Housing vs Net Net Stocks: Weighing Up The Housing Death Cult
This article was written by Net Net Hunter member Xavier Hill and may or may not reflect the thoughts of anybody else at Net Net Hunter.
The housing industry is ubiquitous - but does that make housing a safer investment than a portfolio of decently selected net net stocks?
The prevalence of real estate investing is palpable. Friends and family own homes, often mentioning how much money their house has risen in price. Home renovation shows litter our TV screens, and adverts from mortgage brokers, banks, and property developers saturate the airwaves.
Add to this all manner of government programs and investing in real estate from afar becomes akin to a cult. More than a mere cult, it’s a death cult both in name and, more importantly, in terms of your financial health.
Housing vs Net Net Investing: In Debt We Trust
The housing market is a highly leveraged asset class. In my state of New South Wales, Australia, the average Mortgage is $AUD 544,000. Considering the average Australian wage is $80,000 pa that is a lot of mortgage debt. Whilst it may not be as severe in other countries, it is clear that the housing market depends on easy access to mortgages to sustain current valuations.
Governments love their citizens taking out mortgages and provide all sorts of incentives to encourage people to get a load and buy a home. But before taking out a mortgage, it is useful to consider the derivation of the word. Mortgage combines too latin words. Mort which means death and gage which means pledge. A mortgage literally means a “death pledge” and when you have a government incentivizing its citizens to take out a death pledge, that I will soon show destroys your financial health, that to me fits the description of a cult.
Of course I am being somewhat facetious but it needs to be remembered that a mortgage can be a massive burden on you, your lifestyle, and, most importantly, on your investment returns. Once again when looking at how to approach the housing vs net net stocks argument, it is informative to look to Warren Buffett.
Warren Buffett on Houses vs Net Nets?
Buffett tells the story of being 25, managing money, and renting a house at 5202 Underwood St Omaha for $175 a month. Despite his investment success, his wife wanted to buy a home. As Buffett recounts, “(I replied) I'd be glad to buy a house, but that's like a carpenter selling his toolkit.' I didn't want to use up my capital.” This is a powerful indication of where Buffett stands on the housing vs net net stocks debate.
And for good reason. Data before the 1920’s is a little fuzzy, but any assessment of the housing vs net net stocks debate needs to look at returns and studies show that over the long term the stock market kills the housing market in terms of returns. In fact one study by Sean Ross at Financial Poise shows that between 1928 and 2012, US housing increased at an inflation adjusted rate of 0.2% vs the Dow Jones Industrial Average at 1.6% over the same period. Net nets, of course, far outpace the returns of the Dow.
An even better study is comparing the data from the National Association of Realtors housing data from 1999 to 2016. Their data shows the average US house price increased in nominal terms by 2.98% annually throughout the 17 year period – remember nominal returns do not consider inflation, all recurring fees, expenses, or one off purchase costs that come with buying a house.
Compare this to the whopping 18.63% nominal returns of a backtested plain-vanilla net-net strategy during the same period. Also remember this backtested strategy is based on buying every net-net stock available each year - including terrible net nets. By using Evan’s Core7 Scorecard your results will definitely outperform this. Just look at how he’s done so far. For perspective over that 17 year period $100 invested in housing would of returned $159 vs a net net strategy return of an astronomical $2,736. This return comes without having to pay for maintenance, manage tenants deal with neighbours etc. It would be higher using Evan’s Core7 Scorecard, as well.
So how come you hear of so many people making fabulous sums of money in real estate? Well quite simply it is thanks to massive amounts of leverage. It is the ability to be issued high levels of leverage to purchase real estate that makes for endless stories of people making money out of housing.
Housing vs Net Net Stocks: Both Tumble
It is important to reflect on this. Buying housing is a leveraged bet on an asset and there is a very real chance you could go into negative equity. If you think the idea is crazy then speak to homeowners in Alberta Canada or Karratha and Moranbah in Australia or Detroit USA. The power of leverage means that if the investment turns sour, the house may cost you far more than just your initial deposit.
Buffett of course assuages leverage. He has seen so many fellow investors come and go due to leverage, as he says…“You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing”. Evan is the same.
In fact I am yet to hear anyone on the Net Net Hunter forum suggest you take on leverage to buy net net stocks because their fabulous returns mean you just don’t need to. By avoiding leverage you can still earn great returns and will definitely sleep far easier at night.
You Can’t Just Sell 1/10th of Your House
You also need to consider the flexibility of owning stocks over a home. By renting you maintain the option to move if you do not like an area, if your life changes and you need a smaller/bigger home, and it’s much easier to move between cities to pursue career opportunities.
While owning a home does provide some intangible benefits, it is absolutely clear that those benefits are frightfully expensive compared to a net-net stock investment strategy. If you can train yourself to handle the volatility, buying undervalued net nets that have been selected using the Core7 principles will provide you with knock out returns compared to the puny returns offered by housing. In my eyes, the housing vs net net socks debate is over.
Although the average person seems to love taking out death pledges, it is a pledge that I have no interest in. As net-net stock investors, we understand that there is a different path, one that has a proven history of outstanding returns. We also understand that if you want to achieve financial success, you must be prepared to do things differently and live with volatility.
These people are rare. Still, intelligent investors do exist in small pockets around the net. Within the Net Net Hunter community you find like minded people who assuage the housing death cult in favour of outstanding long-term returns. While you may be alone amongst your friends, family and peers, with the Net Net Hunter community you are never alone. In fact you have all the support you need to enjoy fantastic long-term returns.
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