy and simple

    In the stock market, you can use very little money to get started. In options trading, I sold into my first trade in the SPY. I let the contracts expire worthless and kept the credit. I only invested $35 and and made $12. Even though that’s a small amount, that’s what I had at the time and that’s 34% ROI. Imagine if I had more back then. I could never do that in real estate with this amount of money.

    To cut it all short, this article pissed me off because people like you who spread false information and don’t have accurate numbers to prove it. As I said before if I can TEAR this article from the website I would do it because now you are hurting other people and misleading as I was as well.

    MARK MY WORDS: if people follow the advice you have in your article, you will be ruining there lives as well!

    • Scott Trench

      Very strong words.

      I disagree with you wholeheartedly.

      You claim that very few people study the market for 80 hours a week. This is true. But, the people that do study the market for that amount of time control 80% of the funds being traded in the market. So I disagree that the competition is not fierce.

      Second – when I bought my duplex, I used FHA financing on a homepath property. Oh there was competition, but no one else could bid unless they were owner-occupiers. This limited competition significantly. But I just call it as I see it.

      Third – you talk about horribly risky investment strategies such as option trading. Losing $50 is no big deal, but options trading is a terrible plan for the vast majority of investors. There is a reason why there are 28 million landlords, and very few options traders.

      We will have to agree to disagree. I your attempt to insult me misguided. At no point do you attack the point that researching individual securities can produce meaningful alpha for the young investor, which is the point of the article.

      • Winston Spence

        And again your comments don’t add up with the title of your article: “Are You Still Picking Stocks? You Are Ridiculous. Here’s Why” and “You’re young, ambitious, & want to invest. Think picking stocks is the way to go? First, hear this argument for why stocks are a TOTAL waste of your funds!” (this was the subtitle in the Biggerpockets email)

        You say RE is less competitive than trading? As others stated in the comments as well that the stock market is WAY more liquid than real estate will ever be. The amount of time it takes for me to get into and out of a trade would take months to do in real estate. Not to mention you have to price competitively with other homes on the market so you are at the mercy of the current RE market. Take the Midwest for example, try fix and flipping a home in Ohio and see how you do. Also the high vacancy turnover rates that go on over there is bad as well

        Your second point- as I said in my first comment not everyone can mortgage a home because of bad credit which is the case for me. Yet again, trading wins in this department because I don’t need a good credit score to start trading, just some money. Let alone be in so much debt with the monthly mortgage of a home! You say the competition is limited significantly in RE? In which market, west/east coast or Midwest? Makes a huge difference. And again you have false information, there are millions of option traders just TD Ameritrade and OptionsXpress

        Third- The point of your article from reading the titles was why the stock market is bad. NONE of your points are valid. The young investor today is a 20-29 years old, thousands of dollars in student loan debt, has no job, bad credit, and lives at home with their parents (this is not me, just for an example so noone get confused lol).

        How do you expect someone in this situation to invest in RE? With what money? What credit? And even if I had just enough money for a down payment, where would I get the money to rehab the property? Suppose I add the rehab costs to the loan, I’ll just be putting myself into more debt! And IF I got by all of this, all it takes is for one major repair to occur or some messed up tenant to take everything away from me. I didn’t mention paying a lawyer for taxes. That’s way I said your article is HORRIBLE and should be torn down. Real estate investing is mostly for individuals for have enough money, credit, and resources to manage a property and be able to get through these major problems. Not for the young investor, might want to change your article!

        And as they say the only people who think option trading is bad are the ones who never tried it.

        • Scott Trench

          Aha – I didn’t look at the metafeed – the description that you’d see on social media. I agree that that description of the article is misleading and am having it changed. I absolutely should have written that myself and made sure that it was true to the point of my article. I just didn’t even know that was part of it until just now, and am embarassed to have overlooked it.

          My total apologies for that.

          Your disagreement stems from (rightful) anger that I am bashing the stock market as an investment vehicle. I do not intend to do any such thing and personally invest in the stock market as part of my portfolio. I simply state that if you are going to invest in the stock market, you might as well do it in passive index funds, because seeking above market returns is exceptionally difficult, and even if you do achieve strong returns, at low capital levels, it’s not worth the added effort.

          Added effort and sweat can and does result in higher returns for real estate investments. As you state there are plenty of risks and difficulties with real estate investing, however, I believe that you are capable of adding value to real estate in a meaningful way at low levels of net worth that are less feasible with stock picking.

          That is the point of my article. Not that stocks are bad, just that added effort in stocks is not worthwhile for low net worth. Focus instead on real estate, savings, earning more money, or something else in which added effort = added wealth.

  16. With all due respect to the author, I disagree with about 99% of the opinions stated here. When done right, beating the market consistently really isn’t that difficult. It’s just a matter of trusting your own convictions and not jumping ship when volatility rears its head. The greatest traders are literally addicted to volatility. It’s their life blood. Oh, and never presume that people are behaving rationally; markets are really a study of social psychology. Also, fund managers aren’t allowed to beat their benchmark because of modern portfolio theory that states that funds that make too much money are “risky” and therefore receive little investiture. As for the “alpha” problem described, well that’s why you need to learn how to raise capital responsibly and take advantage of margin, FX, and options strategies. Making money in stocks is a function of your capital base, and there are many ways to expand it if you have the will and an ounce of creativity.

    I’m not just being obstinate. You can take advice from one of three people: People who have never tried, people who have tried and failed, and people who have succeeded. This Matt character may be successful while also working like a dog, but Wall Street is populated by people with the same mentality who all think the same, act the same, and ultimately commit the same mistake by believing that more analysis, more information, and more trades over a shorter time frame will produce greater returns (don’t even go there with algorithm trading). They’re guessing!!! If you watch CNBC you’ll quickly see most aren’t smarter than you or I. The media is an enormous propaganda machine used by the elites to cloud your mind and make you believe you can’t make it, that the pros have something you don’t have, and it is 100% grade A BS. It’s just like what Matthew McConaughay said in Wolf of Wall Street: Keep em on the Ferris wheel 24 hours a day.

    • Scott Trench

      Thank you for your comment LR. I would very much like to see data suggesting that average part time, small investors can consistently beat the data. When that happens in large numbers over the long term, I’ll be happy to post a giant retraction, admitting I was wrong.

      Until I get that data however, I will continue to believe that anyone who claims to beat the market by 3-5% per year over the long term, should probably be managing one of the largest funds in the country. I will literally give you all of my money to manager as part of your portfolio, with 2% of any above market returns going straight to your pocket. Just show me the guy who’s beaten the market over 20-30+ individual picks and 20-30 years.

  17. Scott –
    You’ve got such a defeated view of investments it’s disappointing. You sound as if you have a fixed mindset. I’m a stock investor and I just decided to diversify my investment with real estate. Not saying one is better than the other buy your blog is very incomplete. To talk about leverage and say banks won’t lend you $ for stocks shows how narrow your insight is.
    Have you heard about options? This is just one form of leverage. Buying a leap contract worth 100 shares is a safe way of leveraging.
    That’s just one way which shows how poor of an analysis you did. Not to mention the power of dividends and compounding.

    • Scott Trench

      I never state that stocks are worse than real estate.

      I say that producing alpha (beating the market) over the long term is a rare and difficult feat. Even when it is accomplished, the effort needed to consistently produce alpha is better directed towards an asset class where effort is better rewarded.

      It is very reasonable to have 50% of your money in stocks, and 50% in real estate. I just think it’s unreasonable to attempt to beat the stock market. Even if you win, the vast efforts needed to get and extra 2-3% return are hardly worth it.

  18. Timothy Trewin

    Good article but I think it is slightly misleading. Investing in the market, much like real estate can be good long term if an investor has the proper philosophy. Much like is touted on here, the “Get Rich Slowly” crowd tends to do well. Your typical stock picker is doing just that, trying to be the dreaded “day trader” that tries to buy low and sell high and gets burned. You can’t time the market no matter how hard you try. The same can happen in real estate and many, many people looking for a quick buck in REI have gotten burned as well. There are advantages to both the market and real estate. With REI you can typically get a higher monthly ROI than the market, but the entry point tends to be higher for an average investor (such as 20% down on a $100,000 invetment vs. hypothetically $15 for a stock). Also if financial situations change, a person who invests in the market can just stop investing while it’s not always that easy with real estate.

    Ultimately they are both good investments and a wise person could and should invest in both if they are able.

    • Scott Trench

      I think that this is great advice. Be in both the stock market and in real estate.

      Good stuff! I certainly agree that both are great investments and that you outline the risks.

      I’d simply add that the stock market investment should probably be in an index fund requiring almost no analysis, and that lots of time and energy should be spent seeking a quality real estate investment.

  19. Rob Young

    I think stocks should be a part of every investor’s portfolio. You don’t need to analyze the way Buffet does. He looks to hold long-term and is very interested in the long-term prospects of the business. His method involves analyzing a company’s financials in detail. You don’t need to research that way. Many retail investors (do-it-yourself investors) trade based on fundamental analysis (knowing what stocks to buy) and technical analysis (knowing when to buy and when to sell). There are tons of very accessible and understandable books and classes on fundamental analysis and technical analysis.

    Trading on fundamentals and technicals has allowed me to earn great returns while spending very little time doing research. I typically hold a stock for more than three months.

    Stocks have several advantages over real estate. Stocks are very liquid. Stocks are easy to buy and sell. You can make money in a stock when it increases in value (long a stock) or falls in value (short a stock). You can set up stop losses that automatically sell a stock when it falls below a certain level. You can make money whether the market is rising or falling.

    Like investing in real estate, investing in stocks requires time, energy, and discipline. If you simply turn over your stock investing to your 401(k) manager or to someone else, you will not do very well. This would be like telling your realtor to choose your properties for you without you analyzing them. You would never do that, would you?

    A smart investor will invest in multiple equities, including stocks and real estate. It’s frustrating to me that I have seen so many real estate investors disparaging stocks. Stocks really do have some very attractive elements that real estate does not. My observation is that those who disparage stock investing the loudest have the least experience doing it. I encourage all my real estate investing colleagues to learn to invest in stocks. Investools (the education wing of TDA Ameritrade) and Investors Business Daily have great tools and education for newbies. You owe it to yourself to learn to invest in stocks.

    • Scott Trench

      Thanks for your comment Rob! I agree with your asset allocation strategy. I think the only difference between my mindset and yours is that I think that I believe that the attempt to seek above market returns from fundamental or technical analysis benefits me far less from a financial standpoint than that same effort directed at real estate.

  20. William Morrison

    Scott, I’d like to offer a more proven strategy to stock selection. It’s an approach that one group has been teaching from about 1951 and worked well though up and down times.

    Before I do that a little background.
    I have both stocks and real estate.
    I have them in both tax deferred accounts and held personally.

    I have a Solo 401k for real estate.
    I have an IRA and a 401k with stocks and ITFs.
    I am involved as a partner in a commercial office complex and I own residential real estate.
    And at one time I was a beginner with little or no money. And now I’m just and old guy.

    I think you need a balance and you can start with small amounts of money.

    Here’s my example.
    When my daughter was in the 6th grade I bought some distressed foreclosures (empty for more than a year in an area that freezes, Maryland). I used what I considered her college fund (and under funded at that, put in less than 5% of the ARV).

    I went in with low cash out of pocket but enough to have a cash neutral position when finished. I define that as 120% of rents covers monthly expenses, mortgage, taxes, maintenance, small repairs, etc. The additional 20% covers vacancies and long term repairs like a roof replacement or HVAC. These numbers tend to work in neighborhoods with average or better schools as a way to define the class rental I’m talking about.
    She did every thing she could handle, yard work, hauling trash and painting some. I told her the goal was to pay for college or as much as we could.

    Property values stayed the same for a long time as they can. Then rose just enough including our sweat equity to pay for her five years room and board (change of majors will make it five years).
    No student debt was my goal.

    Now why would I list that here.
    At the same time she bought with money she had saved, two stocks that allowed dividend reinvestment. She put in about $125 dollars total from gift money she had saved over time etc. Over a couple years she put a little more in and then left it. She’s two years out of college and now owns a rental house in no small part to no student debt and what she made off the market.

    Here is how she chose her stocks, it takes some time but not a lot.
    She used methods taught by the National Association of Investment Clubs. This is not NAIC. That’s another outfit all together.
    You can find them using looking up BetterInvesting.com.
    They even have some education resources for kids.
    Their targets are five years out or more. You’ll know how to read a Value Line stock sheets when you’re done.

    Scott you will find their filters and process allow you to find stocks from small cap to large cap. They have a track record back to 1951.
    If you update your information about once a year you should never have recovery candidates like Xerox, Radio Shack, and JC Penney which you mentioned above in your portfolio. I think you’ll agree they are not good candidates for a beginner. Not saying it can’t happen, just unlikely with their philosophy.

    That’s BetterInvesting.com. Overtime they have dropped the prominent reference to clubs. An individual can participate.

    A second way for you to avoid the not so positive stock is to become familiar with the CANSLIM method. Use either and then compare yourself to the market 5 or 10 years out.

    This allows you to be in the discussion at work or where ever “I own a few shares of this or that and here’s why”. Or you could just buy an ETF.

    You have to look at all the tools available to you and ask does it build wealth, permanent cash flow or both?
    And help your kids start now. No matter what age.

    • Scott Trench

      Thank you for this thoughtful comment. I think that your approach to stock picking is very reasonable and that it has worked for you.

      In your case you own both and have put thought into both investments. I hope that your selection of stocks continues to provide outsized returns for you!

  21. Lynn Harrison

    Personally I think this is a little oversell on real estate. I’d suggest anyone all geared up on this should check threads on the DIY forum and really do your research on this site. Ask a lot of questions. Construction isn’t just “a little bit of work”, especially if you want it to be eye appealing. You can lose money on this too even with hard work. If the foundation is off or there is hidden structural rot it equals major repairs.

    Competition is fierce in most areas that have high employment. Even some that don’t. I just tried to bid on a tear down in an economically depressed town which had 5 cash offers within 2 days of being on the market. I think the property is going to be a place to park someone’s money or a statistic for dividends with Blackstone or someone else. I don’t think there is much if any money going to be made on that house for at least 5 years. It will probably be torn down to decrease taxes and may very well be a loss.

  22. Matt R.

    Charles not sure what happened to my response. Hopefully you see this one. Every round table discussion I have seen in the past 5 years picked aapl as a top contender and it was not as if this is some closely guarded secret. You could subsitute goog or even longterm powers like IBM or CVX. The guys who pick these types will beat 99% of REI. For some reason Scott likes to compare stocks to REI but they are so different it is hard to compare fairly. When I can point to real world examples it seems like some REI folks dicount the facts based on hindsight. Yet I have made these observations for years. I had a gentlemans bet with Mark Ferguson about a year ago. My picks vs his buy and holds. I have not checked back but my picks are up substantially and I am fairly certain equal or better than any sfr rentals.

  23. Anya Zola

    Scott,
    Sorry to hear how disenchanted you’ve become with the stock market over time. But, you represent 80% of the people who jump in with both feet and fail. Why? There are any number of self-proclaimed market gurus and/or brokerage firms dangling the “carrot” of easy profits before the uninitiated and uneducated looking to make a quick dollar. Just follow this strategy…..just buy my program……just park your money here….. = PROFITS! Pure hype designed to appeal to one’s sense of greed.

    If your money is important to you, then invest in yourself by way of a proper education before entering the stock market. Consider your $5k – down payment for the cost of education and be glad it wasn’t more. Get the right education – it is out there. In addition, be wary of anyone who claims they can offer you quick/easy profits in the stock market (or anything else for that matter). Ask to see their bank statements. Otherwise – walk away!

    Basic considerations for successful trading in the stock market:
    1. Market conditions (up, down, sideways)
    2. Market participants (10 classes of participants)
    3. Fundamental analysis
    4. Technical analysis
    5. Risk analysis (probabilities)
    6. Personal style (buy and hold, swing, day, intraday, etc.)
    7. Back testing strategies + paper trading

    Anyone attempting to jump into the stock market trading their own money without understanding these key aspects will end up gambling and not trading. I’m sure you worked long and hard studying the stocks you were interested in. But if you were naive enough to believe that that was all you needed to do to be successful as a stock trader/investor – you’re ridiculous.

    Don’t know if your friend was a mutual fund manager or a hedge fund manager. Big difference. Mutual fund managers only need to outperform the S&P to get a passing grade as a successful MFM. A large number of hedge fund managers rely on algorithms and trade on the millisecond – something no retail trader can do. Believe me, many hedge funds go belly up because they rely on an algorithm to dictate when to buy/sell. So you see, your thesis that you can’t win w/o big money in the game – is flawed. The flip side of that coin is you can lose – and lose big! Don’t assume MBA’s, stock brokers or hedge fund managers are experts at making and keeping the money they trade in the stock market – too many aren’t! I know a former stock broker (college educated business major) who quit the business because he realized all he was was a glorified salesman losing investors a lot of money to make his brokerage firm a lot of money in commissions. He was first in to the office in the morning and last out at the end of the day. His health was going down the tubes with no real success to show for it. He never understood the stock market and how to be successful in it. Ironically, some of the best stock traders don’t even have a degree.

    You’re operating under the assumption that because you didn’t have enough money to invest – you couldn’t be profitable. Whether you’re trading $5k, $15k or 500k, to be successful you need a proven strategy that consistently makes money. If you saw the movie “21”; Professor Rosa warned his student Ben that if they were to be profitable at counting cards playing Black Jack in Las Vegas, they would be following a very specific set of rules – they were not gambling. Ditto for trading the stock market….

    Whether it’s stocks or real estate – to be profitable the principle is always the same: BUY LOW – SELL HIGH!

    • Stephen S.

      This far-too-simplistic catch-phrase has likely doomed more portfolio’s than it has benefitted.

      But Low – Sell High

      Sounds good and plays well in casual conversation. But a critical concept which it causes many people to completely ignore is: never be afraid to sell low. Without that ability – no stock market investor can succeed.

      No one can pick only winners – so invariably some losers are purchased. The Classic Portfolio Destroyer comes along with the But Low – Sell High mantra – and that is: holding the losers. And as this usually complimented with selling the winners (to “take the money off the table / recover the initial investment / gamble only with the winnings” ) the net result becomes a portfolio of all losers. Which is the death of suitable returns.

      Losers have to be mercilessly culled from any successful portfolio – but almost no one has the stomach for this. And to defend their inability to act they mindlessly chant: Buy Low – Sell High.

      While the saying itself is true – it just doesn’t tell the whole story. Selling the losers sooner rather than later is also mandatory. Because “waiting to get even before I sell” is a losers game.

      stephen
      —————

      • Anya Zola

        Stephen,
        You are absolutely right!!!!! Investors get attached to their stocks and don’t want to sell. What’s that all about? The thinking goes: ….. I like this stock…… I can’t be wrong….. it will come back…… The 3 greatest saboteurs of any portfolio is IGNORANCE, FEAR & GREED.

        I sense a certain angst in your tone and suspect you’ve survived (or maybe not) your own trial by fire in the markets. You take issue with the statement: BUY LOW – SELL HIGH as too simplistic and somehow believe there’s a correlation between that and “holding onto losers”. NOT TRUE! What you have is a failure to be intelligent about entering the market.

        The scenario you outline is someone who’s losing money badly and to compensate closes out their losers AND their winners. You state that they may go on to “gamble” only with their winnings. The key word here is gamble. The stock market, like a casino – will be only too happy to take your money.

        Now you’ve got someone who’s demoralized by losses, walks away wondering what happened, licking their financial wounds and feeling stupid. This is what happens to people who don’t know/study/understand:
        1. market conditions
        2. market participants
        3. market cycles
        4. fundamental analysis
        5. technical and risk analysis
        6. Trading style to suit their personality
        7. back testing & paper trading
        and that’s why 80% of the people fail to be successful in the markets.

        …you state that almost no one has the stomach to cull their portfolio of bad stocks. Are you kidding me? Anyone trading with that mindset has no business managing their own stock portfolio if they expect to be profitable. Get a professional to manage it or find some other safe investment for your money.

        Finally, the biggest market participant is the Institutional Trader. I can assure you they trade to win. Their mantra has always been and always will be BUY LOW – SELL HIGH!

  24. Nick Calenda

    The key I think is for people to find out what works best for them. These are just 2 examples. I will be the first to admit that I’m only good in the stock market when it goes up. Knowing this, I feed money into the market when I see it going up, i.e in 2008. I have been able to fund my RE investments with stock gains for the last few years. If this part was missing for me I would have to work a lot harder with RE. These stocks are separate from retires funds, but for retirement you should also have RE in them.

    Now, with RE, I have learned that I only do well when the market is moving up or sideways. Since 2001, we were not active with RE from 2007 – 2009, in 2009 we started buying when we saw the RE market moving up and have been active since.

    To weather the storms I feel you need both. Watch the markets and do what is right for you in the current market conditions, there are many strategies but stick with the ones you find work best for you and plan for the markets to change, cause they will.

    The key is to diversify and to create residual income along the way, people make fortunes in stocks and RE so might as well take advantage of both.

  25. Stock market and RE are two different animals. The former is public where everyone has access to the same info easily while the latter is less public and it requires more effort to dig the info before doing any investment.

    For me, investing in stock market requires the minimal work (like passive investing) to make the money works for me. Going for RE requires more work in this case, but the return might be higher (but no guarantee).

    I need to learn more on RE before I could decide if RE is the thing for me. That’s why I am here at biggerpockets.

  26. I agree with you that stock picking is a waste of time, but I don’t agree that your net worth has anything to do with it. Stocking picking is a waste of time, period. Index investing isn’t lazy; it’s just a better way of doing things; chums like Matt don’t like it because they can’t make money off of it.

    “Matt manages a pretty sizable fund at a well respected firm in New York City. He spends perhaps 80-100 hours per week studying his industry (technology stocks) and has done this for over a decade. He reads annual reports, market news, and press releases from his Bloomberg terminal, and studies investor decks the moment they become available.”

    Tell Matt I said sorry for wasting his entire life contributing nothing to society. Studying all of that crap isn’t doing anything but making him dumber.

    I put up 100 stocks on a dartboard yesterday during my 5 year old cousin’s birthday party. He and all of his friends threw darts at the picks, and I created a portfolio out of them. Turns out they outperformed Matt because the kids didn’t drag the fund with any ridiculous fees for the illusion of performance.

    “And let’s not forget: Realistically, even great investors only dare to hope for 1-2% above market returns over the long run. Stock picking, even for a prodigy, is just a complete waste of energy for anyone with low net worth. Chasing alpha in the stock market only makes sense if you have millions, or better yet, hundreds of millions of dollars to invest.”

    Chasing alpha never makes sense. If your friend Matt is outperforming the market, then wouldn’t we all want to invest with him over index investing? Or is this a hedge fund with a huge barrier to entry? No worries man, I don’t like losing money in hedge funds either.

    I don’t know anyone with hundreds of millions of dollar who puts it in a hedge fund. Those things go belly up all day long.

    There are no fund managers that consistently beat the S&P 500 every year. If your friend Matt is charging for his fund, it’s probably in the realm of 1-2%, and given that he only outperforms the market by 1-2% as you said (doubt it), then his investors are barely breaking even. Factoring in the inconsistency of humans relative to the mindless algorithm of a cap-weighted index like the S&P 500, I don’t see why anyone would bet on your average friend. We are all average though when it comes to the market, so don’t feel like I’m offending you.

  27. Abraham Vandiver

    I see be heart of your article and I agree. Real estate makes sense for the vast majority of people, and a large majority of the population has no business picking stocks because they lack both the education and self-discipline.

    But, the reason you’ve had such an uproar over this article is your gross over simplification of investing in equities. You accused one other individual of creating a strawman but that’s the foundation of your post. You start this article by presenting this behemoth “Matt” – well educated, well connected, and with multiple resources at his disposal. And then you lay out your arguments based off this outlier, “If Matt is only correct 60% of the time, what are your chances?” “If Matt only beats the market by 1-2%, what can you hope to do”?

    Your arguments fail to take into account numerous factors: the size of one’s portfolio(it’s easier to move in/out of a position when your portfolio is limited to thousands of dollars as opposed to million); their current income (high income earners are already in the top tax brackets. Adding in another income source only dilutes their earnings further); their preference for active vs passive management (ceteris paribus, real estate takes up more time and requires more resources); the tax benefits of contributing to a deferred compensation plan (usually around 18k that is no longer taxed at the federal level and often restricted to equities); the difference in liquidity between real estate and stocks; the ability to leverage through marginal accounts; the ability to generate significant income through derivatives. The list goes on and on.

    Again, I agree with the heart of your post, but you failed to present the two options unbiasedly. And, when you make this type of post on a website that attracts highly educated and well informed individuals, you need to write an article that matches that demographic.

  28. “Those who say you can’t do something, shouldn’t stand in the way of those who are doing it”

    Never shocks me the amount of ignorance about the stock market on this site. I don’t want to waste my time explaining myself, but to those who are more open minded, MANY people trade in the market for a living. Yes, its true you need to know more than just buying a stupid index fund. There is A LOT to it and takes years of work. But it’s not the type of work the media and this article depicts. Its not about studying a company’s balance sheet for hours and making guesses. That is what amateurs THINK market professionals do. It is not.

    I LOVE when people say there is no leverage in stocks. There are many leveraged funds for those who know how to use them. There are futures, there is forex, there are options. Many forex traders use 100:1 leverage. Talk about not using your own money.

    It’s true, stock trading is not for the faint of hard, its not easy, but it can easily be done with the right tools and mindset and understanding.

    Watching real estate investors analyze stock traders is like listening to a car salesman critique the work of a heart surgeon. They are in absolutely no place nor have any knowledge of the field to make any type of judgments.

    Anyway, just for those who don’t know any better, none of this garbage is true about traders wasting their time. You just don’t know how to do it nor how to go about.

    So, lets end with where we began.

    “Those who say you can’t do something, shouldn’t stand in the way of those who are doing it”

  29. Great article, but did you have to wait 1 year before renting your owner occupied home? As far as I can tell, FHA loans don’t allow you to rent out in the first year, so were you able to get around that and how? Thanks.

    • Scott Trench

      My understanding (and the action that I took) is that I was able to rent out the extra space in my home IMMEDIATELY after moving in. The deal with the FHA loan, as I understood/understand it is that you must move into the home and occupy it for one year. There was nothing that I heard about not being allowed to rent out the other units, and the lender, my agent, and the seller were aware of my intention to do so.

      I got around that by living in the property, as agreed, for one year, and renting out the other units.

      You are not allowed to buy an investment property that you do not intend to live in using an FHA loan.

  30. Fred Maul

    Hey Scott,

    I agree with your thesis except this part you threw in about “small business”. Small business is not really addressed in your article, but I consider most start-up businesses to be very risky for first-timers. Running your real estate portfolio like a business is a must though.

    Also, let’s face it, most investors cannot beat a computer algorithm designed by the smartest, most well-paid geniuses on the planet!

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