Is there a reason why Equity has had higher returns than Real Estate or Gold in the long run? In India, Real Estate and Gold have been the traditional investment assets. This love for the Real Estate & Gold has been so ingrained in everyone’s mind that it’s almost impossible to argue against investing in these. Part of the reason for the preference for these is that it’s possible to see, touch, feel Real Estate and Gold, where as Equities are a little more abtract and hard to understand. I was wondering if there’s as easy to explain reason why Equity should outperform Real Estate and Gold in the long run.
Yes. Gold and real estate are just blobs. Equity is ownership in a business that, hopefully, is producing cashflow, building something, taking inputs like gold & real estate and adding value, etc. “Equity” should have higher returns over the long haul, and I’m sure it does depending on how you measure it. Gold & real estate should only increase in value with the trickle(?) of inflation.
virginCFAhooker Wrote: ------------------------------------------------------- > Yes. Gold and real estate are just blobs. > Equity is ownership in a business that, hopefully, > is producing cashflow, building something, taking > inputs like gold & real estate and adding value, > etc. > > “Equity” should have higher returns over the long > haul, and I’m sure it does depending on how you > measure it. Gold & real estate should only > increase in value with the trickle(?) of > inflation. Thats not really true. Real Estate works in boom/bust cycles, like equities… There are definitely opportunities for super-normal returns (over the short to medium term), if you can call cycles correctly. Over the long haul, while the returns offered by may not be as attractive as equities, direct real estate (i.e. not through REITs) offers good diversification. (REIT pricing is impacted by equity markets…Current US REIT pricing is a case in point. A lot of REITs are trading way below the value of the real estate they hold).
I do think gold is just a blob that produces only its lease rate which is something like the convenience yield of owning something of which there are tons and tons easily available. But for an easy if not quite true explanation how about CAPM? CAPM says thats the best rist adjusted return comes from holding the market portfolio which is the portfolio containing all the investable assets in the world in proportion to their value (or something like that). That means that the broader your portfolio, the better it should perform in the long run. An investment in the S&P contains a significant component which is already real estate, including all the land owned by corporate America (lots) as well as more direct real estate investments like all the REITs in the S&P 500 (which I am too lazy to look up). There is some gold component to the S&P 500 as well including some gold mining stocks (too lazy again) and whatever investments corporate America has in gold.
Well, gold doesn’t produce cash flows (unless you’re investing in gold producing companies), so its value really just depends on supply and demand at the moment. Equities, on the other hand, control shares of profit in industries that have management strategizing about how to deliver a good and service at maximal profitability. Therefore you have supply and demand for the product, plus the ability of a team of professionals to engineer a process of delivering it efficiently. Technologies, knowledge, and experience ought to be able to create additional value by improving that process over time, giving a return that goes over and above any created by additional demand. There is also additional risk in equities, since supply and demand are somewhat unpredictable, and on top of it, we don’t know if the management decisions are going to be good ones or bad ones, so there is going to be a higher risk premium that successful companies are going to have to be able to return to compensate for this risk. So, commodities tend to do well when there is massive increase in demand, or during a stagflationary period, when growth is low (hitting stocks), and inflation is high (hitting bonds). I’m not all that familiar with how real estate strategy works, but I think the fact that real estate generates cash flows makes it a distinct asset class from commodities. The value of the real property tends to keep track with inflation relatively well, I think, but the cash flows are sensitive to economic conditions and the ability of renters to pay.
JoeyDVivre Wrote: ------------------------------------------------------- > An investment > in the S&P contains a significant component which > is already real estate, including all the land > owned by corporate America (lots) Would take some aggressive accounting to have that show up as a component of return?
CAPM justifies holding a Market portfolio as it provides the best risk-adjusted returns. But, what’s the case of Equity Vs Real Estate Vs Gold? The supply of Real Estate is potentially limited. As the demand for real estate goes up and supply is limited, the prices should continue to go up indefinitely (atleast as long as the population/demand keep going up). Considering the current boom in East & South Asia, real estate would be in great demand in the cities in the region. Real Estate prices in some of the fast growing cities in Asia such as Bangalore have gone up multiple times over the past few years. Gold prices have doubled over the past few years, whereas equities in developed markets haven’t kept pace. Equities in Emerging markets have beaten gold by a large margin. But, that’s the empirical evidence. Is there a reason to believe the equities would continue to do better that real estate and gold? I realize that Equities are the best long term investment based on trends of over a century; but will this hold true for all ages and conditions. Is there a ‘silver bullet’ explanation to why Equities would outpace Real Estate & Gold (commodities)?
How will the aging of the population and the baby boomers heading toward retirement affect the equity market? The current generation has negative savings and have much more debt than any other generation? In other words, they don’t have as much to invest in the market. It will have to have a negative impact on the stock market, no?
DarienHacker Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > An investment > > in the S&P contains a significant component > which > > is already real estate, including all the land > > owned by corporate America (lots) > > Would take some aggressive accounting to have that > show up as a component of return? It’s probably not an accounting issue but of course the problem is that equities represent a residual interest and land is the part that is not so residual. And there are the usual issues of real estate not being marked to market and not very volatile for whatever reason.
Demand for real estate is likely to intensify for demographic reasons, but RE is often highly leveraged, and therefore the fluctuations in the terms of credit are likely to affect the near term performance of RE much more than the demographics. Just something to think about. Obviously the degree of leverage can Change from country to country.