Episode 17 of the podcast strays from my usual focus on index investing. That’s because it’s almost impossible to talk about investing today without acknowledging the role of real estate. One of the most common questions I get these days is, “Does it make more sense to invest in a portfolio of ETFs or buy a rental property?”
My guest on this episode is Ben Rabidoux, president of North Cove Advisors, a market research firm that specializes in real estate. Ben is an outspoken and articulate commentator on housing issues, and in our interview he touches on the subtleties that affect the decision to buy a home versus renting and investing the difference.
Getting over the hedge
In the “Bad Investment Advice” segment, I wonder aloud why hedge funds are portrayed as the most sophisticated of investment opportunities. It’s true they are usually available only to the rich, but there is little evidence that their high cost and exclusivity provide genuine value.
You can be pretty confident that a Rolex is a more precision timepiece than a $50 watch from Wal-Mart, and that flying business class will deliver a better experience than a knee-bruising ride in economy. But hedge funds, despite their allure and mystique, have mostly been wealth-destroying investments—except for the fund mangers who run them. Despite this dismal track record, you can now buy ETFs that bring hedge fund strategies to the hoi polloi.
Warren Buffett believes the reason wealthy investors are attracted to hedge funds is not so much the expectation of excellent returns, but rather the status they seem to convey. As he writes in his 2017 letter to Berkshire Hathaway shareholders:
“The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive. In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial ‘elites’ – wealthy individuals, pension funds, college endowments and the like – have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars.”
Playtime is over
Finally, in the “Ask the Spud” segment, I answer a question from a committed Couch Potato who keeps a little “play money” aside to buy individual stocks.
I used to encourage people to have a small side account for stock picking if they found it fun, but I’ve begun to argue against the idea. Rather than being a harmless way to “scratch the itch,” experience has shown me that play money accounts are actually more likely to be a huge distraction. The real risk isn’t even that you’ll lag the market badly: on the contrary, it’s that you will enjoy some initial success as a stock picker.
What I mean is that humans have a tendency to ascribe their failures to bad luck, but when they succeed they tend to credit their superior skills. So when people do well with their stock picks, they can quickly become overconfident, at it’s not long before they find themselves wondering why anyone would bother with index funds when it’s so easy to just select the best companies.
I’ve also found that index investors who have a side gig tend to focus way too much attention on their stock picks. That can lead them to waste time reading the daily financial media, with its relentless focus on forecasts and short-term performance. One of the major benefits of indexing is that liberates you from giving a $@#& about any company’s quarterly earnings report so you can focus on what’s really important.
This is completely unrelated but ZAG’s management fee is now reduced to 0.08. Thank you Couch Potato!
Really enjoyed your conversation with Ben Rabidoux. It is very hard to get a balanced perspective on real estate as an investment in this country.
So if index funds and real estate investing leaves one too exposed to one asset, where else is he or she to put her money?
@derpy: The point here was that the Canadian market, specifically, has more exposure to real estate than many people realize because so many of its largest companies are in the mortgage business. Global diversification solves most of that problem.
Big fan of Ben and you Mr. Couch Potato. This is a great podcast and is insightful on how to see the position of real estate in the Canadian economy. It is going to be very painful for those who are over leveraged. I am currently overweight in Canadian markets (home country bias) and moving away from Canadian index funds. Appreciate that this confirms my concerns and articulates it better than I ever could.
Another great podcast. Thanks Dan!