Most of my clients have investments in both real estate and the stock market. This is a good thing as this provides them with some diversification. I also have investments in both but this latest bout of lack of consumer confidence has really made me think about what is a better investment. The following discussion then is solely my opinion based on my personal experience and is not meant to address your own personal circumstances. As always you should always do your own research and discuss your investment strategies with your own advisors.
I received an email from one of my clients recently lamenting the decreasing value of his property over the past year and exclaiming that this was the worst investment he had ever made. While I understand and sympathize with his frustration of trying to sell his property in a Buyer's market I would beg to differ with his conclusion. At the price his property is listed at he will still be making a sizeable positive return on his investment just not as much as he would have if he hit the market at its peak two years ago. I have had numerous stock investments that have lost 50% of their value from a year ago and in some cases lost all of their value. This type of rapid loss or total wipe out of value just does not happen in real estate. Real estate, as the name implies, is REAL. The land is not going away and it cannot be replaced. It is not just a piece of paper. In addition, most people derive some personal use or joy from their real estate. One of my real estate investments is a large acreage with stunning views of this beautiful Valley. Every now and then I hike up on this property and it brings me a strong sense of satisfaction and I know that some day someone else will have this same joy of ownership when I ultimately sell. I cannot say the same for my stocks. Even the ones that have made me money.
My other philosophy on real estate and the stock market is that the real estate market is imperfect especially in relationship to the stock market. By this I mean that all stock market investors have access to the same information which is readily available. An exception to this would be someone with insider information that is not yet public. This means that the stock market, for the most part, is a relatively perfect market in that prices paid for stocks at any given time are based on everyone having the same information. There are, of course, other exceptions to this. One which comes to mind is Warren Buffett. I am reading his autobiography right now and what I get out of this is that Mr. Buffett made it his policy to know more about the companies that he was investing in than even the owners did and he sometimes had other reasons to buy. In addition, he was in a position to not just buy a small percentage of the shares of the companies that he was interested in but to buy enough shares that he could control the boards of the companies and therefore control the destiny of that company. So, unless you have Warren Buffett size wealth you cannot control your investment in stocks in any way. You are just subject to the whim of the companies management and the public's perception of how that company is doing. Real estate, on the other hand, is a very imperfect market. Some people know and/or have access to more information about a particular piece of real estate than others. An example of this was one of my very first real estate commercial real estate sales where I discovered that the city where I lived was changing the traffic patterns by making opposing one way streets. This would mean that one of the streets which had rarely been used was now going to become a major thouroughfare. I brokered a sale on a piece of raw land on this street to a client of mine and he sold it again six months later at double the price. So, although this information was available to everyone, most people were not aware of it. While this is a straight forward example, there are all sorts of examples which would be more complex and may require some techniques to create value (i.e. by changing zonings, subdivision, etc.). The important thing to realize though is that as a real estate investor you are now like Warren Buffett in that you are in control of your investment. This is a very powerful concept which cannot be overstated.
I guess you probably know by now that my preference between real estate investing and investing in the stock market strongly favours real estate. I do however, think there is a place for both. If you are considering an investment in real estate in our area I would be happy to spend some time with you and share my knowledge of the Valley.