Real Estate vs. Mutual Funds

[21pro]

and raising the rents can lead to increased vacancies...

 

[Dave in Phoenix]

I am just pissing myself laughing: XARIR and his magical 46 year Mutual Fund yielding 10% per year compounding with special tax advantages. Wow, what a whopper. Who sells this amazing fund; the pixies or the elves?

Hmmm.

In my real business life I come from a CPA firm background (taxes specialty for decades) and for 20 years A CFP, Registered Investment Advisor in the U.S., been a Real Estate Broker, and am interested in facts not hype). My business website is www.davecfp.com.

A couple points:

Over the long-term you could toss your dart at a dart board in the U.S. market (Candian quite similar but my expertise is the U.S.) and get a 10% return, or just invest in a low cost index fund like Vanguard.

Smaller caps historically have outperformed the large caps of the S&P500.

Real Estate can also be a good investment but it is not liquid and you have selling and buying expenses you can't ignore. Rental Real Estate can be a time consuming hassle and risk of not having it rented. Your home is not really an investment since you have to live somewhere. Unless you downside you don't realize the increasing value unless you refinance to pull funds out and have higher mortgage.

It is not a mutual fund vs real estate issue. Both have a place in diversified investment portfolios and I especially like some private REITS from sponsors with long histories of never an investor loss including the crash of the 80s in the U.S. On the other hand I am quoted in Barrons long ago about my attacks on the deceptions of many real estate syndications of the 80s.

In mutual funds for 20 years I have reserached and recommended funds based in part on Risk/Reward analysis. Look at stable management with long record of "excess return" (in Modern portfolio theory - "Alpha") for the risk taken (Beta).

I have "benchmarks" in a wide range of categories that in my view have the best opportunity.

Our goal which has been consistently achieved is to double the S&P500 index return in client portfolios.

Also downside risk is far more important than big good market returns. If you lose 20% you then need a 25% gain just to break even. This is why for retirement planning you can't just assume a say 4% safe withdrawl rate because if you are hit my large market losses your "safe" 4% annual withdrawl assumption could leave you wiped out a lot sooner than expected even with a 10% "average" market return if the timing of the losses and gains is not in your favor.

I am just sharing ideas and experinces not any sales pitch since I can not work with Canadians only U.S. Citizens.

A lot in this thread is half truths and an either RE or mutual fund mentality, when both have a place in various forms in a diversified investment portfolio, depending on individual investment objectives, risk tolerance, liquidity needs and personal bias.

The response should not be construed in any direct or indirect manner as a solicitation for advisory business or securities business and is posted in Canada for Canadians as informational only, where I have no licenses to practice. This is therefore not sales literature or correspondence under NASD regulations and therefore does not require usual disclosures required for sales literature or correspondence.

 

[Dave in Phoenix]

I can easily agree with ESCO that an individual working within the securites industry getting inside info and buying and selling from his own account can make serious money.

And probably go to jail. Isn't inside information illegal to trade on in Canada like it is in the U.S. ??

If your talking about brokerage firm reserach to hype the firms they are working for or need to blow out of their own inventory and is the sales pitch on the "squawk box" they here first thing in the morning on today's hot sales idea.... that is not inside info but brokerage hype. I assume in Canada just like in the U.S.

 

[Dave in Phoenix]

However, you can typically leverage a real estate investment anywhere from 75% to 95% thus dramatically increasingly your return on equity.

Tell this to real estate investors in the U.S. in the 1980s who had huge losses.

Leverage only works if
1) Your RE keeps going up in value.

2) If you have positive leverage i.e. the cap rate from the property is in excess of the debt service.

Today you can benefit from positive leverage especially the multi-million dollar big boys who get the lowest fixed interest rates of today, far less than what an individual can get for an interest rare.

 

[Esco!]

Isn't inside information illegal to trade on in Canada like it is in the U.S. ??

Yes it is and just like in your country it happens everyday, day in day out.

 

[Dave in Phoenix]

Yes it is and just like in your country it happens everyday, day in day out.

Actually true insider trading I think is rare. You go to jail i.e. Martha Sturart who simply acted innocently not knowing it was inside info from her broker.

I think the sales hype situation is much more common.

Every investor client in the U.S. has to complete under NASD regs an informational statement which specifically asks if you are a 10% or more shareholder or officer director in any public company. This relates to insider trading rules. If a broker-dealer was caught allowing insider trading or a customer did these are very serious violations in the U.S.

I realize you may thinks everyone is a crook, but true insider information is taken very seriously in the U.S.

As an NASD Registered Principle who operaties an OSJ (office of supervisory jurisdiction) I assure you I would take any indications of insider trading extremely seriously. A rep that allowed that would be immediately terminated and NASD actions would probably prevent him from ever being security licensed again in addition to criminal investigations that could result in jail time for SEC insider criminal violations.

I don't think its as common as you think at least in the U.S.

 

[mmouse]

The returns on real estate depend heavily on the investors knowledge - the kind of social networking and local knowledge you cannot read on the internet or publications, unlike mutual funds. Person A who just stepped off the boat in Toronto has a much better chance of a better return from mutual funds, unlike person B who has lived here all their life and has a good network of friends actively involved in RE investing.

For example, I am sure strip malls could produce a fine return, probably much better than many mutual funds. However personally I have how to go about buying a strip mall and I couldn't afford a whole one anyway. On the other hand I can read the Globe & Mail every day, choose a fund, call the bank and buy it - easy.

 

[goodtime]

Actually true insider trading I think is rare. You go to jail i.e. Martha Sturart who simply acted innocently not knowing it was inside info from her broker.

I think the sales hype situation is much more common.

True, they use dancers instead.

Insider trade happens, whether U.S. or Canada, Nortel & ATI comes to mind. Hopefully it's rare instead of the norm.

Good points Dave. I done both. Both are good investments depend on ones' tolerance for risk, market cycle, & your time commitement.

 

[Dave in Phoenix]

Absolutely no one I have ever met has proved to me that they have averaged 25% return on equities over 10 years or even 6 years, not one not ever has been able to back up the boast with actual hard verifiable evidence.

On the other hand I can introduce you to a huge number of people who's 6-Year return on their Mutual Fund portfolio is 3% or 5% which is just fine but ain't going to make anyone rich.

I agree on both points.

And no investment professional should dream of trying to project any particular return since they are just too variable and 20%+ is totally off the wall. But the 10% over last 50 years is a correct historical statement but results vary greatly in different time periods. But past performance can never assure future results.

The last 3-6 year data returns can dramatically change depending on when your ending date is. In the U.S. market we had huge losses from 2000 until October 2002. Fortunately our approach resulted in far less loss than the market averages. So what time periods in or out of that cycle make a huge difference. In Canada you of course have had a huge run up laterly in the energy sector so over short time periods you have have large gains.

But what if you have a downturn like a few years ago in the U.S. ?

Suppose you invested $100,000 in the S&P500 Index* on March 24th 2000 just before the most recent bear market decline. As of October 9th 2002, the bottom of the market decline the S&P500 Index had gone down about 49%. The value of your S&P500 investment would be only about $51,000. To fully recover from your 49% loss, you'd need to gain 96.08% versus the 49% you were down. Let's look at the numbers.

$51,000 x .9608 = $49,000 + $51,000 = $100,000 beak even.
The “average” return of a 49% loss followed by a 96% gain is 23.5%.
But your actual return is 0%

While the S&P500 “only” lost 49% the Nasdaq 100 lost 83%!

 

[21pro]

Dave, I agree with alot of what you are saying and perhaps i can't articulate some things as well as you... and for others, that's ok to have your own opinion... i have averaged 25% per year for the last 10 years (without ever using leverage)... i am not an investment professional and i think that gives me certain advantages when making decisions...(i don't think i'd make such risky investments if i had the conscience of looking after other people's money... i'd rather just disclose what i do, and if someone wanted to copy my portfolio, then great!)...lol

i've learned that:
1.the main key is to practice patience...
2.it is much harder for a 30,60 or 90 dollar stock to move 20% or more so i focus on stocks priced between 2 and 5 dollars...(i sometimes look at beta, or volatility to make sure it's a stock that can move)
3.i only consider stocks that have been publicly traded with a history of 10 years or greater
4.i look for stocks that have traded at much higher levels in the past and have the potential to trade at those levels again.
5.i swing for the fences on troubled stocks... meaning, i'll hold a portfolio of 25 stocks in different sectors that all have a chance at either going bust or doing a ten-bagger or better... only 2% of these stocks ever really go into receivership, so the chances of me loosing my money 100% are close to nil... and it's never happened- i've lost 100% of a badly picked stock before, but i've also had a 40% overall return that year from my other stocks...
6.i follow a list of CEO's and other managers that are really good at turnarounds... look for them and you'll see where you should put your money... one example is Jos Wintermans and James Shannon... they have helped me with a few companies in the past.. a vitamin company, Sodisco Howden, SkyJack... so when they move, i follow them... they are with Cygnal technologies right now, which i haven't purchased yet as it hasn't hit its bottom yet... but, when it does i'll buy and probably set a selling target at about 5 bucks- the key is i'll wait 10 years for it to occur.
7.i use stock screeners once a month to make a list of 100 stocks across the tsx and NYSE to watch... but, i only make about 3-6 trades per year- this raises my return as my commissions are very low.
8.each stock has its own story to tell. sometimes p/e ratios are important, sometimes debt ratios are more important, i predict what future changes may be and how they will impact the company i am considering... consider after 9.11 i purchased airline stocks... but i waited until 2002 to do so... my logic was that 'given demographics and a global economy, in 5 or 6 years more people will be flying then ever'... sure you can say "hindsight... he's making this shit up!" but, there is more to it, i wanted to pick an airline that wouldn't go bankrupt from as it was and still is a very risky field to invest in... i had another trend in mind and that was the falling of the U.S. dollar... i though i'd look at foreign stocks on the NYSE and see if any were airlines...(buying a foreign company trading on a domestic stock exchange would give you a positive return should your domestic dollar fall as compared to the foreign dollar)...so i looked and like a north star on a clear cold night KLM airlines jumped right out at me. i did my research and found it fit my criteria perfectly... i bought KLM for about 11bucks...it was a deal as it's book value showed it worth $41/share and had positive cash flow of $960million, but it wasn't a perfect picture... KLM had a heavy debtload and debt/equity ratio of 2 to 1 and big losses were expected for 2002 as passenger traffic was falling drastically... so i wasn't ready to buy, but on further investigation, i found out the Dutch government was going to inject $24.7million into the company... some good news. and 9/11 as horrible as it was, would actually be good for the airline industry going forward as it will force airlines to streamline operations more efficiently and new security measures will make flying moreso safe than in the past. so i bought. since then air france merged with klm giving me an unexpected portfolio boost... hey, someone else out their noticed the value! i still own 1000 shares of air france at around $22-$23/share, my $$$ up 166% since i bought KLM in 2002. (i just gave this example as to how i go about picking stocks- it might sound crazy to you, but this method has worked for me... it takes little time and i can do it all on my own)
etc...

none of this is a secret... i've come up with most of these ideas from reading investment newsletters and books by david dreman, etc... as evident by how much time i waste on terb, you can see i have alot of time to spare for reading...

i think investing for these slightly better returns is alot like many other things in life such as dieting or penis enlargement for that matter- if you just rely on pills you might get a bit bigger or harder..., but, if you employ an exercise regime for your unit and stay disciplined for 10+ years then going from looking like a cigarette in front of a beachball to some girth and length that resembles the size of 2 coke cans stacked on top of eachother is 100% possible... DISCIPLINE is all it takes.

oh, and i have to admit... i absolutely suck at picking stocks on the short term... i tried those online stock picking contests and i do brutal... probably because i pick troubled stocks where it is hard to know exactly when the turnaround will occur... and my worst ever year was 2000 when everyone else was making money, i lost over 17%...

 

[goodtime]

Reasonable approach, sounds a bit like Buffett's. You must admit, stocks requires some luck, timing and opportunity than RE.

I love KLM. But it could've gone the other way. Good call with Dutch gov bail-out, like B.A., the result would devastate their economy. The Air France/KLM deal almost didn't happen with the EU & NYSE anit-trust law, they had top lawyers. A.F. part of Wings with Northwest, while KLM, Skyteam with Delta, overlapping routes & competition.

 

[Dave in Phoenix]

21pro

Very good - when will your book come out in print

Actually what you do is very similar to two mutual funds we recommend basically similar procedure but with large staff to do research, meet heads of potential companies, look at business plan, evaluate results of past business plans of a company etc. Things the individual investor can't do.

Sometimes they can even consult with companies and make suggestions or help in proxy fights if they become a major (5% or more) shareholder via their fund.

I also include these more aggressive options as you suggest as part of a diversifed portolio but again as you suggested I could never recommend just these kind of investments. Although our two benchmarks that do this also held up very well in the 2000-2002 U.S. market decline.

I often say when looking at the most speculative usually smaller companies, spinoffs or restructure situations, as long as you spread your risk to the extent comfortable you can ONLY lose 100% on losers. But as your experience shows the unlimited upside of a few good winners can more than make up for a few losses even of 100% because winners can gain more than 100% and often do.

One of our benchmarks for example as of 4/18/06 per Morningstar is up 18.61% year-to-date and a 3-year trailing ave annual return of 37.77%/year.

Another which does the same with many foreign smaller companies is up 28.03% year-to-date and a 3 year average annual return of 58.05%/year.

Neither of the above examples have any high industry sector concentrations but look for mostly small/mid caps regardless of industry/sector with those big gain potentials as you so well shared your method to try and find.

But as you so correctly pointed out and again from my standpoint I could never recommend just these two funds for a clients portfolio and personally while more aggressive than what I'd be with clients I am more widely diversified since these funds could have large losses if you luck or business conditions go against you.

I think you proved how these kinds of returns are possible but require more work and a bit of luck that most individual investors are not able to do or would have the risk tolerance to do.

But like you their are fund managers that investors can utilize that have long term records of these sort of returns. Yet I would never tell a client to expect anything like these returns long-term.

 

[Guy7]

I Tried Both!

In your opinion, what is a better investment - buying property, i.e. land, a house, or channeling your money into mutual funds?? I.e. contributing to an RRSP. (assume you can only pick one, not both). Discuss.

both have benifits, i tried and i am presently happy with Mutual Funds, then my luxurious Pent-House Condo, these days renters are a real pain in your ass.
so no hassele mutual funds are growing on its own, but i bought them through Edward Jones, & have bought a mix of 11 mutual shares, not just putting all the eggs in one basket.

 

[21pro]

passionate about their interest, objective and SHREWD.

...this probably is their formula for success.

generally- hard work, passion, obsession can all be traits that could lead to wealth beyond anyone's needs... this can happen in almost any field...

from a recent self directed investor conference, i've had the pleasures of meeting:
-a doctor in Calgary makes over $890,000/yr
-a real estate salesperson that grosses commissions of over $540,000/year.
-a commercial slum landlord that has positive cash flow of $43,000/month.
-an Ebayer that sells garage sale items and has amassed a wealth of $3.1 million in 7 years....

one thing in common with all of these people were that they work in fields where 99% of the workforce make less than $80,000/year!

what killed me was that the doctor drove a 1991 Honda CRX... not customized... just a stock rust bucket of a car. his explaination was, 'i don't need anything bigger than this, it's cheap and reliable'..- he's owned the car since he bought it used in 1993... again he reasoned, 'bought it when it lossed most of it's depreciation, but still looked new... i guess it grew on me' is what i remember him saying....

 

[Ares]

no commissions

Hey i found a guy in york region who offers all funds on a no commission basis (front or back) and yes I can get Industrial Alliance and Templeton and stuff. He works off the trailers, though only deals with larger accounts, I have averaged 22% for the last 30 months though, as was mentioned, he tells me not to expect that every year, lol. He feels 9-12% on average is doable

 

[goodtime]

And he can freely move you $$$ at will... CFP that gives you expected return? hm...

 

[Ares]

i got no complaints

been with him for almost 3 years, so good so far