I used to think a successful property investor could easily translate their experience into success in the share market – until I learned how different the two asset classes are.

Shares and property are two of the most popular investing strategies to build wealth. And they share several commonalities between them.

Both asset classes can provide income and capital growth over time. Each is subject to market cycles. And both require patience and discipline to see long-term results.

But the two asset classes are also very different in their own ways. And understanding those differences is crucial for successful investing.

This is why many successful property investors struggle when they start buying shares. They expect the same rules to apply. And while there are some skills that overlap, the game is still different.

In this article, I’ll walk through some of these factors, explain the key ways shares are different to property, and detail why I believe a change in strategy and approach is needed.

The brutality of business

A key reason shares and property behave so differently comes down to one factor: the business world is unbelievably brutal, whereas housing is a basic human need.

The global stock market is filled with thousands of companies, all ruthlessly competing for customers, profits, and market-share. As the world changes, some businesses adapt and thrive, but many simply won’t make it.

Just think of some of the variables at play:

• New competitors emerge with better, smarter, faster, cheaper ways of doing things.
• Old companies get bloated and bureaucratic and slow.
• Consumer preferences change, driven by hard-to-predict trends.
• Technological innovation will render some companies obsolete through no fault of their own.

When you add all that up, you get an interesting outcome. Over a 20 year period, many individual stocks won’t just underperform – they’ll disappear altogether.

Individual companies vs individual properties

Property investors often look at shares and wonder why ETFs are so popular .

“Why would you bother diversifying so much instead of just picking a good company, like I can with property?”

This sounds perfectly logical, until you learn the following:

• A large percentage of companies will do worse than the market average, with many going bankrupt.
• Only a small percentage of companies have outsized returns. And no, these winners aren’t obvious in advance.
• Markets are relatively efficient and all estimates of future earnings are being ‘priced in’ daily by people who know more about these companies than we do.
• Most of the market is composed of calculated investors – unlike housing where most of the market is homebuyers purchasing for personal or emotional reasons.
  

Now, the market is often wrong too. But the point is, unfortunately, you can’t just find a company that meets a few good criteria and then consistently achieve better than average performance.

It also goes a level deeper.

Variation of performance within property and shares

If you invest in property, the total performance of most houses or apartments has historically been likely to be decent – over the long run at least. I think most people would agree with that.

There will be variation between suburbs, property types, land size, and other factors. But the market forces of population growth, demand vs supply dynamics, and inflation generally push property values higher over time. Add to that a rising rental income over time and I believe you’ll do just fine.

The main point is this: over a multi-decade timeframe, the difference between the worst performing property and the best performing property won’t be significant.

Now, you could argue that even a small difference in capital growth rate matters over time. I agree with that, and I understand. But I’m talking about this in relative terms.

Think about the best-to-worst property performance for a minute. For argument’s sake, let’s say one property in a city might grow in value by say 100%, another by 250%. That’s a fairly big margin. But now consider the same spectrum in the share market.

Over a multi-decade timeframe, think about the difference between the worst performing share and the best performing share. Even if you’ve been investing for only a few years, you’ll already have seen or heard of far bigger differences in performance than this.

The worst performing shares are going to lose 90-100% of their value. And the best performing shares are going to be up 10,000% or more. It’s very different from property, and the spectrum of performance is far wider.

You can’t just pick one or two shares and expect to get anywhere near ‘average’ performance, like you could with property. In the context of stock markets, that would be a wildly unrealistic expectation.

The variation in performance means you need to adopt a different strategy. Just picking a ‘good’ company isn’t going to cut it.

This is why I believe diversification is essential in shares. Unlike individual rental properties, owning just one or two individual shares comes with a far lower chance of paying off.

Business is brutal and results are far more unpredictable – something you wouldn’t want to bet significant amounts on. As Vanguard founder John Bogle was fond of saying: “ Don’t look for the needle in the haystack. Just buy the haystack! ”

Property demand and longer term certainty

While property prices fluctuate, the underlying dynamics don’t change all that much. Sure, the types of property and locations people want to live in might shift over time, but the change is relatively mild.

In reality, people always need somewhere to live, and there’s a limited supply of available properties, so demand is more consistent over time.

And yes, you might see wild booms and busts in some markets. But on average, it’s unlikely you see a sustained collapse in the price of a property the same way you can with a business. After all, even if you burn a house down and assume there’s no insurance, the land still often has considerable value.

A house can literally sit in one spot for 50+ years and be just fine, and the likelihood it has grown in value is high. In contrast, many individual companies won’t even make it past the next decade. A study by McKinsey found that the average lifespan of companies listed in the S&P 500 was 61 years in 1958. Today, it is less than 18 years.

Sure, you need to renovate a property over time, but the asset itself isn’t going anywhere. There’s a level of certainty to it that you won’t quite get with an individual company, no matter how stable that company might seem today.

Another reason this plays out is due to supply and demand. Homebuilders simply won’t keep producing homes if there’s no demand. And even if there is demand, they won’t build unless they can do so at a profit margin they’re comfortable with. For this reason, property markets rarely end up with a massive oversupply of homes that remain empty or end up worthless for extended periods.

Another (more obvious) difference between shares and property is how debt works.

Debt and leverage

With property, borrowing large amounts of money is the norm. In fact, it’s expected. Most people don’t buy a rental property outright – they take out a mortgage, and the bank is more than happy to lend them a huge amount of money, often with relatively low interest rates and long repayment terms.

Why? Because of the above factors. Property is seen as a safe, tangible asset that historically isn’t prone to 50% drops in value and can’t ‘go bankrupt’ like a share can.

With shares, leverage is a different beast entirely.

Borrowing to invest in shares, using margin loans (for example), is far riskier. Banks and lenders know that share prices are volatile. They’ll happily loan you money – but only up to a certain loan-to-value ratio (LVR). And if your portfolio drops too much, you’ll be asked to tip in more money, or the lender will simply sell down your positions to reduce your leverage.

No matter how great your share or ETF is, lenders simply aren’t willing to tolerate you sitting on a 90% geared share portfolio. The bank doesn’t want big losses on their loan books, especially when you might crystalise those losses out of fear and they can’t be sure you have extra capital to repay.

Compare that to property. If your property price drops 20% (and that can happen), the bank doesn’t really care. As long as you keep making your regular repayments, the bank will leave you alone and let you ride it out.

Now yes, you can borrow against property to invest in shares , but that’s outside the focus of this article. The point here is, you can’t take your ‘leverage-to-the-eyeballs’ approach from property and translate it to shares, expecting the same strategy to work. You’re far more likely to get wiped out .

Volatility and emotions

Both property and shares go through cycles, but the level of volatility you experience is dramatically different.

Property prices move relatively slowly, even if the dollar figures are bigger. 1% per month in either direction is considered a decent sized move. With shares, 1% per day in either direction is fairly common.

Even in a property downturn, price declines happen gradually over months or years. Now, you could argue that in ‘real time’ or ‘on the ground’ prices are moving quicker and it takes longer to be reflected in the property price indices. But most people are not transacting in the market, so they simply go by the ‘averages’ that are reported. This means the up-to-date, on-the-ground prices each weekend aren’t affecting their mentality on a regular basis.

With shares, the opposite is true. You’re constantly bombarded with price movements on a daily basis, regardless of how irrelevant they are to long-term investors. This is especially true for individual shares.

An individual company can move 20% on a brief earnings update. That can take some getting used to. And sometimes your company might decline by 5-10% in a week for seemingly no reason at all.

You can bring the long-term property mindset to your share investing, and I believe you should. But it’s not so easy in practice. The volatility itself can cause investors to panic and make emotional decisions.

Share prices reflect sentiment just as much as fundamentals. Even the best companies go through painful declines. So, investing in shares requires greater emotional discipline, and a stronger stomach. You need to accept wild price swings without losing confidence in what you’re doing.

Liquidity and flexibility

A final difference to note is the sheer ease of buying and selling with shares compared to property.

You can get in and out of an asset for, say, a total of $13 in brokerage. With property, you’re looking at 4,000 times more than that, with stamp duty and selling fees!

Not only that, but with shares you can sell a portion of your holding rather than the whole lot. That can be a huge advantage, not only to manage your taxes, but to alter your position sizing, cashing out gains, and creating extra income to live off.

Of course, this comes with some downsides. The ability to transact so easily makes people transact more often. This can mean they’re more prone to buying and selling unnecessarily – hopping in and out as they change their mind over what to invest in and why. Add to that, nervous investors are more prone to selling out at the worst possible time, AKA panic-selling because it’s so easy to do so.

Contrast that to property, where most people will sit through downturns because they know the market will eventually recover. Not only that, they’ll also be reluctant to sell even after making a decent gain because the cost of selling is so high.

Final thoughts

This was not intended as a property vs shares article. That requires far more detail than just the points I’ve discussed here.

The goal here was to explain why you can’t simply approach share investing with the same mentality that you approach property.

While they’re both great vehicles for building wealth, they require different strategies and mentalities.

A sensible share investing strategy will lean far more on the benefits of diversification. Having just one or two individual companies can come with very low odds of success. On the flipside, I believe owning hundreds (or thousands) of companies is a sensible and efficient strategy.

Not only that, but additional research is unlikely to pay much dividends in the share market. Due to the intensely competitive and professional environment, the odds of outperforming are greatly lower than with property.

And finally, be sure to use leverage moderately (if at all), while preparing for the bumps and potholes in your quest for long term compounding.

Property investors can get away maximising leverage, picking a half decent house, and letting time do the work. But in the share market, the brutality of the business world means playing defence is more important. If you don’t have diversification, emotional discipline, and a long-term mindset, the market can eat you alive.

Until next time, happy long-term investing!

Dave’s best-selling book Strong Money Australia is available on Amazon. Listen to the audiobook on Spotify or Audible.