Tax Guru-Ker$tetter Letter
Tuesday, August 13, 2002
Why I Don't Invest In Stocks
Many people seem to be confused why I, a very staunch & unabashed capitalist, do not believe in investing in the stock market. There are several reasons why I have never invested in the stock market & can't sincerely recommend it for my clients. I'll cover a few of the main ones.
First is obviously the odds of making money in the stock market. As I mentioned below, it is really a crap shoot. Anyone who claims to have the secret formula for guaranteed honest profits is a liar. No such thing exists. The only way to make consistent profits is by using insider information; which has side-effects, as Martha Stewart has discovered. The market is susceptible to too many rational and irrational variables to allow any kind of accurate prediction.
I have always been a big believer in owning one's own business, which you can control. Investing in the stock market is not even remotely close to that. Even if you buy 10,000 shares in a large corporation, your ownership percentage is a tiny fraction. You have absolutely no say in what the business does and are at the complete mercy of the people running the company. As has been shown, this can be disastrous for small investors. None of the recent revelations of corporate accounting fraud have surprised me in the least and just go to show how powerless an investor is.
Best Vantage Point
One of the side benefits to being in the tax business is the ability to see what other people do to make or lose money. While I don't have an exact count, over the past 26+ years, I have prepared and reviewed at least 15,000 tax returns. Over that time, the number of people who consistently make profits on stocks is extremely tiny. The number who lose money in stocks is huge. The only ones who make consistent profits in stocks are the stockbrokers who earn commissions and often churn accounts just for that reason.
So, if stocks have proven themselves to be unreliable income generators, what kind of investment has the best track record? Real estate. In fact, it's almost the complete inverse of stocks. The percentage of people making large profits in real estate is huge, while the number losing money is very small.
It is also a very real fact that the tax laws make accumulating large amounts of wealth via real estate much easier than with stocks. Gains on stock sales are taxable, even if the money is plowed right back into other stocks. Contrast that with sales of real estate. Up to $500,000 per couple of tax free gain is possible every two years from the sales of primary residences. Gains from other kinds of real estate don't ever have to be taxed if their disposals are set up as like kind exchanges, where the proceeds are reinvested into new real estate within 180 days. I have seen hundreds of people parlay a few thousand dollars into hundreds of thousands through this technique. Not having taxes eat up the return makes the investment grow much faster than if gains had to be shared with our rulers.
Having access to cash is actually easier via real estate investments. Loan proceeds secured by real estate are tax free and much easier to obtain than a loan using stocks as collateral.