Sunday, June 2, 2013

Stocks versus property. Why I prefer stocks over property.

Singaporeans love the property market. The fact that it took our government seven anti-speculative measures to dampen Singaporeans' love affair with property since 2007 is evidence that it is very hard to break this strong love. In the meantime, the lack of success is not exactly bad news to the government. They have made 1 billion in tax revenues from the property curbs.

There is substantial anecdotal evidence that more Singaporeans made more money from property than stocks. Just ask and look around. Our parents' generation who dared to invest in property have secured their retirement. It is small wonder the next generation will do the same thing since property investments have worked for decades for so many people.

I have peers who took the plunge and invested a second property 5 years ago. I am sure they are doing quite well. Some have urged me to stop hoarding my money and take a plunge into the property market. Another told me I will never become rich because of my steadfast refusal to take the risk to buy a second property. I probably look stupid to these people. However, I think it is fine to look stupid for good reasons which will be explained here. 

In one sentence why I refused to buy an investment property - I cannot control risk with property investments with the same ease as stocks.

Given the very high property prices in Singapore and my own financial resources, I only have enough money to buy 1 property for investment.  Only 1. What can be more concentrated than that? The lack of diversification makes it hard to manage risk. With stocks, I can construct a portfolio of 30 stocks with not a single one taking up more than 5% of my net-worth. I can afford to make several mistakes without facing financial ruin. Can the same be said with a concentrated property portfolio consisting of only 1 property? To make matters worse, this single property has to be bought with leverage. How many Singaporeans can buy a property with cash? When an investor uses leverage, his margin of error is greatly reduced. The mortgage debt is usually quite substantial because it can take 20-30 years to repay with today's high property prices. It is quite common to pay 25% cash with the rest using borrowed money to purchase a property. The investor loses 20% when the property drops 5%. Leverage introduces the risk of margin call. Although banks seldom ask borrowers to top up their mortgage loan when property price drops, they are legally allowed to do so. If the borrower misses the interest payment because he loses his job, the bank may foreclose and force-sell his property in a battered-down market at a lousy price. With stocks, there is no need to use leverage. One can build a diversified portfolio with as little as SGD30000 with cash.

Value investors tend to steer clear of bubbles. I do not shun participation in a bubble if the underlying asset is liquid. The end period of a stock bubble is historically characterized by a parabolic rise of stocks in a short time. Being out of the market at this stage means missing out the opportunity to make lots of money in a short time. Thus, I will join in the crowd despite knowing that it is a stock bubble, although only a manageable portion of the net-worth will be inside the market. (Don't try this if you are a newbie in the stock market, particularly if you have yet to suffer gut-wrenching losses) The reason why I dare to join the bubble is that stocks are liquid. The moment danger is sensed, one can get the hell out in a single trading day. This is one of the advantages of being a retail investor with a small fund to manage. It makes risk management much easier. Properties are illiquid with high transaction costs. Unlike an equity investor, there is no way for a property investor to get the hell out even if he desperately wants to because of property's illiquid nature.

If a hired fund manager shows me a portfolio with a highly leveraged, super-concentrated and illiquid portfolio, I will sack him straightaway so that I can sleep better. How to manage risk with a portfolio like that? Middle-class Singaporeans who took on a 20-year mortgage to buy an investment property are doing just that.

Besides the inability to manage risk, there is another good reason to avoid property investments. I hate debt intensely. The only time I overcame this hate was to buy my first residential HDB Singapore flat so that I can marry the love of my life. While this article frowns on property investment, a HDB flat is highly desirable. One motivation foreigners convert to become a Singapore citizen is to have the privilege to buy our HDB flats. Particularly for Singaporeans who have sacrificed for National Service, don't ever miss your privilege to buy a HDB flat. It is almost a sure-win as it is subsidized by the government. Besides, everyone needs a roof over our heads that provides the stability for us to marry and start a family.

Buying an investment property today usually involves taking on a huge debt that requires at least 20 years to repay. This makes a person a financial slave. If the goal of investment is to be financially free, then does it make sense to take on so much debt for an investment that it risk making one a slave for the next 20 years? It is not just money anymore. It is freedom. With a heavy debt, a person has to tolerate bullies at work. It is easy to slip into mental depression if a person has to drag his feet every day to work in an environment that drives him crazy. Although my present workplace is wonderful and I am working with and for pleasant and smarter people at the moment, there is no guarantee that this can continue. The advantage of investing and saving hard is to accumulate enough "fuck-you" money to have the freedom to show the middle finger and quit when faced with unreasonable behavior at work. Buying a second property at this point will take away all the "fuck-you" money that I have painstakingly accumulated over the years.

For high net-worth individuals with enough money to buy up multiple properties with cash, property is an appropriate component in this investment portfolio. It is easier for the rich to manage risk in their property portfolio. For the majority of middle-class Singaporeans like me, I think they should think twice before committing to a highly leveraged, concentrated and illiquid investment that can potentially make a slave out of them for the next 20 years.

87 comments:

  1. Totally agreed with your views. If I have the spare cash, I would rather invest in liquid assets like stocks, bullions or currencies. At the moment, I just don't see any value in Singapore properties.

    Regards,
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    www.sgwebreviews.blogspot.com

    ReplyDelete
    Replies
    1. With the high leverage and lack of diversity if I were to invest in a property, I face the risk of financial ruin if the market reverses. This is why I avoid properties for the time being.

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  2. Replies
    1. Hi CreateWealth8888,

      Based on anecdotal evidence, I am sure there are more Singaporeans who became rich from property than stocks. Likewise, I also think there are more Singaporeans who became poor from stocks than property. I wrote the article from a risk management perspective. It is easier to manage risk with stocks than with property. As for returns, it is a matter of timing and economic conditions. Sometimes, property beats stocks. Sometimes, stocks beat property.

      For readers, do what you like, what you are comfortable with, what you are good at. But do be mindful of the worst-case scenario. What happens if things go wrong? For stocks, even if things go very wrong, I can still avoid financial ruin. This is why I prefer stocks.

      Delete
  3. There is always a cycle in Property Market as well as any Markets. Right now the Property Market is in full swing and I am sure it will be depressed in the near future.

    For me, Property Market is as good as Stock Market. You just need to be "fearful when other are greedy and greedy when other are fearful". Property Market, like Stock Market, should be taken advantage of when in depressed mode.

    In the Property Market, first rule of thumb is Location, Location and Location. Other rule of thumb about Stock Market I have applied them to the Property Market too.

    The only difference between Property Market and Stock Market is the entry price, just what HYOM has pointed out. The entry price of Property Market is way above those for the Stock Market. Consequently, it is very difficult to diversify in the Property Market. Diversification is very very important in any Market if you want to increase your luck going through the next bubble burst.

    ReplyDelete
  4. An addition to my previous comment that I think might help. About property, the bank would be willing to lend you money at the cheapest interest rate.

    Therefore, first get the property when the property market is down. Secondly, borrow long at lower interest rate then get return with bigger rate in the stock market. Over the long run, you would be better off.

    ReplyDelete
    Replies
    1. Hi VoA,

      Thanks for your comments. You are right that mortgage interest rates are usually the lowest that an average person can borrow in his life. So, if one has to take on leverage, then property is the right asset class. In a beaten-down property market, taking on leverage to invest in property may not be a bad idea.

      Delete
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  6. Hi Hyom,

    I am impressed when you pointed out to CW8888 that "Based on anecdotal evidence, I am sure there are more Singaporeans who became rich from property than stocks. Likewise, I also think there are more Singaporeans who became poor from stocks than property.". This shows that you are able to look at things from different lens. I think you will go on to achieve great things in life.

    Regards,
    Greatsage
    www.sgwebreviews.blogspot.com

    ReplyDelete
  7. It is always good to think of your future. But be sure that when you dream, dream big. A dream that is not only for you but also for your family. Think of what can lead you to success just like real estate business can do for you.

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  8. That's a really good point. Property is the ultimate concentrated investment.

    ReplyDelete
  9. I think you lack the millionaire mindset to build a passive income. Read 'Rich Dad Poor Dad'. Lots of people retired early by buying properties after reading the book.

    I can see that you are a very stingy person from your blog. But if you think education is expensive, try ignorance. Go to some Wealth Seminar to gain some knowledge to build a passive income.

    ReplyDelete
    Replies
    1. Wow, the arrogance and the ignorance of it! Do not make sweeping statements as though "Rich Dad Poor Dad" and millionaire mindset is the Way. It's all about timing. Try building a passive income from inflated assets that are vulnerable to capital losses.

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    2. And it's not nice and wise to pass judgment about people being "stingy" without knowing the person.

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  15. Thanks for sharing! Totally agree! I like the liquidity point regarding stocks.
    With stocks, you can jump in and out, unlike property.
    Stocks also have a tight bid and ask unlike property.

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  22. Sometimes, investiments are like gambling where you can either loose or gain and in any way, one of the above has to happen. Many people share success with stocks while others share the other way round. Personally, what I like is earning enough regardless of what although doing so needs turning a blank ear and eye on many things fir example the Misconceptions about money people believe in

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