John wrote:

- quote -

R = Return = profits that go to stockholders
A = Assets at acquisition cost
I = Investment which is Assets minus depreciation
E = Equity which is Investment minus liabilities (bonds & loans)

- quote -

Yes, that is the way I take it. I think real estate investors don't
take depreciation fully into account because they see the market value
of their properties rising.

--
Ron

Ron,

Good post.

Two comments.

REITs vs. real estate held more directly might be a tough comparison. I
know little about REITs. I sense that they are mostly traded based on
yield plus the underlying fundamentals so the liquidity produces a
valuation that is closer to stocks and bonds compared to direct RE
ownership.

The UK has seen many years of under building compared to the projected
housing needs. Mostly from zoning (they call it planning permission).
What is good for preserving the environment and keeping open spaces in
their natural state tends to drive up the values of the existing
housing stock. Simple supply and demand dynamics when there is more
demand than supply. Based on how long it takes for zoning changes and
other such things plus the focus on the value of open spaces I think
the price inflation triggered by the zoning is a long term contributor
to higher prices (rather than a temporary inflation of the price).

Question.

Can you spell out the math (simple version) for:
ROA
ROI
ROE

Real estate investors talk about cash-on-cash returns. From what you
said this sounds like ROE.

John Corey

John wrote:
- quote -

Many companies are highly leveraged without the stockholder having to
get leverage on his own.

You are right that there should be a level playing field in comparing
real estate investment to publicly owned companies. Comparing the ROI
would probably be the best way. ROA uses undepreciated assets and ROE
excludes debt.

For instance, IBM has ROA at 7.6%, ROI at 11.26%, and ROE at 25.78%.

I don't know what would be a good REIT to compare against.

The stockholder is at a disadvantage now because the market price for
most stocks is several times higher than the equity (5.9 in the case of
IBM). In addition, stock options and stock buy backs may materially
reduce the effective return to stockholders.

The real estate buyer might have a similar problem with real estate
being inflated by senseless laws (NIMBY) such as zoning and government
purchase of development rights.

If anybody is really suffering, it's those that keep all of their
assets in fixed investments.

--
Ron

Phil,

I agree with your point below.

- quote -

As real estate produces an income to service the debt (the leverage)
and the stock market does not (other than annual dividends) what would
be a fair comparison? I do not think cash purchase of real estate is
valid. Most common and most practical seems to be leveraged real estate
compared to zero leverage stock. On that basis the 'obvious' choice is
no longer obvious.

John Corey

"dapperdobbs" <GeorgeCFL[at]hotmail.com> wrote in message
news:1142594902.241357.290370[at]z34g2000cwc.googlegroups.com...
- quote -

I believe some finance academics tested that before the internet was a
common source of information. IIRC, the results were that, if you got your
subscription delivered early and acted on the changes promptly, you could
outperform the market. How much of that was self-fulfilling prophecy, (or
if it was interpreted by the authors to be self-fulfilling prophecy), I
don't recall. I imagine that timeliness issue has been eliminated by
instant information.
--
Chris Cowles
Gainesville, FL

"John" <john.corey[at]gmail.com> writes:

- quote -

Without any leverage, real estate's long-run returns have only
been around 2% above inflation. (I don't have the reference
handy - that's from memory). Stocks have been about 7%, at
least this century.

Not much point pushing the notion that leverage can improve
those returns in real estate - it can do the same for stocks,
if one can ride out dips adequately (and you're right, there
are some cash-flow issues which may make that a little tricky).

- quote -

If there are many asset classes, it makes sense to track their
volatilities and returns and *correlations* and perhaps build
a portfolio which minimizes risk and maximizes returns through
appropriate diversification. But, surprise surprise, this has
been done before...

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

Tad Borek wrote:
- quote -

Housing is a good share of the personal wealth in the US, so it makes
sense that people should at least own their own house. On the other
hand, if all families owned two houses, half of the houses would be
vacant. I have heard that if you are going to be managing rental real
estate, you should have at least 8 units to get some economies of
scale. A co-worker has been investing in REITS because of the high
dividends, but is shifting to other investments. REITS have the
advantage of allowing geographically diverse investment and greater
liquidity over conventional real estate investments.

- quote -

Current tax laws encourage corporations to go into debt, thereby
increasing risk to the stockholder.

If an investor wants to increase (or decrease) the leverage, he can use
stock options.

The Savings and Loan bail out shows the taxpayer is carrying much of
the risk for real estate loans.

--
Ron

Ron Peterson wrote:
- quote -

I recall long-term data - including that study - showing that real
estate is essentially an inflation-returning asset.

It kind of begs the question though. The cost of housing is a big factor
in defining "inflation" so naturally the increase in the cost of housing
is going to look a lot like the inflation rate. It's a bit like
comparing the population growth rate of Albuquerque to the population
growth rate of New Mexico.

One thing I'd distinguish in the comparison is "use of leverage and tax
preferences" and "return on the underlying asset". Equities on their own
have had much higher returns. But real estate has two big advantages as
an investment, vs. stocks: you can obtain government-subsidized,
fixed-rate loans for most of the investment capital for very long time
periods; and the tax code is full of special preference items for real
estate owners. Using so much leverage with stocks hasn't been allowed
with stocks since the crash of 1929. Too bad that lesson didn't carry
over to today's real estate speculators...or the lenders serving them?

-Tad

John wrote:

- quote -

Bonds and real estate, IIRC.

- quote -

There was a recent study that looked at real estate (houses) in
Amsterdam going back centuries and found a very low rate of return. I
suppose that a knowledge investor can do very well in real estate but I
don't think that it would apply to everybody. My brother-in-law tried
doing it but found that it wasn't worth the grief. A high-school
classmate has done well in it, on the other hand, but her husband has a
high income but their 720 California garden apartment's income probably
dwarfs that.

- quote -

There are thousands of asset classes since each company, piece of real
estate, and collectible are different. I would expect that the asset
classes that are most important to our economy would have the highest
rate of return.

The answer does depend on the individual, but I am not sure there is
much safety in choosing a low-yeilding investment.

--
Ron

dapperdobbs wrote:
- quote -

I was particularly interested in the idea that one could double one's
real investment wealth in 10 years or quadurple it in 20 years. So
conceivably, a couple with a million dollars in investment wealth could
have 3 children and give a million to their children at age 20 and
still have a million left for their old age.

- quote -

I think that you are following the spirit of contrarian by investing
based on real information beyond the market price trends.

- quote -

Most people use their emotions to pick stocks and that is what causes
them to do worse than random.

--
Ron

John <john.corey[at]gmail.com> wrote:

- quote -

Cash on cash return is strongly affected by leverage. by leveraging you
increase both variance and return.

I wonder if there's some proxy for EV/V as would be used to measure
profit in an advantage gambling proposition.

The other problem with this comparison is that real estate is not a
purely passive investment. Yes, you can pay other people to do all that
stuff, but now you have hiring and firing (or contracting)
responsibility. I'm thinking it's relatively unusual to make 15% cash
on cash return if you hand over all operations to somebody else
*entirely* and own as passively as you would own stock, but maybe this
is more common than I realize.

The other thing about real estate is that there are *huge* imperfections
in the market. Any monkey who knew how to throw darts at a financial
page would have had the long term expectation quoted for stocks over the
years studied.

Can you get 15% cash on cash return in real estate by buying random
investment properties at market price?


Michael

--
A: Because it messes up the order in which people normally read text.
Q: Why is top-posting such a bad thing?
A: Top-posting.
Q: What is the most annoying thing on usenet and in e-mail?

I did not take the time to read anything more than was was posted here.

What is being compared? Equity (stock) to bonds seems obvious. Any
other asset classes?

6+% above real return sounds low compared to real estate unless you are
comparing cash purchases. As real estate produces an income then the
use of leverage is reasonable so the cash on cash return would be
higher than 6%. I know investors who will not even look if the cash on
cash return is not 15% (before inflation).

I have done no study for 204 years. I also find that many announcements
happen when there is a book to sell and the data is only accurate if
you accept the narrow definitions used (stock compared to bonds as if
there are only two options is common). While it is useful to know about
stock vs. bonds the book publishers know sales will be higher is they
make a blanket statement (The Asset of Choice for the Long Run) which
is not technically supported by the research.

If there are 14 or 17 asset classes is there a study that rationally
looks at them all and compared the typical way each is invested in so
that we can a practical comparison rather than one that is bias towards
specific choices? Is there really one answer for all people at all
ages?

John Corey

"dapperdobbs" <GeorgeCFL[at]hotmail.com> writes:

- quote -

No one's ever said outperforming the market isn't possible.
The question is whether or not you can identify an outperforming
manager *going forward*.

Because "outperforming the market", even over a long stretch
of time, does not prove that the manager has any skill.

With all the managers out there, we would expect some to outperform
the market, even for long stretches, due to sheer chance.

The real question is whether or not there are more of these
outperforming managers than would be predicted by chance alone.

And by the way, saying "they beat the SP500" (as some of these
funds/managers love to trumpet) doesn't mean they outperformed. They
need to be compared to the correct passive benchmark. For example, if
some actively-managed fund is in the small-cap value space, it's
totally bogus to say they "outperformed the market" if they beat the
SP500. You need to compare them to a small-cap value index instead.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

After posting, I read the entire article and I will watch for the
future articles he promises. In the meantime, I checked Schwab's
newsletter and noticed an article by Greg Forsythe about a book:

"... there is a new book on the New York Times best-seller list that
actually deserves to be there: _The Little Book That Beats the Market_
by _Joel Greenblatt_, who was once a highly successful hedge fund
manager."

Covering the period 1988-2005 the people at Schwab tested the formula
for his top 30 stocks to return 19.9% versus 11.9% for the S&P. They
then proceed to assert that their equity rating system over the same
period incorporates more parameters, and returned significantly better.


The reason I post that is to illustrate that while I hold that
analyzing a company is essential, outperforming the market is possible.
Value Line also claims their selection process has consistently
outperformed the market. The tools and books are available.

Yah. Und so?

The inflation adjusted data extending back 204 years, and the subset of
the past 80 years, is indeed interesting. And it is a valuable
contribution to this forum, IMO.

The formal language of portfolio management apparently must attempt to
incorporate "risk" as something quantifiable (so that it can then be
reduced). I've looked briefly at the equations used for hypothetical
portfolio modelling, and risk, and I've read briefly discussions of the
risk\ reward idea. Maybe I am a little too stupid to understand, or too
little a player for it to be important to me. I did, however, think
about it, and I came up with a statement I think is meaningful: the
risk one incurs in crossing the street is very significantly
diminished, if one keeps one's eyes open. And I'm sure you can come up
with a better one than that, such as maybe, the more one knows about an
endeavor, the more likely one is to succeed. Or even, one's chances of
winning at poker are greatly increased by looking at one's cards.

The reason for going into all that otherwise completely useless
discussion is simply to point out that if one is careful about
selecting companies whose businesses are better than average, one has a
very good chance of outperforming the market. That is to say: the risk
of loss is greatly diminished by studying up on the company, and the
potential for gain is greatly increased.

Some would say that is not true, and I would get a "D" at best in an
MBA program for my statement. I know the argument: one might do better
picking a company at random. Go figure. (Which would you rather do?)

As some here will note, I prefer to read Ben Graham, and Buffett. It's
much easier than the portfolio management equations, and I find it to
be applicable to analyzing a company, as well as insightful reading.

Yah.

at website
http://finance.yahoo.com/columnist/a...nvest/2881?p=1

The Future for Investors
by Jeremy Siegel, Ph.D.

Stocks: The Asset of Choice for the Long Run
by Jeremy Siegel Ph.D.
Utility Links

Thursday, March 9, 2006
Where should you invest your hard earned money? Using history as a
guide, the answer overwhelmingly is in stocks.

During the past 204 years (through 2005) stock investors have earned an
average 6.8 percent per year after inflation and that return has been
remarkably stable over long periods. Over the past 80 years, real stock
returns averaged 6.7 percent per year, and since the end of the Second
World War, the annual return has been 6.8 percent. This return includes
both capital gains and dividend income and is measured after the
effects of inflation have been subtracted. These numbers mean that on
average, investors' wealth has doubled in purchasing power every decade
in stocks, a feat rivaled by no other asset class.

Neither I nor any other economists have uncovered precisely why
investors have received this return and cannot promise they will
receive it in the future. But history clearly suggests that stocks will
continue to be the best long-term assets for investors.

Stock returns are composed of the sum of the average real return on
safe bonds, such as U.S. government bonds, which has been about 3
percent, plus an extra risk premium that has averaged between 3 percent
and 4 percent per year. This risk premium has propelled stocks above
other asset classes in investor returns.

...

--
Ron