February 2001

Newspapers are, in my view, notorious for their negative slant on the societies they report on. More copies are sold when stories detail vicious attacks and murders between enemies than when they detail, say, endearing comments made between lovers, so that is the genre of story that they gravitate towards. Consequently, the ardent reader of newspapers can easily get the impression that there are more attackers and murderers in society than lovers.

Mark Twain once said that he once didn't read a newspaper for seven years, and that they were the happiest seven years of his life.

I do not subscribe to any newspapers because of this slant and the fact that being on the move such a lot means that I wouldn't get to see many editions until after the news was new. It is difficult to avoid newspapers on your travels, however. On December 27th, I was sitting in an airport lounge at Philadelphia's airport awaiting my flight to California, when I was struck by the headlines of that day's issue of USA Today. At the top of the front page, above the headlines "7 colleagues killed in Massachusetts" and "Prisons release record number of ex-convicts" was the lead story "Housing Market beats Stocks in 2000".

The first paragraph reads: "When the numbers are in, 2000 will go down as one of those rare years in which Americans count their houses, not stocks, as their best-performing assets". A table in the article details that while the average value of a home increased by 7%, 1-year CDs (Certificates of Deposit) only went up by 4.97%, while Money Market Funds went up by 5.5% and Dow Jones Industrials went down by 6.9%.

These results are appalling! Not so much that in their opinion housing outperformed most other forms of investment, but the notion that in other years property trailed behind! The media's inability to grasp what I consider to be a fundamental advantage of investing in real estate is, I am sure, one of the prime reasons why potential investors, goaded on by financial advisors who have not yet figured out a way to profit from advising clients into property, stay away from property.

In any comparison, it is important to compare the proverbial apples with apples. Thus, in comparing the investment performance of your money invested in various sectors, it is important to always consider how the asset performed in relation to the capital put in.

When you buy a CD, you have to put up the face value of the CD. For nearly all investors, when you invest in money market funds or stock markets, you have to put up all of the cash representing your investment.

On the other hand, when you buy a property, you may choose to pay the full price in cash, but you can also (very easily!) get a mortgage for 20%, 50%, 70% or more of the value. There are mortgages available for 90% of the purchase price. In other words, it is not comparing apples with apples to compare the performance of a $100,000 investment in CDs, money market funds or the stock market with a $100,000 property. And yet this is what most market commentators will do, and certainly what a lot of financial advisors do to convince their clients that property really is not as great as some say it is. What we should do is compare the performance of a $100,000 investment in CDs, money market funds or the stock market, with $100,000 invested in property. If this $100,000 was used as a 10% deposit on a $1,000,000 property, then a 7% increase in property values would translate to an increase of $70,000 in our $1 million property, which is an increase of 70% on our original $100,000 investment in real estate.

What we are talking about is leverage, or gearing. The same would apply to leverage in other forms of investment, but like it or not, all over the world newspapers and billboards are full of advertisements offering financing for the acquisition of real estate, and not other asset classes. In other words, gearing is readily available to property investors, and rarely available to investors in other assets classes.

So, if we can show that statistically most property investors are geared, while most money market and stock investors are not geared, then I believe it would be perfectly fair to compare the performance of property relative to other investments by taking this phenomenal power of leverage into account. Calculated this way, even if the stock market goes up by 15%, and real estate only goes up by only 5%, then any property investor with a mortgage of at least 66% would have done as well or better than their property-averse counterparts.

Of course leverage also works in the other direction: if the market goes down, then the downside is amplified just as surely as the upside. But that brings me to a very interesting observation… Consider all the properties you have ever owned. And then consider all the properties your relatives and friends have ever owned. Have you ever known one to plummet in value by 60%, 90% or even disappear off your balance sheet entirely?

That is exactly what happens to stocks and shares traded on markets around the world. In other words, a stock market may have an increase of say 5% in a year, but that really represents the average of many wildly disparate stock gyrations, with some going up phenomenally, others going under, and everything in between. Whether your collection of stocks does well or not is, it seems to me, a bit of a gamble. On the other hand, it is much easier to see which properties will go up in value: trends are slower, less volatile, and with fewer deviations from the average. Thus, the city with the highest growth in any nation in 2000 is very likely to be at or near the top again in 2001. In other words it is stupendously easy to beat the national average! That's probably what investors of technology stocks thought a year ago, to their eternal regret!

So am I annoyed or distraught that unlike me, newspapers do not promote property as being tens or even hundreds of times better than other investments? Of course not! Imagine if everyone stopped investing in all these other vehicles and joined the real estate gravy-train. It would become increasingly difficult for me to find bargains.

But forgive me for chuckling when I read a headline that proclaims the "rare event" that property outperformed other investments.

Successful investing!

Dolf de Roos