For more than 10 years I haven’t watched TV so radically that I haven’t even watched feature films. Yes, yes, I am the person who has not seen the series “Game of Thrones” - I exist. All these years I have consumed information exclusively in printed form. For some time now I decided to interrupt the “asceticism”. The other day I watched “Shutter Island” with Leonardo DiCaprio. Throughout the film, the viewer looks at the plot through the eyes of the main character. And only at the very end the director reveals the real picture to the viewer. The contrast is stunning. The film impressed me and made me think. Highly recommend. We are all a little like the main character of this film.
“Trust none of what you hear, half of what you read, most of what you see”. - Nassim Nicholas Taleb.
But here Taleb is unoriginal, he practically repeated the quote of another great American, Edgar Allan Poe, who said, “Believe nothing you hear, and only half of it you see.”
Have you noticed that people, when arguing their point of view, most often use an expression like, “I saw it with my own eyes”? When someone tells me that, my brain immediately sets off an alarm. In fact, what we see is almost always a guaranteed sampling error, and the person is most likely mistaken. But what he “saw with his own eyes” does not give him a reason to doubt his convictions.
What we can see is only what surrounds us. And what surrounds us strongly depends on the place where we are, the time when the event occurs, on the people among whom we are and who are somehow connected with this event, and on many other things and our individual cognitive abilities of perception.
For example, somewhere in a rough part of the Bronx, in the dark, surrounded by local residents, it will most likely be difficult for us to find a competent interlocutor on the topic of investments. Moreover, we are unlikely to have a favorable impression of America and Americans if this is the only area of New York that we visited in America. Conversely, in downtown Manhattan, the likelihood that we will meet an interlocutor with whom we can have an interesting conversation on the topic of investment will be much higher, and our impressions of America will remain diametrically opposed.
In one of my recent articles I mentioned that statisticians understand me better than anyone - they “think in terms of the general population.” Economists understand that it’s a little worse - they “think in categories.” Even worse, financiers understand, they “think in projects.” They understand accountants very poorly - they “think in terms of the reporting period.” Professional deformation affects the way we perceive the world. We see the way our brain is used to thinking. What can we say about ordinary people whose professions are not related to mathematics and money?
Surprisingly, I sometimes hear this argument even from people whose professional activities involve analyzing long series of data. Once on social networks I came across one such interlocutor. According to him, he is an analyst who writes programs for our ministries and has been to America many times, but has not met investors there, and in his authoritative opinion, investments in the United States are carried out exclusively by professionals. When I asked how many millions of ordinary Americans he managed to talk about investments with during his trips, my random interlocutor found it difficult to answer, after which I could only joke that now I understand why somehow not everything is going well for our ministries with their programs.
What happened once may never happen again. But if this happened a second time, it will definitely happen a third time.” ~ Arabic proverb.
This proverb is not from Scheherazade's fairy tales. Regression to the mean is an obvious phenomenon from mathematical statistics, but at the same time, it is often overlooked by us in decision-making, and is one of the most frequently made behavioral errors that confirm itself.
It's no secret that as an investment, most often, Kazakhstanies prefer to invest money in real estate, gold and deposits. Every time I post articles on social media about real estate and gold as unprofitable investments, I get a barrage of criticism. The critics' arguments are always the same; assets are reliable, you can touch them with your hands, see them with your eyes...
It is absolutely incorrect to evaluate the investment attractiveness of an asset using criteria; “touch with hands”, “see with eyes”. Such arguments say absolutely nothing; neither about the potential for future returns (benefit) nor about expected risks (reliability). In the stock market, the return on assets is estimated as CAGR (compound annual growth rate) - the cumulative average annual growth rate, and risk, St.dev - standard deviation. Below, I have provided historical data (and for clarity, graphics) of three assets since January 1, 2005, since the largest and oldest exchange-traded funds for real estate with the ticker VNQ (Vanguard Real Estate ETF) and for gold with the ticker GLD (SPDR Gold Shares) were created in October and December 2004.
What do we see? Average annual profitability; real estate in the USA (the world's first economy) 5.79%, gold 7.92% and stocks 8.88%. Risk (standard deviation); real estate 22.21%, gold 16.98% and shares 15.1%. The best year in this historical period; real estate 40.52%, gold 30.45% and shares 32.31%. Worst year; real estate 68.3%, gold 42.91 and shares 50.8%.
For clarity, I collected the data in a table:
Thus, the conclusion is obvious. On average, stocks are much more profitable and reliable than real estate and gold.
Still in doubt? Remember 2008, and then 2015 on the Kazakh real estate market? By what percentage did your property depreciate then? Compare our income then and today? Do you still believe your eyes? Then read on...
Below are charts from a Market Sentiment article showing what rich and poor Americans are investing in and how much money they are investing in. The richest 1% of American households own 56% of the stock market, more than the other 99% of American households. The poorest 50% of American households invest only 4% of their wealth in stocks, while the richest 1% of American households invest 61% of their wealth in stocks. Rich Americans have 11% of their wealth in real estate, while the poorest 50% of Americans have 55% of their money invested in real estate. Doesn't remind you of anything?
Of course, we can say that for poor people, buying real estate is the most important and primary task in arranging their lives. This is also stated by Maslow’s pyramid of needs. But, from a rational perspective, this need becomes quite moot when looking at long-term asset returns from 1890 to today. Over the past 140 years, real estate returns after inflation have averaged a dismal 0.6%, while equities have returned after inflation an average of 6.63%. As a result, the 140-year inflation-adjusted cumulative return for real estate was only 122%, versus a staggering 515,782.66% for stocks!
“What leads us to trouble is not that we don’t know something... What leads us to trouble is knowledge that we consider “true”, but which is actually wrong.” ~ Mark Twain
Manage your life and personal finances wisely.
Knowledge is power!