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In Part 1 of our Stocks vs. Real Estate duel, our two personal finance heavyweights traded blows on 6 major points. In Part 2, we have 6 more areas to shake out whether putting your money in real estate or the stock market is best. Let the debate continue!
Ahmed: When you buy stocks you’re partnering up with Wall Street sharks and some pretty unscrupulous corporate characters that have a talent for authoring pulp fiction and marketing it as balance sheets. In plain English, there is a good chance you’re dealing with swindlers that cook the books and issue misleading projections of earnings. And if you want to know how these thieving rats get away with it, consider reading my book The Sheep and the Guardians: Diary of a SEC Sanctioned Swindle which is a case study of what corporate crooks get away with right under the eyes of regulators.
With real estate, only fools get ripped off. For one, you have the protection of title insurance. The rest is a matter of your own personal judgment of the value of the property. The average American who sells you a house is not a swindler. But when you’re dealing with average corporate shark, they are from an entirely different species. Let’s just say that you can write their code of ethics on a disposable napkin and they have an unhealthy habit of throwing it in the waste basket.
Omie: Yes, unfortunately, there are many cases of fraud, Syntax-Brillian is just one of them. But as I made clear in 5 Cheap Maxims for Investing in the Stock Market, the only way to reduce your risk is to diversify and avoid concentrated positions. There are always going to be Enrons, Worldcoms, etc., but by-and-large if you are well-diversified, you aren't going to see your whole portfolio take a beating. Having one company make up more than ten percent of your portfolio is putting yourself at too much risk.
Real estate is full of swindlers too. The difference is that it's hard to diversify your property holdings. Just look at those cheap land scams in Arizona, Nevada, or Florida. We just came out of a decade where real rstate and fraud are forever linked hand-in-hand and had it not been for the massive intervention of the Federal Government, the entire system would have collapsed. Unfortunately, real estate scams are just as common as stock scams. You can start with inflated appraisals and go down the list to falsely qualified buyers, straw buyers, non-existent competing offers, predatory lending, bogus AAA rates bonds, etc. It's hard to keep track of all the scams that were being pulled and how "par for the course" they became. Real estate prices were artificially inflated by an entire industry that kept beating the drum and chanting the "real estate always goes up" mantra.
The equity markets have problems with regulations, but for many years there was zero oversight in the real estate industry.