Tuesday, 23 October 2012

Why is property normally viewed as a safer investment?

Stocks and properties are, suffice to say, the 2 most common investment vehicles that are usually adopted by the general public.

Properties can be residential houses, shophouses, commercial properties etc. While stocks are usually common shares and preference shares.

Property investment seems to be favoured by wealthier investors who can afford the large capital outlay upfront. Leverage also helps to increase the purchasing power to many times of net worth, so long as he has the money to settle the downpayment and service the monthly mortgage payment later.

On the other hands, stock investment is favoured by many more small time investors, due to their low initial capital required (for example, $3,000 can buy you 1 lot of Singtel). It is also more readily available to layman, due to proliferation of brokerages, online trading accounts, and mobile trading apps.

I will not talk much about the merits and drawbacks of both investment types as there are no short of articles debating which is more superior over another. What makes stock/property a better investment tool has various criteria that are unique to every individual in different circumstances, such that there is no point arguing.

My question is, why is stock investment viewed as a much riskier tool, compared to property investment? Why is shares investment more frequently associated with gambling/speculation compared to property? Why is someone dabbling in shares trading being frowned upon, while someone who flips property for quick profit labelled as true 'investor'?

In my view, it is due to the fact that live stock prices are extremely easy to obtain through various sources, refreshed every second; while this is not the case for property.

Think about it. Both asset classes have no difference fundamentally. Every stock quote is tied to an income generating company that is generating earnings. Property, due to the advancement of economy and a growing population, will always have its value that can earn it's owner income. However, there is no avenue for property owner to check and get an 'updated' price of its property every single minute. There isn't a screen, a software that display the property's prices in blinking red/green, shouting at him 'its rising!' or 'oh no! its falling!!'.

While all these, are happening in the arena of stock investment.

It gives the impression that the price of a stock always fluctuates! There is absolutely no pattern, or methods to at least gauge roughly the true price of a stock. It is akin to trying one's luck in a classier form of gambling, betting that you are able to sell your stock to the buyer hours (or minutes) later at a higher price. It is luck! It is punting! It is risky!

But, does the price of a stock equate to its value? Is a company's earning capacity changing by the minutes? Is the price quoted and shown on screen a true reflection of the value of your stock investment?

Ultimately, one must differentiate clearly between price and value. Price is what you pay, value is what you get. And I figure that at least 90% of the stock investment population are not able to tell the value from the price. That is why majority of these investors lose money.

I am making steady progress towards becoming one that knows what is value and what is price. This is the single most concept that one must grasp before he can expect fruitful investment results.

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