The Common Sense Investor

Selling your house for twenty times the purchase price, sixty years later, may seem impressive, but you would have made a lot more money investing in good companies.

These days, everyone’s into real estate. My uncle became a multi-millionaire simply by buying and selling three of his homes at the right time and in the right place (he bought a beach home before beach homes were in super high demand). He’s made more money in real estate over the last 15 years than he has in his entire professional career.

But you know what? He’s really just gotten lucky. Because of stories like his, everyone wants a piece of the pie. But instead, they end up artificially inflating the price of real estate, and end up buying on the high-end. It is very very difficult to consistently make money from houses. Yeah, you might get a stroke of luck and hit the market at all the right moments, but investing shouldn’t be about luck.

Recently, my grandfather sold his house for $140,000. Most of my family is impressed by the huge margin of profit that he made between that $140,00 and the $7,000 that he bought the house for in 1946. The house effectively sold for twenty times its original purchase price.

That seems impressive at first, but really it is not. My grandfather would have made a lot more money from investing that $7,000 into some good companies back in 1946. In fact, with an average return of 10%, that $7,000 would have turned into more than 2 million dollars.

This is a great example of why its better to invest in the stock market than in houses. Houses hardly make you money over the long term. They really don’t. My grandfather’s rate of return was between 5 and 6 percent per year for the last 60 years. That’s barely better than inflation over the same period. If you’re barely beating inflation, then you’re not in a good investment.

For the skeptics out there, here are some things to note. My grandfather lives in a good neighborhood that has average house appreciation. In fact, his town is going through something of a renaissance and actually now draws in tourists from around the world. The point here is that my grandfather’s neighborhood is your average American neighborhood and his house is your average American house. Over sixty years, his house barely averaged a 5 percent return.

On the other hand, stocks have averaged close to 10% over the same period. Historically, stocks outperform real estate, bonds and cash. The stocks of good companies are reliable sources of wealth over the long term, and it is my view that if you are serious about investing for consistent, maximum profits, you should stick with the stocks of solid companies and avoid the speculation involved in trying to time the real estate market.