What Stock Investors Can Learn From Real Estate Investors

Real estate has a significant advantage over stocks: Real estate lacks liquidity and continual real-time pricing.
Real-time stock prices are readily accessible throughout the trading day. What’s more, stocks can be bought and sold with little effort and even less cost. Real estate, on the other hand, is bought and sold at considerable cost of both time and money. What’s more, the real estate price isn’t revealed until a deal is negotiated. Before that, “price” is an illusion based on an appraisal (which is really a guess).
Most investors buy real estate for income. Because real estate is bought for income, investors benefit from real estate’s inefficiency. I proffer this as counterintuitive because inefficiency is a form of self-binding – a useful, but underappreciated, technique for achieving long-term goals.
The ancient Greek story of Odysseus is the classic, prototypical example of self-binding. You may remember that Odysseus wanted to hear the Sirens’ song as he sailed by their lair. At the same time, Odysseus feared being lured upon the rocks by the Sirens’ song. Odysseus ordered his sailors to plug their ears with beeswax and to bind him to the ship’s mast.
Sure enough, Odysseus heard the Sirens’ song and implored his sailors to set him free. Instead, the sailors bound Odysseus tighter. When the ship finally passed out of earshot of the Sirens’ song, Odysseus’ sailors released him. Had Odysseus lacked the foresight to self-bind, he would have acquiesced to his impulses and he would have perished.
Real estate’s inherent inefficiency is a form of self-binding. It prevents real estate investors from being overcome by emotions that lead to irrational and detrimental trades. Real estate’s inefficiency forces investors to focus on the long term because short-term options are limited.
Stock investors should impose a similar form of self-binding to improve both their long-term performance and their mental health.
In “Fooled by Randomness,” Nassim Taleb offers an insightful example of the pitfalls of exposing oneself to the siren song of instant market access. Taleb’s example centers on an outstanding investor who earns 15% returns annually with a portfolio that displays 10% price volatility. This means that in one year the investor has a 93% probability of success in one year.
It also means that if the investor monitored his portfolio only annually, he would have a 93% chance of experiencing pleasure. But look what happens when the frequency of monitoring increases:

The more you monitor, the more likely you’ll confront negative information. The outstanding investor in Taleb’s example has a 46% probability that he’ll encounter negative information (and thus pain) if he monitors daily. If he monitors hourly, he has a 49% chance of encountering negative information. And remember, the negative registers on the brain twice as much as the positive.
Outstanding – and even good – investors make themselves needlessly miserable through constant monitoring. Worse, they are likely to act on their misery.
What’s a stock investor to do?
Real estate’s inefficiency naturally binds. Stock investors can similarly self-bind by focusing on what’s important – the income stream – and ignoring what’s unimportant: daily price fluctuations.
The major market barometers might drop another 10%, 20%, or even 50%, but it doesn’t matter as long as your income stream continues to flow unabated. The focus on income, as opposed to price, is one reason real estate has historically been a better investment than stocks for accumulating long-term wealth.
To learn more about a selection of stocks that includes reliable income payers in the real estate space, click here.