My 1000th post - Property isnt speculating, buying shares IS!

[tubs]

OK, I've finally made it to 1000 posts. So I thought I'd post something a bit different, and even a bit controversial.

There's been a lot of discussion lately on property being speculative (specufestors is a term often bandied about). And its far safer to put your money into shares. There's also a feeling that people who have purchased over the last 5-7 years were just fools who got lucky, rather than astute investors. And considering how much money people have made, perhaps they were smarter than some people give them credit for.

But here's the thing. I think shares are far more speculative than property. You see, when you buy property, you can go to the suburb, drive around it, look at the houses, shops, ammenities. Look at where the train stations are, bus stops etc. You can look up historic growth, crime rates and rental figures. You can compare that property with dozens of similar ones in the same area. You can even stop and chat to the neighbours about the area if you like.

Furthermore you can look at your prospective purchase and see it, touch it, even smell it (if you like!). You know how big the rooms are, the land, what the views are. You can get a licensed builder to do an inspection.

Essentially, there's very little you CANT find out.

Which means that, far from being speculative, there are probably no other investments you can make where you have access to so much information to make your decision on.

But with shares, you have access to so little information about the company. If there's a big problem looming in a mine, how will you know? Do you have access to the research on longer term commodity prices? No you dont.

Nor do you have information on the different types of borrowings ANZ has, and their exposure to 'sub-prime' borrowings.

Any number of things could be a problem for companies you can buy shares in, and you just wont know about them. You have to decide whether the shares are a good opportunity based on information that, even if you had access to it, would take far too long and be far too complex to decipher.

And hey, when you buy shares, you're buying because somebody else is selling. So why do you assume you know more than them?

I know there will be exceptions to these rules, such as property being impacted by the closure of major local employers or negative decisions, such as toxic dumps etc, but you can make a far more informed decision buying property than you can buying shares, so shares are a far more speculative purchase than property.

 

[Mr. Fabulous]

This is a joke post, right?

Mark

 

[GoAnna!]

I think one factor which makes property and shares feel so different is that you can look at the price of your shares this exact hour, and the next hour and the one after than. There is an immediacy and that impacts the feeling of risk and opportunity.

Property appears to move in slow motion. Often the movements are not known until months after the fact. Perhaps if I saw my properties fall $200K over a month or two and a margin call was possible I would feel that property was very risky. The closest I have come to experiencing this was Sept 11 when properties fell in my market by 10% at least from one Saturday to the next. People were spooked and it showed. Right now I am sourcing more funds and the banks are spooked and it does make property feel more risky than it did even last year.

So is it time to buy shares ?

 

[evand]

yes Mark, i thought the same thing.

If all property goes up 8%-10% or whatever it is...what does it matter, why do you want to drive past or touch or whatever your IP?

Plenty of investors have bought IPs without seeing them. I have bought a couple like that.

Tubs, you obviously are not an experienced share investor or you would know the answers to your risk questions.

btw: hows the copy writing going?

 

[tubs]

Hey Evan

The copywriting's going great! Flooded with work at the moment, got a couple of jobs with some BIG name writers who I wont name, but once I got serious, its all happening fast!

And no guys, this post is not a joke.

My point is that there is far more information available about a property purchase than there is about a share purchase. Its all there to see with a property, but not with shares, where so much information is hidden.

I guess I'm a bit tired of the implication that people who buy IPs are stupid speculators who dont know what they're doing. Even though they've probably made a more informed decision than someone who buys shares. And this is more about fundamental analysis than technical analysis.

You could say that for a property purchase you have got easy access to about 80% of the information that you'd need, although you still need to understand the drivers of the market to apply that information to. Whereas you probably only have about 30% of the information you'd need with shares, and there's a lot more 'skeletons in the closet' with shares, such as the reasons behind such big drops in the markets, particularly banks recently.

 

[marg4000]

Why not do both?

We own IPs and we own direct shares. Each serves a different purpose. I prefer to have some money in shares because of the availability of receiving sale proceeds after 3 days. Can't do that with properties.

Yes, my shares have dived recently, but are still well above purchase levels. I have seen property prices fall too.

Historically, both recover, so long as you are not forced to sell during a downturn.
Marg

 

[yo yo ma]

I guess I'm a bit tired of the implication that people who buy IPs are stupid speculators who dont know what they're doing. Even though they've probably made a more informed decision than someone who buys shares.

I buy IPs and shares... they both have advantages and disadvantages

 

[chilliaa]

Hey Evan

The copywriting's going great! Flooded with work at the moment, got a couple of jobs with some BIG name writers who I wont name, but once I got serious, its all happening fast!

And no guys, this post is not a joke.

My point is that there is far more information available about a property purchase than there is about a share purchase. Its all there to see with a property, but not with shares, where so much information is hidden.

I guess I'm a bit tired of the implication that people who buy IPs are stupid speculators who dont know what they're doing. Even though they've probably made a more informed decision than someone who buys shares. And this is more about fundamental analysis than technical analysis.

Of course owning residential property is less risky than owning shares. Thats why the banks offer higher leverage against residential property for longer durations.

But that does not mean that shares are TOO risky to be considered an investment class.
For those of you that say property goes up 7-10% a year in the long term, well shares go up around 8% a year in the long term as well.

People also forget that buying shares is buying a small amount of the underlying company. So your success in investing in shares is more about being a successful business analyst.

In regards to availability of information, your viewpoint is very limited. Theres plenty of information to value a company, its just most people want the 5 line 'expert' summary. They are too lazy to delve into the details of the company, go through the annual reports in detail. Even more worrying retail investors like to 'buy into the story'. This happens time and time again. The better and more believable the story the easier it is to flog the shares.

Residential property is a better investment from purely a leverage point of view.
But shares are a better investment from a profit/cash generating point of view.

 

[buzzlightyear]

My point is that there is far more information available about a property purchase than there is about a share purchase. Its all there to see with a property, but not with shares, where so much information is hidden.

I would have thought the challenge (especially in Vic) in finding out sale prices as there is no 'free and easily accessible database of up to date information' is a real irritant (to me anyway). Share prices are two clicks away.

 

[austini]

Oh dear,

Another property Vs shares post. It all depends on personal preference and many experienced investors choose to own both. If you are worried about individual company risk and/or perceived lack of information then consider investing in an index fund or one of the older listed investment companies. Almost no research required and there's nothing to do after that - just bank the dividend/income and no bills to pay. Investment property will require much more time both in selecting the property and ongoing administration etc not to mention enormous transaction costs. Of course one arguement for property is that it can be more highly leveraged if you are game to do so in a credit crisis!

Cheers - Gordon

 

[tubs]

Its not property versus shares.

I'm challenging the viewpoint that investing in property is 'speculating' where investing in shares is not.

I believe the opposite is true, given the amount of information that is readily available on a property purchase compared to a share purchase.

 

[chilliaa]

OK, I've finally made it to 1000 posts. So I thought I'd post something a bit different, and even a bit controversial.

There's been a lot of discussion lately on property being speculative (specufestors is a term often bandied about). And its far safer to put your money into shares. There's also a feeling that people who have purchased over the last 5-7 years were just fools who got lucky, rather than astute investors. And considering how much money people have made, perhaps they were smarter than some people give them credit for.

But here's the thing. I think shares are far more speculative than property.
Really if thats the case how come there is the credit crisis in the us. whats the source of the credit crisis, and if property does not go through speculative phases then how come the underlying loans are not fully recoverable

You see, when you buy property, you can go to the suburb, drive around it, look at the houses, shops, ammenities. Look at where the train stations are, bus stops etc. You can look up historic growth, crime rates and rental figures. You can compare that property with dozens of similar ones in the same area. You can even stop and chat to the neighbours about the area if you like.
For shares you look at the previous 10years worth of historical data, you analyse the companies ability to match financial returns to their company vision, you look at the structure of the companies strategic vision, you look for changes in the strategic vision that may highlight increased future risk.

Furthermore you can look at your prospective purchase and see it, touch it, even smell it (if you like!). You know how big the rooms are, the land, what the views are. You can get a licensed builder to do an inspection.

Essentially, there's very little you CANT find out.

Which means that, far from being speculative, there are probably no other investments you can make where you have access to so much information to make your decision on.

But with shares, you have access to so little information about the company. If there's a big problem looming in a mine, how will you know? Do you have access to the research on longer term commodity prices? No you dont.
Who said that investing in shares has to be limited to the resource sector. Thats why i have minimal investment exposure to the resources sector. I cant be certain of future prices, so i dont buy the shares

Nor do you have information on the different types of borrowings ANZ has, and their exposure to 'sub-prime' borrowings.
Once again look at their 10yr historical financial records, look at the details in the notes to accounts in the annual report. You cant get exact information, but you can generate a very good 'feel factor'. In order to reduce risk you have to diversify on this issue. Divide your resources between each of the big4 banks

Any number of things could be a problem for companies you can buy shares in, and you just wont know about them. You have to decide whether the shares are a good opportunity based on information that, even if you had access to it, would take far too long and be far too complex to decipher.
Granted you actually have to do some work. If at the end of the day it is still too complex then once again dont buy, stick with companies that you better understand

And hey, when you buy shares, you're buying because somebody else is selling. So why do you assume you know more than them?
this is exactly the same for property. Why is the other person selling? there are always numerous reasons

I know there will be exceptions to these rules, such as property being impacted by the closure of major local employers or negative decisions, such as toxic dumps etc, but you can make a far more informed decision buying property than you can buying shares, so shares are a far more speculative purchase than property.

Just my opinions

 

[steveadl]

In regards to availability of information, your viewpoint is very limited. Theres plenty of information to value a company, its just most people want the 5 line 'expert' summary. They are too lazy to delve into the details of the company, go through the annual reports in detail. Even more worrying retail investors like to 'buy into the story'. This happens time and time again. The better and more believable the story the easier it is to flog the shares.

I think what Tubs is getting at is there are more potential 'nasty surprises' in buying a share than there are in buying a house.

Buying a house in a capital city (obviously buying in a one industry town would be riskier) in a location you've researched is relatively safe.

Buying a companies shares leaves you open to many possible issues that aren't easily researchable in annual reports eg. a perfect mine with low costs gets flooded and sets back production by 2yrs (was it Cigar Lake that happened at a little while back?). On top of that you have a lot more market sentiment driving your share price which can effect your investing actions ie. Sept 11 saw the ar$e fall out of a lot of stocks whose business was not effected in any way what so ever.

Your investment has now gone down 20% over night and will take 6 months to recover. During that 6 months time your hands are now tied as to what you can do (assuming you're leveraged).

 

[chilliaa]

I think what Tubs is getting at is there are more potential 'nasty surprises' in buying a share than there are in buying a house.

Buying a house in a capital city (obviously buying in a one industry town would be riskier) in a location you've researched is relatively safe.

Buying a companies shares leaves you open to many possible issues that aren't easily researchable in annual reports eg. a perfect mine with low costs gets flooded and sets back production by 2yrs (was it Cigar Lake that happened at a little while back?). On top of that you have a lot more market sentiment driving your share price which can effect your investing actions ie. Sept 11 saw the ar$e fall out of a lot of stocks whose business was not effected in any way what so ever.

Your investment has now gone down 20% over night and will take 6 months to recover. During that 6 months time your hands are now tied as to what you can do (assuming you're leveraged).

Yes thats why i said that owning residential property is less risky than owning shares. This is obvious, as indicated by bank lending practices.

But that does not mean that one asset class is better or worse than the other. It depends on the individual investors ability. Plenty of retail investors have made/lost money in both asset classes.

So the more important issue is one of self reflection. Are my personal habits suitable for investing in a particular asset class. Its got nothing to do with the asset class itself, but everything to do with the investor himself.

 

[tubs]

I dont think we disagree Chilliaa. Information is available for both asset classes, I'm not denying that. But one is more readily available than the other. Info on shares is definitely available, but as you've said it takes a lot more time and discipline to understand. Its easier to understand the value of a brand new kitchen than a PE ratio.

Steveadl seems to have summed up what I've said perfectly.

 

[chilliaa]

I think what Tubs is getting at is there are more potential 'nasty surprises' in buying a share than there are in buying a house.

Buying a house in a capital city (obviously buying in a one industry town would be riskier) in a location you've researched is relatively safe.
So is buying a share that has very strong economic moats. Look at woolworths, is there anychance that people will stop buying in woolworths? Or look at Mc Donalds, any chance people will stop eating at Mc Donalds. How about wrigglies chewing gum? any chance of a new wizbang chewing gum replacing the economic moats around wrigglies? So the underlying business is relatively safe. The investment return however will also fluctuate depending on the price paid for the asset (just like residential property), and short term economic issues (just like residential realestate)

Buying a companies shares leaves you open to many possible issues that aren't easily researchable in annual reports eg. a perfect mine with low costs gets flooded and sets back production by 2yrs (was it Cigar Lake that happened at a little while back?). And what happens when a mass build up of residential property occurs in your areaOn top of that you have a lot more market sentiment driving your share price which can effect your investing actions ie. Sept 11 saw the ar$e fall out of a lot of stocks whose business was not effected in any way what so ever. And what happends when investors are spooked by the current high interest rates, there is a drop in prices which has nothing to do with the underlying 'business' of the residential property the purpose of which is to generate rent.

Your investment has now gone down 20% over night and will take 6 months to recover.Doesnt this also apply to geared residential property During that 6 months time your hands are now tied as to what you can do (assuming you're leveraged).

My opinons

 

[chilliaa]

I dont think we disagree Chilliaa. Information is available for both asset classes, I'm not denying that. But one is more readily available than the other. Info on shares is definitely available, but as you've said it takes a lot more time and discipline to understand. Its easier to understand the value of a brand new kitchen than a PE ratio.

Steveadl seems to have summed up what I've said perfectly.

Please dont get me wrong. Im not against you for deciding that property is the way for you. If thats the asset class that you feel most comfortable with, then you are WISE to stick to it.
The easiest way to get burnt is to invest in an asset class you dont fully understand.
Plenty of people have made very good money just through property investment and there is nothing wrong with that.

 

[steveadl]

Yes thats why i said that owning residential property is less risky than owning shares. This is obvious, as indicated by bank lending practices.

But that does not mean that one asset class is better or worse than the other. It depends on the individual investors ability. Plenty of retail investors have made/lost money in both asset classes.

So the more important issue is one of self reflection. Are my personal habits suitable for investing in a particular asset class. Its got nothing to do with the asset class itself, but everything to do with the investor himself.

Spot on Chilliaa - agree entirely.

 

[steveadl]

My opinons

So is buying a share that has very strong economic moats. Look at woolworths, is there anychance that people will stop buying in woolworths? Or look at Mc Donalds, any chance people will stop eating at Mc Donalds. How about wrigglies chewing gum? any chance of a new wizbang chewing gum replacing the economic moats around wrigglies? So the underlying business is relatively safe. The investment return however will also fluctuate depending on the price paid for the asset (just like residential property), and short term economic issues (just like residential realestate)

Yes, but the problems we're taking issues with in this thread are the unforseen ones. eg. Centro's business was pretty sound 2yrs back as well, the millions of people who shop in their malls aren't going to stop going there overnight. But they got hit by their leverage and the credit crunch. Now looking back you could probably analyse their balance sheet and say 'yeah I could see that coming' but many of the analysts who were recommending the stock and funds that were buying into it back then certainly didn't. The business itself hasn't really changed, but the owners/shareholders have seen their investment plummet. Incidentally, shares can also drop to zero. Very few lots of land in a capital city are worth $0 - if you find some, let me know!

You're right, the issues can happen to property as well (ie. caught out by market fall when leveraged), but generally it doesn't happen as quickly to property and you have more time to react/move. It also doesn't experince as bumpy a ride (in general) as stocks due to higher entry and exit costs. Sure either could drop 10% overnight, but it doesn't happen to a hous every other week like it does to a share.

But then I think we're getting back to the issue you raised about it being the individual investors personal preference and risk attitude. Clearly we know which one I favour.

 

[MCS_80]

Great thread tubs.

I see your point and understand your logic.

I am more interested in property for the reasons you state. Touch, see and study my investment easier.

I have interest in shares also, but want to get some experience in property first, then ill be pounding the shares with research and pouring money into them also.

Cheers

Mick