Why shares suck

Share indices overstate performance… by design!

Ok, one of the debates I get drawn into all the time is “are shares better than property?”

There’s a few reasons why property is a better fit with me. I like it. I can understand it. I can also work with it.

If I try to bump up a property’s value by adding another bathroom, or doing a workover of the back garden, I can end up on the cover of “Better Homes and Gardens” magazine.

But if I try and bump up a share’s value somehow, it’s called fraud and I end up in jail.

You can’t do anything with shares. It’s totally out of your hands. It’s all comes down to what your company is doing, and what the market is doing.

(And if it’s out of your hands, isn’t it just gambling?)

So I like property. And look, I can see why people like shares, but it’s not such a great fit for me.
But one of my bugbears is the way people compare property to shares, purely on a basis of financial returns.

Let’s take the ASX All-Ordinaries. Right now, the All-Ords are still lower than their GFC peak.

Yep. 10 years on, they’ve gone nowhere.

(If I owned a property that had done nothing for 10 years, I’d be spewing.)

So on that measure, it looks pretty ordinary to me.

(Maybe that’s where the name comes from?)

But the thing to remember is that the All Ordinaries isn’t a measure of all stocks in the Australian market. The All Ordinaries only tracks the biggest 500 companies.

Now the biggest 500 companies in Australia is fairly stable, but it can change over time.

So let’s say one company does particular poorly one year. And it goes from being the 400th biggest to the 505th biggest.

That company drops out of the All Ords.

That means the poor performance of that particular company doesn’t affect the index.

And what that means is that the index is consistently biased upwards by design.

It’s always going to inflate the results.

And that means that that chart above actually understates how ordinary the share market has been.

 

I mean, imagine if I constructed a housing index, but I said I was only going to include the properties that were doing well. If properties started doing badly I’d drop them from the index.

I’d be laughed out of town.

So look, shares have their place in any balanced wealth portfolio.

But if you want superior returns, and you want the ability to actively work your investments, it’s really hard to go past property.

That’s my 2 cents.

Spiro Kladis
Managing Director, Cashflow Capital

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  1. Roberto
    1 month ago

    How about showing a chart of property growth from 1990 to 2000 – not much happened.
    Then discuss the power of compounding within shares. Reinvesting dividends and cranking credits over time back into a company like Domino’s or JbHifi when they floated until now.
    Sprucing property on the tail end of a massive bull run is a pretty easy sell I would have thought.