Stocks versus property. Why I prefer stocks over property

[Temperament]

Simply put "leverage" is a double-edge sword. The higher the leverage the sharper the two edges. So many Wall Streets Instituitions used this sword to make them so rich until caught by their own over-leveraging and disappeared forever- The latest was of course the "Sub-Prime-Loan CDO" fiasco. And i believe it will just going to repeat because Wall Street can not exist without high leverage.
i still don't know how to use this sword. i would gladly learn from anyone who has been successful in dodging the unpleasant edge of this sword.

For people who are in a hurry to get rich, leverage provides an avenue to achieve that goal. For those who are not in a hurry, leverage does not add value to the investment process in terms of risk/reward ratio. Reward goes up, risk goes up as well. The risk/reward ratio does not improve but risk management becomes more complicated. This is another reason why I see no reason to use leverage.

What was it that Buffett said about leverage? If you are smart, you have no need for leverage. If you are not, you have better not use it. Either way, don't use leverage. Unless you are in a hurry. But isn't patience a universal value attributed to successful investors?

Yeah! No hurry! No sweat! Sleeping well at night all the way to reach your Pot of Gold is a better way. imo.

[Big Toe]

Stock Vs property.
How do you even start to compare the 2?

At this juncture, property prices are near all time highs, so most people would have made some/a lot of money from it.
You can't really short a physical property(can you?) so there are mostly winners. With the onslaught of newly completed supply + interest rate hike, we just may see some losers in the near future. In any case, yields are extremely low for nearly all classes of property, residential/industrial/commercial.

Stocks, locally, we're quite far from the all time highs but most of the blue chips are faring ok. Dont see a lot of meat from here on.
Maybe just a very small handful of firms/stock prices will do well. I am more of a fan of US financials as there are real improvements going on and I feel there is more meat. Cant wait for fed to stop printing money and start raising interest rate. There is nothing more appealing to me now than US financials, stocking up CitiB <$6 BoA <$14

[hyom]

Stock Vs property.
How do you even start to compare the 2?

At this juncture, property prices are near all time highs, so most people would have made some/a lot of money from it.
You can't really short a physical property(can you?) so there are mostly winners. With the onslaught of newly completed supply + interest rate hike, we just may see some losers in the near future. In any case, yields are extremely low for nearly all classes of property, residential/industrial/commercial.

Stocks, locally, we're quite far from the all time highs but most of the blue chips are faring ok. Dont see a lot of meat from here on.
Maybe just a very small handful of firms/stock prices will do well. I am more of a fan of US financials as there are real improvements going on and I feel there is more meat. Cant wait for fed to stop printing money and start raising interest rate. There is nothing more appealing to me now than US financials, stocking up CitiB <$6 BoA <$14

You are comparing them based on the potential for returns while the original post was comparing the two based on the ease of managing risk.

For middle-class Singaporeans who can at most afford to purchase at most 1 property (without avoiding debt), it is not easy to manage risk because the property portfolio is super-concentrated, highly leveraged and illiquid. In contrast, a stock portfolio can be diversified, zero leverage and liquid. Which portfolio allows the investor to control risk more easily?

To quote Temperament's signature, "You can control RISK. But definitely not the outcome of the Return."

[CityFarmer]

Stock Vs property.
How do you even start to compare the 2?

At this juncture, property prices are near all time highs, so most people would have made some/a lot of money from it.
You can't really short a physical property(can you?) so there are mostly winners. With the onslaught of newly completed supply + interest rate hike, we just may see some losers in the near future. In any case, yields are extremely low for nearly all classes of property, residential/industrial/commercial.

Stocks, locally, we're quite far from the all time highs but most of the blue chips are faring ok. Dont see a lot of meat from here on.
Maybe just a very small handful of firms/stock prices will do well. I am more of a fan of US financials as there are real improvements going on and I feel there is more meat. Cant wait for fed to stop printing money and start raising interest rate. There is nothing more appealing to me now than US financials, stocking up CitiB <$6 BoA <$14

You are comparing them based on the potential for returns while the original post was comparing the two based on the ease of managing risk.

For middle-class Singaporeans who can at most afford to purchase at most 1 property (without avoiding debt), it is not easy to manage risk because the property portfolio is super-concentrated, highly leveraged and illiquid. In contrast, a stock portfolio can be diversified, zero leverage and liquid. Which portfolio allows the investor to control risk more easily?

To quote Temperament's signature, "You can control RISK. But definitely not the outcome of the Return."

From the perspective of ease of managing risk, will the conclusion still valid with the REITS? REITS is easily available to middle-class as well, the difference is on the underlying asset.

IMO, REITS seem safer than stocks

[Greenrookie]

Stock Vs property.
How do you even start to compare the 2?

At this juncture, property prices are near all time highs, so most people would have made some/a lot of money from it.
You can't really short a physical property(can you?) so there are mostly winners. With the onslaught of newly completed supply + interest rate hike, we just may see some losers in the near future. In any case, yields are extremely low for nearly all classes of property, residential/industrial/commercial.

Stocks, locally, we're quite far from the all time highs but most of the blue chips are faring ok. Dont see a lot of meat from here on.
Maybe just a very small handful of firms/stock prices will do well. I am more of a fan of US financials as there are real improvements going on and I feel there is more meat. Cant wait for fed to stop printing money and start raising interest rate. There is nothing more appealing to me now than US financials, stocking up CitiB <$6 BoA <$14

You are comparing them based on the potential for returns while the original post was comparing the two based on the ease of managing risk.

For middle-class Singaporeans who can at most afford to purchase at most 1 property (without avoiding debt), it is not easy to manage risk because the property portfolio is super-concentrated, highly leveraged and illiquid. In contrast, a stock portfolio can be diversified, zero leverage and liquid. Which portfolio allows the investor to control risk more easily?

To quote Temperament's signature, "You can control RISK. But definitely not the outcome of the Return."

From the perspective of ease of managing risk, will the conclusion still valid with the REITS? REITS is easily available to middle-class as well, the difference is on the underlying asset.

IMO, REITS seem safer than stocks

I beg to differ that REITS are safer than stock, at least not in current situation. Companies can choose to reduce gearing, REITS usually will not although they can sell assets/issue rights to rise money.

REITS is exposed to refinacing risks, in this sense, buying a physical property with prudence as least allow you to finish the loan, but REITS simply roll over their debt.

Reits price go up and down like stocks, and can get into a bubble, become overpriced

DPU can go up and down too.

End of the day, all assets class risk is dependable not so much of the product by se, but dependable on the amt. of knowledge one has on the product and the magin of safety at entry point.

[Temperament]

Everything has pros & cons:-
Reits are safer than stock in one sense-they are hard assets which usually have some residual value if liquidation needed. Compare to companies, Reits will (in facts) usually need to top-up by issuing bonds, rights issue or bank loans during an economy downturn. Because Reits are mandated to distribute 90% of their earnings. A good example was, as assets value went down during the 2008/2009 downturn, many Reits needed to top up to adjust within their permitted gearing.
So to buy a stock or a Reit or a pair of shoes, you must worked out your reasons first.
And we all have our own reasons.
Me? i like everything that can make me money.
GG. is right at the end of the day.
Anyone can make money from anything from any market if he knows the product and market.

[specuvestor]

To compare stocks vs properties please use ROA instead of ROE with leverage

Property is different from stocks in a sense you need to live in one. So people don't usually cut losses (excluding the investment properties)and that helps in the LONG TERM in an INFLATIONARY (ask Japan) environment, which gives a feel good effect or positive bias.

Those are the fundamental difference in terms of risk and returns when we try to compare the 2.

[hyom]

From the perspective of ease of managing risk, will the conclusion still valid with the REITS? REITS is easily available to middle-class as well, the difference is on the underlying asset.

IMO, REITS seem safer than stocks

This is true. It is easier to manage risks with REITs than with property. Unfortunately, REITs gave me a lasting bad impression in 2008 financial crisis when they asked for so much money from shareholders that it negated the high dividend yields during the pre-crisis period.

REITs have to pay 90% of their earnings in dividends to shareholders. Several REITs' current ratio is below 1. Their highly geared nature plus the inability to retain earnings means they have to ask for money from shareholders in a credit crisis because they cannot get money from banks. I am not even sure if their high dividend yields are sustainable for income investors like retirees. A more sustainable dividend yield of at least 3% is when a medium-sized company with growing earnings and room to grow pays a modest 20%-30% of earnings in dividends. If one has the foresight to buy and hold onto such a company, in 10 years' time with the compounding effect, the dividend yield can rise to 5%-10% even though the dividend payout rate remains at 20%. The earnings growth of REITs is stunted by the requirement to give out 90% of earnings to shareholders. To grow, REITs borrow. If they borrow too much during a credit boom, shareholders got to bail them out in the eventual credit bust.

It may not be healthy for the economy to see REIT yields doubling from here. When rental yield goes up, the cost of living and cost of running a business goes up. Will this not stunt the growth of the rest which represents more productive businesses, not to mention our own standard of living? This is one reason I would like to see more real companies IPO in Singapore rather than business trusts/REITs profiting from rent-seeking less productive economic activity.

[CityFarmer]

From the perspective of ease of managing risk, will the conclusion still valid with the REITS? REITS is easily available to middle-class as well, the difference is on the underlying asset.

IMO, REITS seem safer than stocks

This is true. It is easier to manage risks with REITs than with property. Unfortunately, REITs gave me a lasting bad impression in 2008 financial crisis when they asked for so much money from shareholders that it negated the high dividend yields during the pre-crisis period.

REITs have to pay 90% of their earnings in dividends to shareholders. Several REITs' current ratio is below 1. Their highly geared nature plus the inability to retain earnings means they have to ask for money from shareholders in a credit crisis because they cannot get money from banks. I am not even sure if their high dividend yields are sustainable for income investors like retirees. A more sustainable dividend yield of at least 3% is when a medium-sized company with growing earnings and room to grow pays a modest 20%-30% of earnings in dividends. If one has the foresight to buy and hold onto such a company, in 10 years' time with the compounding effect, the dividend yield can rise to 5%-10% even though the dividend payout rate remains at 20%. The earnings growth of REITs is stunted by the requirement to give out 90% of earnings to shareholders. To grow, REITs borrow. If they borrow too much during a credit boom, shareholders got to bail them out in the eventual credit bust.

It may not be healthy for the economy to see REIT yields doubling from here. When rental yield goes up, the cost of living and cost of running a business goes up. Will this not stunt the growth of the rest which represents more productive businesses, not to mention our own standard of living? This is one reason I would like to see more real companies IPO in Singapore rather than business trusts/REITs profiting from rent-seeking less productive economic activity.

Well, I partially agree the reasoning on property. I agree the hurdles on a middle-class investor, but is there mean(s) to reduce the risk? I don't have a good answer yet. I knew friends solved the capital (or debt) issue by partnering i.e. tenants in common. Will the same enable diversification i.e. participant on more than one property at difference locations or types?

I agree REIT may not meet retirement needs, which regular income is a must, and wary of pay-back via right.

[hyom]

Well, I partially agree the reasoning on property. I agree the hurdles on a middle-class investor, but is there mean(s) to reduce the risk? I don't have a good answer yet. I knew friends solved the capital (or debt) issue by partnering i.e. tenants in common. Will the same enable diversification i.e. participant on more than one property at difference locations or types?

I agree REIT may not meet retirement needs, which regular income is a must, and wary of pay-back via right.

I guess partnerships is one of the solutions. But we can always say no if not comfortable.

By the way, getting a wife is also a form of partnership. You know, partnerships have their own problems. Disputes with partners are quite common. Divorce is a major cause of poverty among men, thanks to Woman's Charter. Nevertheless, I got married despite the risks (huge cost of correcting mistake, impossible to diversify)