Property vs. Shares (again) - but do shares work in reality?

(This is a bit tongue-in-cheek...)

Seems that the property vs. share debate soon results in Buffett being wheeled out as the ultimate shiny weapon from the share side of things to deliver a fatal blow. He's no doubt an extreme (unrealistic?) example and not sure how relevant to average Joes, such as me

I was mucking around on internet and found some extreme examples from the property side of things... some stats below...

Imagine if the Queen of England got a line of credit against her property hit the sharemarket during the crash - awesome - outa the way Buffett

(Hey, just joking...)

Regards, Ilori


" - Queen Elizabeth II the largest landowner on Earth -

Queen Elizabeth II, head of state of the United Kingdom and of 31 other states and territories, is the legal owner of about 6,600 million acres of land, one sixth of the earth’s non ocean surface.

She is the only person on earth who owns whole countries, and who owns countries that are not her own domestic territory. This land ownership is separate from her role as head of state and is different from other monarchies where no such claim is made – Norway, Belgium, Denmark etc.

The value of her land holding. £17,600,000,000,000 (approx).

This makes her the richest individual on earth. However, there is no way easily to value her real estate. There is no current market in the land of entire countries. At a rough estimate of $5,000 an acre, and based on the sale of Alaska to the USA by the Tsar, and of Louisiana to the USA by France, the Queen’s land holding is worth a notional $33,000,000,000,000 (Thirty three trillion dollars or about £17,600,000,000,000). Her holding is based on the laws of the countries she owns and her land title is valid in all the countries she owns. Her main holdings are Canada, the 2nd largest country on earth, with 2,467 million acres, Australia, the 7th largest country on earth with 1,900 million acres, the Papua New Guinea with114 million acres, New Zealand with 66 million acres and the UK with 60 million acres.

She is the world’s largest landowner by a significant margin. The next largest landowner is the Russian state, with an overall ownership of 4,219 million acres, and a direct ownership comparable with the Queen’s land holding of 2,447 million acres. The 3rd largest landowner is the Chinese state, which claims all of Chinese land, about 2,365 million acres. The 4th largest landowner on earth is the Federal Government of the United States, which owns about one third of the land of the USA, 760 million acres. The fifth largest landowner on earth is the King of Saudi Arabia with 553 million acres

Largest five personal landowners on Earth

Queen Elizabeth II.........................6,000 million acres
King Abdullah of Saudi Arabia...........553 million acres
King Bhumibol of Thailand.................126 million acres
King Mohammed IV of Morocco...........113 million acres
Sultan Quaboos of Oman....................76 million acres
"

 

Hi Ilori,

The important thing is that you invest in growth assets (whether shares or property) for the long term.

PS The Queen doesn't own my unit and I'm sure some she doesn't own some Canadian's units

Cheers,

Dan

 

so your telling me I should pick 1 company on the ASX and invest everything into it?

funny that, I don't think berkshire owns 1 stock either...

Most wealthy businessmen don't have the time to research the market, so they will diversfy into a selection of quality investments and focus on their own profession making money.

 

crc,

Where on earth did you get that from my post?

Mark

 

What don't I know this time?

 

Look at the BRW Top 200 Rich List. 51 members on the list made their fortune from property. 29 people on the list made their money from 'investment'.

All it took was to point out the wealthiest man in the world to prove this statement absolutely incorrect.

Mark

 

Thanks Dan,

I reckon you're absolutely right - it does seem capital growth strategies produce greater overall wealth than yield/cashflow strategies.

Cash seems to be the killer - both for keeping the capital growth investments going (ie. loans) and for living (ie. getting some real benefit out of it all).

That's the part where I start to struggle, and difficult to know best thing - guess we can try things like...

1. Earning more money via job - need to be careful we're not just working ourselves into ground however. (Most jobs are an exchange of time for money, therefore limited.)

2. Use a cashflow investment to support the capital growth investment - this is where we look at things like shares - a) hold them for dividend stream; b) trade (cashflow from realised capital gain). To me a general issue with cashflow strategies is that the casflow is quite small - if could get say 20% cashflow consistently it would make a big difference.

3. Living off equity - don't know if this works or not - some things create sense of unease - market cycles (non-linear growth); compounding interest on interest; property getting older & maintenance; whether banks will actually keep lending.

Probably other things or variations on the ideas above.

Would be like the key to the vault to be able to find ideal solution

Regards,
Ilori

 

Hi Ilori,

The thing is to find a way to squeeze income from the capital. You can do such thngs as invest in cash frinedly assets (as you have stated), pay down debt (can take a while, depending on the size of your portfolio), sell everything and invest your capital in ING or something like that and live off the interest (not one that I would suggest to anyone, though).

Mark

 

Thats what I was just going to say.. Warren Buffett made his money from investing, but I say most of those on the BRW made their money from successful business's and investing the proceeds.

Warren Buffet also didn't make his money from conventional investing.. he bought business's, and took a active interest in improving them.

 

One man you point to? Warren buffet isn't a conventional investor. His business is investing. He buys companies, improves them.. certainly what he did is beyond most peoples scope.

Common sence will tell you putting all your eggs in one basket is not the best thing to do. If one thing doesn't work out, you have other aspects which will out weigh.

Warren Buffet also made his money over the long term. Investing on a regular basis, and letting compounding do its trick. He also was able to get above average results.

Again, have a look at that list, and determine if they made their money from investing, or property business's. Two different things..

 

Mark, you can educate yourself here on how some of the BRW rich list made it there:

http://www.brw.com.au/pdf/08rich200profiles.pdf

you will note they all are running successful business. You will see the 'property' people listed all ran development business's.. not from pure investing..

 

Thanks Mark,

Good points - paying down debt is one I forgot to mention.

'Squeezing' income from capital is a great way to put it - you're right, bit here, bit there makes a difference. I was doing just that over the last few years and it's amazing what can be squeezed out of things - bit more rent, bit lower interest, bit lower management fees - cheaper parking, cheaper internet access, not buying newspapers unless have time to read, using the right ATM so don't get extra fee... dollar here, dollar there over a week makes a big difference. Thanks for reminding.

Sometimes the sell down everything and invest in ING (or similar) would be appealing. Only thing is it's a big decision as effectively opting out of future capital growth and replacing it with income stream with no capital growth.

Regards,
Ilori

 

Just on the shares vs. property question again and whether shares really work as well as they should.

Sim and others made the valid point that property might simply receive more press because it's more interesting to write about. Will keep that in mind.

Another thing came to mind however. Over a period of time I attended lots of seminars, as most do I suppose, trying to find the magic formula. Various seminars (internet marketing, franchising, network marketing etc. etc.) but most were based on property or shares - the basic divide.

Now this is not factual by any means, just an anecdotal impression, but it seemed to me that a number of the property based ones could show real wealth. It was easy to see that a presenter had a certain number of properties (10, 20, 80, hundreds, whatever) and there was serious wealth there. Even if the person had a lot of loans, they could simply hold on for another property cycle and let the capital gains increase their equity - and to me, it was very easy to see that these people either were, or would be, very well off.

Of the share seminars I attended, there was only one that stood out. All the rest, mostly with a share trading focus, left me with real doubts. They could show a chart and demonstrate how they did it, even backtest and show simulations, and it seemed so easy to accept - almost factual. However, things didn't make sense.

A share seminar I went to recently was fairly representative... they talked about the returns and had a list of what people had achieved. Some of them were very impressive, equating to several hundred percent per annum. Even if we settle on 100% pa (modest by their standards) - the obvious question to me is around compounding and why aren't these guys all mega rich?

If they start with any decent capital and compound it at 100% pa, it would not take long before they are dealing in millions of dollars. The mathematics don't lie - but, these guys clearly weren't that rich - they were average blokes working evenings trying to make a living.

In fact the main presenter at this particular seminar was at a point where he was 'supporting' himself. What? Here's a guy who talks about massive returns and he is 'supporting' himself?

I put a proposal to them - said that if I could achieve an agreed return (less than 100%) I would pay them double their normal fee, however if I didn't achieve the agreed return, they had to reimburse the fee. I additionally agreed to be totally objective and robot-like in applying their rules, and if I deviated from their system, the bet was off and they kept their money. They wouldn't take me up on it, which I found interesting.

I wasn't trying to be difficult (that's not my nature) - but I went over and over the concept with the presenter - saying that they had the simulation that 'showed' it worked, they had a rate of return they targeted... OK, now, let's compound it a bit... and you guys should all be very wealthy. Not sure if he really understood - but to me there was some breakdown. Something wasn't working - the rock solid theory wasn't translating to dollars in the bank.

Wonder if anyone else has had a similar experience?

Maybe I just move in the wrong circles... but still wonder whether shares really work as well as they are supposed to?

(I don't think simply pointing to Buffett is proof that shares work for the average person, anymore than pointing to the Queen of England is proof that property works. No doubt they both have mind boggling wealth - but we're unlikely to emulate either of them for many reasons.)

PS - I'm not anti-shares... I have shares and hope they do work in reality

Cheers,
Ilori

 

I think you are scratching the surface of what I call the wage/income paradigm vs capital paradigm.
The crowd always focuses on wages/income. An example is some peoples obsession with tax deductability.
Wealth is created - note the word created - by capital accumulation.
From here this simple goal gets broken down. With me - capital appreciation & debt reduction ie net worth.
And from there - shares or property? What ever works for you.
I belive that property has been a better wealth or capital vehicle because its so hard to unload. Shares can be sold with a phone call, property takes more effort. So by natural humane lazyness, we accumulate wealth through our houses because we keep them for a longer time frame. And if you think about the PPOR, any wealth accumulation is normally rolled over into a 'new' PPOR. Its not often sold & spent on depreciating items.
It is capital accumulation by default.

 

ilori, I personally don't think true wealth can come from'trading' shares. Only because most people would have emotion get in the way of building up to this level. Rivkin once said "I have never met a rich chartist." Plus I don't think there are many trading systems which actually work. Sure they look good on backtesting, but in reality the future can hold a different environment hence get different results. Trading also involves luck and certainly lots of skill. If you have either of these you may do well. But in reality most people loose money on trading..

If you apply the same principle from buy accumulate hold property to shares, then you also can become wealthy.

If you want to become mega wealthy, then as mark pointed out in his illustrations, you will need to take a active approach on investing and develop property or run a successful business.

The key to wealth in Shares or property is to buy and hold and accumulate over the long term, and then compounding will do its magic. Sure if you buy a dog property or stock, then sell and re-allocate to a more promising stock or property.

 

You have made a excellent point. People SELL shares at whim.. this is the problem, if you took the SAME approach to shares as property, then both should get simular results. I think both have their place in a balanced portfolio.

 

Thanks Ramada,

That's what I was exploring with this discussion - whether, in general, the theory of wealth from shares is achieved in reality? When we see a model of wealth accumulation using shares - they don't factor in how easy it is to sell; natural human lazyness and all sorts of other things - essentially human nature and life.

It even feels somewhat nonsensical and taboo to question if shares really work - there is commonly accepted 'proof' everywhere. However, I don't bump into normal people who are wealthy from shares - but I do bump into normal people who are wealthy from property. Obvious question is why?

Thanks, Ilori

 

Hi Ilori,

I might disagree with you here and I'll tell you why. Let's take Joe Blow as an example. Joe has worked hard over a twenty year period and accumulated a significant amount of assets - about $1 million, not including his home, all in property and shares. Now, classic case - he's asset rich, cash poor. He gets money from dividends and rent, but it's not enough to cover his lifestyle.

One of the options he has is to sell down and put the money in ING. The problem with this however, is a pesky little thing called inflation. The longer his money is in ING, the more the spending power of that money falls. So every year, his income from ING 'shrinks' in real terms.

Not only that, but he has given up the capital appreciation on his property and shares as well! So it's a double whammy. If you need somewhere to park your money short term or you're saving for a deposit or whatever, bank accounts are a good, safe, reliable place to put that money. But as a stand alone long term strategy, I don't believe fixed interest products are a valid option.

Mark

 

Hi Ilori,

I'm not a 'property man' or a 'shares man'. I've always been about both. Who says you can't have your cake and eat it too? I rely on both as a vehicle for creating wealth AND income and the way I have myself set up is that it is all a nice self funding wheel that just continues to grow.

Mark