Tuesday, May 6, 2008

Stock Investments Superior To Real Estate

Several fundamental, logical grounds make long term stock investments more viable than real estate. As investments initiate with general objectives of selling later down the line for an increased amount, added value means everything.

Added Value Explained

Potential buyers in the future, especially those with rationality, would only offer higher prices for the same commodity/security/land, if they recognize additional value on top of whatever the original investors had acquired. This could mean new products, higher demand, brand name, intellectual property, land, and etc.

Real Estate Offers Little Value Growth

Aside from discovering gold, oil, or dinosaur bones in the backyard, the land itself offers absolutely no added value. The building itself actually depreciates over time, and requires additional expenses (or risks for the investor) for upkeep.

Inflation backs this illusion of consistent growth over time, and collective investor sentiment determines short term price fluctuations. Nevertheless, prices always revert to the mean, i.e. they come back down to the expected, inflation adjusted value (minus depreciation on the building). John Villareal explains this concept clearly at the Super Genius.

Businesses Operate To Increase Value

Stock investors own shares of the company. With each venture, active, determined people toil every single day with the objective of value enhancement. Therefore, despite the short term up or downside swings, companies operate to exploit every opportunity to add value for shareholders in the long run and some do it quite rapidly.

Of course even for long term investors, risk management remain crucial for success. Investing itself equates to that of a self run business where value improvement lies at the end of the road.

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