Forum Archive Index - February 2004

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Callum,

> 
>I just want to see a little bit of debate as to:shares vs property I
>am currently invested in both, when considering the enjoyment factor,
>or what gets me the most excited I would say shares, but then when 
you
>look at property theres the security and lucrative returns, not to
>mention the lessons in business skills that you have to pick up...
>

Shares v Property at the most general categorical level?    Looking on 
the basis of 'share returns' vs 'property returns' that debate was settled 
decades ago.   'Shares' win every time.    So how do I explain the fact 
that it is still a topic for debate?    In my judgement there are three 
concepts to consider that explain why this debate is still live:

1/ Single Investments and Categories of Investments
2/ Buying Psychology and Info-overload
3/ The different structure of the Share and Property markets



Single Investments and Categories of Investments

Note that the title of this debate is 'shares vs property'  not 'shares vs 
propertIES'.    I doubt if Callum even realised that this was the way he 
set up the question to be debated.  But I would venture to suggest that 
*most* people think of investing in property as being based (at least 
initially) around a single property, whereas most first time share 
investors would never seriously consider restricting themselves to a 
single share.   Given that most property investors invest on a 'one 
property at a time'  basis this means they are far more focussed on 
making sure that property is a good one.     They know that they will 
probably keep the property for several years so they make absolutely 
sure they consider the income stream from it and their ability to hold 
onto it as the rental market fluctuates.    

However, it is my contention that most people investing in 'shares' 
wouldn't do anything like the homework, or research within cooee of 
the amount of 'tyre kicking' they would do on a property.    In summary, 
I contend that most of the poor performance people experience with 
their share investments is because of not doing enough homework on 
the underlying business behind them .



Buying Psychology and Info-Overload

The sharemarket is well reported in lots of detail in the daily 
newspapers.    I would argue that if there was a daily suburban 
'property valuation' with published figures of equal depth then the 
property market would not have quite the 'safe and secure' image it 
has now.  My argument here is that if you put your share portfolio in 
the bottom drawer and went to live on a desert island for a year, with 
no access to 'news' of any kind, then all of a sudden your share 
portfolio would become far less risky.

Going to live on a desert island will, of course, not change the 
underlying value of your sharemarket investments at all.    Safe from 
any information on the day-to-day ups and downs of your investments, 
the desert island life will have a big effect on how you feel about your 
invests though.   You won't care if one of your shares drops in value by 
5c and another rises by 10c because you won't know about it!  My 
contention here is that 99% of the daily share price movements that 
you read about in the paper each day will have no lasting effect on 
long term sharemarket investment performance.  Sometimes when 
people are given too much price information, then that places 
inordinate psychological pressure on them to 'act' while the option of 
leaving everything alone is not given sufficient weight.  Frequent 
trading 'just because you can' is not IMO a good share investment 
strategy.



The different structure of the Share and Property markets

When buying property there is an expectation you will have a 
mortgage on it.   But if you marched into a sharebroker to invest your 
money, how many brokers would assume the money was 90% 
borrowed?  If you look at most of the self made property millionaires 
around, most have become so using other peoples money (typically, 
the banks).     The property itself has not made them their fortune.    It 
is the leverage on the money they have borrowed that has made them 
rich.     So why are bank managers falling over to lend people money 
on a property purchase, while taking an exceptionally cautious view on 
those borrowing to invest in shares?  IMO it is because borrowing to 
invest in property is less of a foreign concept than borrowing to invest 
in shares.

There is a perceived view that property 'always goes up in value' (false 
of course) yet shares are fluctuating in price so much all the time that 
they are far more 'risky'.    So most bank managers lend to invest in 
property.   But it is my assertion that it is actually the gearing that is the 
most important aspect to investor property returns, not the underlying 
property itself.



Summary

Property vs shares?    In one sense this is not even a comparison as 
'property' is merely a class of asset (real estate) and 'shares'  is a 
financial structure for investing in any class of asset.  Comparing a 
type of asset with a financing structure is like comparing an apple with 
a fruit shop.  But IMO the greatest return (and I think that is what most 
of us are interested in) would be obtained by combining the gearing 
element of a good property investment with the capital gain potential of 
a good share.    Whether you can convince your bank manager to 
allow you to do it though, is another story.

SNOOPY


--
Message sent by Snoopy 
on Pegasus Mail version 4.02
----------------------------------
"Sometimes to see the wood from the trees, 
you have to cut down all the trees."




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