The superiority of the stock investment

December 20, 2018 | Digital Asset Management

In the long run, returns on equities outperform the returns on all forms of investment such as bonds, cash, precious metals, or even real estate by far.

Global equities have outperformed bonds and treasury bills since 1900. Over the past 118 years, equities have generated an annual real return of 5.2%, while global bonds have generated an annual real return of only 2%. This means that equities outperformed bonds by an average of 3.2% per annum.

The following chart shows the impact of this differential over the years. The chart refers to the US market. With an annual performance of +6.5%, the US equity market outperformed the world equity market by +5.2%.

The real performance of the investments

The graph on the left shows the development of equities versus bonds and liquidity, excluding inflation (nominal). The chart on the right, on the other hand, takes into account an average inflation rate of 2.9% p.a. and therefore shows the real performance of the investments.

Source: Credit Suisse Global Investment Returns Yearbook 2018

Why the yield on real estate decreases

The most recent statements, according to which real estate offers a large financial gain with less risk, are not correct. This is because real estate prices have only exploded as a result of extreme interest-rate policy interventions by central banks with penalties on money deposits. In the long run, higher real estate prices will put themselves into perspective. Taking into account the costs associated with real estate, inflation and the recent price rises just mentioned, the rental yield to be achieved is anything but attractive.

The risks of real estate investments

Real estate investments usually incur high ancillary costs such as land transfer tax, land registration costs, contract- and trust costs and brokerage costs. Additional maintenance costs are incurred just to maintain the value of a property. When buying a property, a great deal of capital is also tied up in a single investment. If this property serves the purpose of commercial letting, the risk of damage and loss of income by a tenant increases. In addition, it should not be forgotten that most landlords own property used by themselves – this increases the cluster risk, as the total assets are invested mainly in one asset class.

Other negative factors that reduce the attractiveness of a property include political efforts to put a brake on rental prices or further tightening of the tenancy law. This severely restricts real estate owners’ and landlords’ scope for action. The additional danger of rental nomads and the threat of damage can be immense and must not be underestimated.

What you can still learn from a real estate investor

What real estate investors have in advance of the typical equity investor, though forced to do so, is not to look at the price of their investment on a daily or weekly basis. Since the price of the property the investor has bought is not published daily on a stock exchange, he looks at his investment property over many years. Most equity investors are unfortunately distracted by the daily ups and downs of the stock markets. And let themselves be distracted from the actual idea of why they bought a share: The participation in a company, the business model, the management and the future prospects of which they are convinced of.

Many real estate investors buy real estate because it is a real, “tangible” value. Shares are investments in a company and therefore less tangible, but they are just as real valued as real estate. As the owner of a share, you are a co-owner of a real company that has an actual tangible and capitalized value – just like real estate.

Shares vs. precious metals

Precious metals and precious stones are not an effective hedge against inflation. Gold, silver and diamonds led to even lower yields than US government bonds. Even if the tangible assets provide a high level of protection, they still do not generate a return.

Despite strong fluctuations, the equity markets offer the highest long-term returns of all forms of investment. However, this only applies to investors who remain invested over the long term, keep a cool head in times of crisis and do not sell in panic as soon as the market goes into reverse. Share price developments cannot be predicted in the short term. Most investors often sell at the worst possible time as they try to time the market. Finding the right time to enter after a sale is almost impossible and resembles a lottery game. Who knows when a correction will be over and when the time has come for a re-entry? From the point of view of the value investor, a sale only makes sense if an investment is actually overvalued.

The popular savings book or liquidity is a very bad investment. In the current low interest rate environment (currently approx. 0%), every investor who invests in cash loses purchasing power through inflation. (1€ remains on the account indeed 1€, but it loses value after some time. For example: 1 litre of milk cost 1€ a few years ago. Today, this euro is no longer sufficient and 1.20€ is needed for 1 litre of milk. Thus, the Euro has lost value.)

Why liquidity in the total assets of an investor nevertheless makes sense is not due to their interest rate. A cash reserve should always be available to cover planned or unforeseen expenses. This flexibility also protects against not having to sell shares in a phase of undervaluation when money is needed.

Source: Credit Suisse Global Investment Returns Yearbooks 2015 and 2018

The Credit Suisse Global Investment Returns Yearbook (“Yearbook”) has become an important reference for long-term return data and has developed expected risk premia for 23 national equity and bond markets. It was published by the Credit Suisse Research Institute in collaboration with professors from the London Business School.

The Global Investment Returns Yearbook examines long-term risks and historical extremes of investment performance. It documents on a global basis the long-term and short-term returns of equities and bonds, based on a detailed and complete series of data dating back 118 years.

Estably is the first Liechtenstein-based digital asset management firm to offer world-class asset management through a blend of technology and human investment expertise. Thanks to the portfolio managers’ many years of experience in the field of value investing, the aim is to achieve above-average returns – starting at an investment sum of € 20,000. The aim is to make professional asset management, which was previously possible exclusively for major investors, accessible to everyone – in a convenient, transparent and profitable way.

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