What's the better investment, real estate or stocks?

From time to time, the press runs pieces on the merits of investing in real estate versus stocks. As with any topic touching on investments, there are vehement opinions in both directions. The argument will probably never be resolved. The two sides hunker down and hear only their own claims, or focus on timeframes that support their own views. Advocates of property will always have a story about some guy who bought into a neighborhood that became trendy and made a killing, while ignoring the others who lost money on a property fling. Proponents of stocks will rebut with tales of people who made a fortune and ignore the ones who chose companies that collapsed.

There's no point in expanding the debate to cover every stock index and every home on the market. Everyone has his own war stories about investments, no matter in what. Given that there is no clear-cut answer to the question of real estate versus stocks, I'm not going to dwell on it. As there's no consensus about past figures, it would be hopeless to start making predictions about the future.

So I won't take sides. I'd like to say that I hope you all, dear readers, have enough money to invest in both stocks and property, and then everybody will be happy, though that isn't likely. That isn't how life works.

In general one could say that investment in Israeli stocks over the last 10 or 20 years has been terrific. On average, if you bought a diversified portfolio and let it sit there for years, you did well. But the same is true for the real estate sector.

But as the argument rages and analysts vie to analyze figures from the past, one point has been forgotten, and it's a lot more important than whether a given investment avenue generated returns 1% greater than another.

The question is, how many investors actually benefited from long-term investment in stocks and how many benefited from long-term investment in property. (By which I mean people who bought apartments and leased them to others, not people who bought apartments to live in themselves.)

I have no data on the issue. But my personal impression is that I don't think there are many people out there who were directly active in the marketplace, who sat on portfolios for the long term without twitching. I don't mean people who own stocks through long-term savings vehicles such as provident funds or insurance schemes; they don't have any decisions to make there. To sum up my general impression: I know a lot of active investors who lost their pants on stocks, and know very few people who lost their pants in the real estate market.

Investor or trader?

Why is that? One could argue about the merits of stocks versus property, but the fact that stocks have generated handsome returns is unarguable. They have, period. So why have so many people lost money on them, while so few have on real estate?

The answer does not lie in their choice of investment avenue. Over time, both stocks and property have generated handsome returns. The answer lies in human nature.

Simply, when people buy a property for investment purposes, they tend to behave like true long-term investors. When they buy stocks, suddenly they tend to behave like speculators and succumb to spasms of emotion.

Look around you and ask yourselves: Do you know anybody who bought an apartment for a few hundred thousand dollars and leased it out, only to see its value drop by say 20%? I'd bet you do. Now how many of those people sold the asset at a loss and then bought it back when prices recovered? I'd bet that none have.

Now let's ask that same question about stocks. Do you know anybody who bought shares, panicked when the market turned downward and sold at a loss, then bought back the stocks when prices recovered? I'd bet that lots have.

This isn't an Israeli thing. It happens everywhere. Unhappily, people tend to buy shares in upswings and sell in the trough. And that's why so many people lose money even if they've been in the market for a long time.

The bad timing in buying and selling is exacerbated by another factor. People who buy property rather than stocks tend to be more rational. They rely on numbers and facts, not fantasies. Not many would buy an apartment that isn't likely to be rented out for years and may never be rented out. They certainly wouldn't buy a speculative apartment like that after its price had tripled inside a year.

Property buyers do their homework. They will want to know what kind of rental income the apartment can generate and what the return on their investment might be. But when stocks are hot, you'll find plenty of people happy to hop onto the bandwagon of some unknown company that never made a penny in revenues, let alone profit, but which soared based on the mere chance of a speculative capital gain.

Learning from other people's mistakes

Detractors say the two biggest disadvantages of investing in real estate is low liquidity and high transaction costs. This is true. No question about it, selling a portfolio of shares can be done a lot faster than selling a house. And the costs will be less. The disadvantages sound pretty bad.

But when you factor in the intangible parameter that we can call "self-inflicted damage" by investors in stocks, those disadvantages turn out to be pretty minor after all.

The very fact that it's so easy to get in and out of stocks is what makes investors make bad decisions. They feel an urge to react to every development. There are any number of studies showing that the urge to respond does much more harm than good. So the very disadvantage of the real estate market, that you can't react to developments on the spot and it will cost you a packet to react at all, turns into an advantage.

Think how many times investors dumped stocks during a dip because of some transient event that had no impact whatsoever on company valuations in the long run. Take for instance when Ariel Sharon as prime minister was rushed to the hospital, or the onset of the Second Lebanon War. Israeli stocks tumbled, though neither event affected company values in the long run. But I don't know any property owner who scurried to a broker to sell at a discount because the prime minister had a stroke.

The conclusions are clear and well known, in fact. Yet investors seem to pay little heed. If you want to reap the gains that the stock market can generate in the long run, you have to take the long-term view and behave rationally.

You have to learn to treat your portfolio like a property asset. View shares as a certificate that you own a piece of a company. Judge your investment using numeric tools, not fantasies. Be prepared to take losses on paper and act against the trend, meaning, build up your portfolio when the market is falling and sell when it's rising fast. Don't try to spot the lowest point to buy and the highest point to sell. It isn't possible.

Don't indulge in regret when a share you bought drops in price, or vice versa, when a share you sold gains ground. Ignore it. Move on.

The writer is the chief executive of Compass Investments, a member of the Psagot group.