I often write answers on Quora, where I am the most viewed writer for investing, wealth and personal finance, with over 223 million views in the last few years.
On this article, I will use my answers to reader questions on Quora to answer the following three questions:
- Which investments seemed great decades ago but are now worthless or doing extremely badly at least? What can we learn from this? Why are technology and collectables high-risk in some situations and how can people deal with this?
- Given how highly tech stocks are valued, should people avoid the sector, or increase allocations due to the increased use of online e-commerce stores? How about world-wide tech firms – are they undervalued compared to companies listed on the New York Stock Exchange in the US?
- Is investing in real estate, and specifically rental properties, superior to stock market investments? I use the UK as an example and look at all factors including taxes, time costs, hassles and maintenance costs. Are there any alternatives to direct real estate for investors who like the idea of investing in real estate?
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Many of the niche investments which went out of fashion.
There have been many companies, such as Kodak, that have suffered due to trends changing as well such as Kodak.
Other examples include:
- Hard drives
- Baseball cards
- Some currencies which did well and then became worthless, including bank deposits.
- Some college degrees which were targeted at niche jobs that no longer exist. Of course, degrees are an investment into learning as well though.
- Of course, businesses that target those specific niches. The list here is countless as the internet has disrupted so many industries. Look at travel agents and internet cafés. They were all the rage even in the early 2000s.
The two commonality are that many collectables and technologies are vulnerable long-term.
That is especially true if you physically hold these technologies or collectables because you want to sell them off long-term.
Even if you buy stocks in individual areas, it can still be high-risk. Firms in a very specific niche, like Kodak were, can get into trouble if they don’t adapt to changing times.
That is one reason why even many professional investors buy the entire market (ETFs and so on) or at least buy countless stocks to diversify.
The future will be interesting as well. Previously “prime real estate” in the commercial sector was prestigious.
With the working from home and online trends, that is changing. I doubt it will ever become completely worthless though.
All the while there are some businesses that always stay alive – those that are selling a necessity or have a very strong brand.
Ginette’s shavers, Cola and Pepsi will almost for sure be with us in 20 or 30 years.
It isn’t easy to disrupt that space as Virgin discovered when they tried Virgin Cola.
Coca-Cola themselves saw a huge backlash by trying to replace the original Coke with “New Coke” in the 1980s despite the consumers saying it tasted better in a blind test.
So, even Amazon would struggle to disrupt Cola as brands (personal and business) can’t be disrupted as much as the firms focusing on just the benefits of the product and service.
That is because there is an emotional connection with the consumer or businesses out there.
It is a far broad question as it depends on:
- Your age and risk tolerance – the two are often linked but not always. If you have a longer-term investment horizon then you can lower your risks investing in stocks markets.
- Your skills – are you a professional real estate investor or not
- Which specific real estate market you are looking at. In some countries, such as the UK, the government has an unofficial policy now to discourage second homeownership. It can be seen in white papers and other policy documents. So, taxes are much higher than before. To give you just one example, if you buy a second home now in the UK, you are charged an extra 3% for the buying tax (stamp duty) than if it is your primary residence. The taxes + maintenance costs are incredible high now. That isn’t the case in all countries. Some countries have zero property taxes and make it tax advantageous to invest.
I will get off the fence though and say that for most people, a diversified stock and bond portfolio makes more sense than rental properties.
One big reason is costs (including time costs).
Let’s give an example, using the UK, because I know the market better.
If you invest say $100,000 or pounds into an ETF portfolio focused on stocks and bonds, the total costs of investing will often be 0.1%-1% depending on many factors per year, such as if you need an advisor and so on.
Taxes can be zero. The UK has something called an investment ISA. You can put 20,000 pounds per year ($27,000) tax-free. That is every single year.
So, over 40 years, you could put in over $1million USD equivalent without taxes on the gains.
In comparison, with real estate, you have the following costs:
Buying costs (stamp duty)
The next £125,000 (the portion from £125,001 to £250,000)
The next £675,000 (the portion from £250,001 to £925,000)
The next £575,000 (the portion from £925,001 to £1.5 million)
The remaining amount (the portion above £1.5 million)
In addition to that, these are the rates on first home buyers. For rental properties you need to add 3%.
So, 5%-15%! Remember also that there is an indirect cost to this. If you put down 1 million pounds and need to pay 13% in tax (130,000 pounds), that 130,000 pounds could have grown more invested in stocks than in the property.
Then you have maintenance costs which are usually 1%-2% per year. Usually the tenant pays the yearly taxes.
Then you have capital gains taxes once you sell the property. The UK’s capital gains rate is 20% – and as mentioned if you invest in an ISA it is 0% up to 20k a year.
Yet the rate on residential properties is 28%! So, you pay an extra 8% than on other assets and 28% more than people who use investment ISAs.
And let’s not forget that it takes more work to invest in real estate. As time is money, we need to add another 1%-2% for this indirect cost.
Taken together, the maths is clear. If a broadly diversified portfolio does 8%, and something like the s&P500 has historically done 10%-11% adjusted for dividend reinvestment (S&P 500 Return Calculator, with Dividend Reinvestment) even getting 15% gross from property might not be enough for the net returns to compare.
Historically, stocks have beaten property, especially adjusted for maintenance costs and taxes.
That means you can only “win” in real estate by focusing on rental income + leverage unless you get in at the right time in the right market.
The only exceptions to the above is if:
- You are a truly professional real estate investor and this is your life
- You happen to live in the right place, at the right time. Buying in the UK in the 1990s and 2000s was the right time before the 2008 crash. Less taxes. Easier to leverage with 100% mortgages etc.
- You use leverage/debt carefully to increase returns
- The focus is on rental yields and not capital appreciation.
In conclusion then, I would go for a liquid portfolio if you can. Cheaper. Less hassles. More diversified so less risky than owning just a few homes.
Far easier to liquidate part of your portfolio if you have an emergency. Real estate can take months to sell and get the money.
You can invest in thousands of firms by buying ETFs costing 0.1% per year.
If you really like real estate, try a REITS index. Historically they have often beaten direct real estate, for fewer costs and hassle.
A primary residence is different. For that try a rent vs buy calculator. Sometimes it is cheaper to buy and other times better to rent.
A primary residence, moreover, is much less work. Rental properties are like running your own business in some ways.
You have to manage cash flows and indeed in several countries the tax authorities consider it to be like running a business.
That’s a lot of hassle for the returns. You may as well open your own business in that case.
There are two schools of thoughts here.
One is that technology stocks are much more overvalued compared to other stocks and especially some international ones like the FTSE in the UK and some emerging markets.
On a traditional p/e basis, they do look overvalued. Against that, there are some strong counterarguments about why you should value tech stocks differently.
Here is one of the Shark Tank judges explaining this concept – he also owns a firm which produces ETFs:
The argument some people, like O’Leary, makes is simple. Tech stocks make money by reinvesting money back into the business.
Amazon didn’t look profitable for years on paper, yet they were investing money into sales growth, which eventually translated into profits.
We cannot, therefore, judge a technology company on traditional p/e measures.
It also has to be remembered that technology is the future and has been for decades – the Nasdaq has beaten the S&P500 and Dow Jones despite all the volatility in the middle.
I am somewhat in the middle. Technology, the internet and online is clearly going to continue to grow.
There are billions of people who either don’t have the internet globally, or don’t use it to shop.
Millions of new users are coming online all the time, incomes are rising globally despite the fact that Covid will affect developing and developed countries alike for a few years and the global population is rising.
Younger people everywhere are doing things online. So, eventually, we will have billions more people online with higher incomes.
That doesn’t mean somebody should put all their eggs in technology stocks and the S&P500, and for that matter MSCI World, is already diversified enough.
What should definitely be avoided is picking individual tech stocks. The 1990s should be a lesson here.
The internet was the future. The Nasdaq more than recovered from the 2000 crash.
Yet many individual tech stocks went to zero. Many of those tech stocks were bought by people, often technology IT people, who thought “I know this product, and it works well – it will catch on”.
We see the same mistakes made by people like doctors who think their superior knowledge of a product or company is more important than cashflow in analysing a healthcare stock.
Yet no matter how well you know a product, that doesn’t mean it will monetize.
Far better to be globally diversified into technology. Many non-US tech markets are also undervalued as well.
As a final point I have noticed that many of the people who catch trends in investing end up worse off than those who don’t.
Often times they get lucky once or twice, get bored, and keep speculating.
In the answers below, taken from my Quora answers, I spoke about:
- What are the biggest indictions of all forms of success? What personality attributes and actions can contribute towards it.
- Is there a big difference between “fake” rich people and “real” rich people, or does it depend on how people achieved their wealth?
- What is ESG investing and should you invest a high percentage of your portfolio into this rising asset class?
- Are there really legal get rich quick schemes that work? Or are they all too good to be true and best avoided by the majority of investors?
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