In 2021, JP Morgan Asset Management published a research paper titled The Agony & The Ecstasy, Michael Cembalest (March 12, 2021) jpmorgan.com that took a deep dive into the risks of stock ownership.
In the paper, Cembalest discusses the performance of individual stocks over the past 40 years. He found that almost half of all stocks suffered a “catastrophic stock price loss,” defined as a 70% decline in price from peak levels, which is not recovered. This means that owners of single stocks have a high chance of suffering a “catastrophic stock price loss” at some point.
As for stocks that don’t suffer a catastrophic stock price loss, 26% underperformed the market. To summarize, roughly eight in 10 stocks were losers that cost investors money. Naysayers will point to the fact that the U.S. stock market is much higher than 40 years ago. But that’s not inconsistent, with eight in 10 stocks being losers. That’s because the market’s positive returns can be attributed to just 10% of stocks, which JP Morgan called “mega winners.”
The conclusion we can draw from the JP Morgan paper is that among investors of single stocks, there are a lot more losers than winners. Wall Street’s response to this assertion is that diversification is the key to avoiding significant losses. Diversification is also the key to achieving mediocre returns. It’s why Mark Cuban once declared, “Diversification, that’s for idiots.” He advised that “investors should stick to cash unless they’ve got a really smart investment.”
Smart ultra-wealthy investors understand that the odds are stacked against investors regarding the stock market – with the average individual investor unable to keep up with even inflation. Either you risk the high possibility of a catastrophic loss or diluted returns from diversification. Betting on an individual stock that takes off is gambling. The chances are slim that you will hit the lottery.
Savvy investors don’t speculate because they understand that sometimes there’s no recovery from catastrophic losses or, in the case of non-catastrophic losses, a long road to recovery. That’s why sophisticated investors like the ultra-wealthy stick to a “really smart investment” they can understand. That’s why so many of these investors gravitate toward real estate. It’s something they can understand, and unlike a new technology, it’s been around forever with a track record of success and data to back it up.
Instead of gambling on stocks, consider commercial real estate with several growth & profit centers and hedges against downturns, inflation, and disasters:
Commercial real estate (CRE) investments generate reliable and consistent rent that can be diversified across multiple tenants to ensure continuous cash flow. With rent, investors do not have to rely on the whims of the market to generate positive returns. When generated passively through equity or debt investments in private CRE investing companies, this passive cash flow is a powerful tool for compounding wealth through reinvestment and paying down any outstanding secured debt to generate equity.
Passive investments are the secret weapon of the ultra-wealthy for growing wealth and freeing up their time to do the things that interest them and not the things they’re obligated to do.
Besides cash flow, appreciation is another profit center for CRE. Because of its intrinsic value – value beyond what the investing public is willing to pay – productive assets like CRE generate additional appreciation beyond normal appreciation due to inflation.
Some may not consider tax benefits as a profit center, but anything that reduces expenses to boost the bottom line is just as much a profit center as rents generated from leases. In the case of tax benefits and CRE, a penny saved is most certainly a penny earned. Avoiding $1 in taxes is as valuable as adding $1 in revenue to the bottom line. Passive CRE investments structured as partnerships offer multiple tax benefits, including deductions, depreciation, long-term capital gains treatment, and avoidance of self-employment taxes.
Insulated from Market Drivers.
CRE is illiquid and is therefore insulated from the market drivers that generate market volatility. Immune from talking heads, the press, and social media, CRE is not susceptible to the same forces that liquid stocks are and, therefore, not prone to the wild volatility the equity markets experience often. Unlike stocks, the herd cannot move the needle of CRE prices short term.
With long lockup periods, time is on the side of CRE investments because:
- Time allows the asset to mature and maximize efficiency.
- Time allows the investor to profit from the compounding effects of reinvestment of cash flow and underlying appreciation.
Smart investors don’t like Wall Street odds. Either you can go for broke, which is often the case for individual investors, or you can diversify away your return potential.
That’s why instead of Wall Street, smart investors stick to what’s tried and true and are sure to generate consistent long-term returns insulated from market drivers.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.