Get Rich Education 399: Why Stocks Don't Create Wealth, STRs, Build-To-Rent
Have you ever met anyone that created wealth with stocks? I haven’t. Why not?
Inflation, emotion, taxes, fees and volatility are the reasons. I break this down.
The Rule of 72 is what traditional advisers cite as a wealth-builder. I describe why this does not work.
Learn why returns from stock and mutual funds are often less than zero.
What really creates wealth? Leverage.
Learn trade-offs between long-term rentals and short-term rentals.
Zach Lemaster joins us. A licensed optometrist and captain for the US Air Force, he’s become financially-free through real estate.
We discuss the pros and cons of owning “Build-To-Rent” new construction income properties. It takes patience during the build process.
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Partial transcript:
Welcome to GRE! Why Don’t Stocks Create Wealth? After answering that, learn about some tradeoffs between LTRs and STRs, and the pros & cons of getting a construction loan and new-build rental properties. Today, on Get Rich Education.
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Welcome to GRE! From Hialeah, FL to Haleakala, HI and across 188 nations worldwide - that’s almost all of them - I’m Keith Weinhold. This is Get Rich Education.
I find it interesting that there are still smart people out there who think that stocks create wealth.
Everyday people could create wealth just by investing in stocks or mutual funds or ETFs?
I’ll tell ya. I have never met anyone in my entire life that has become wealthy from investing in these vehicles.
Now, that’s something that shouldn’t offend stock adherents. That has been my personal experience.
Just asking around here at GRE a bit, I found that our Content Manager, Matthew… he said that he once knew just one person that did get wealthy with stocks… and that is because that person’s company IPO’ed.
OK, well that’s worth knowing. But as for everyday investors, what one might call a retail investor that buys and owns Apple stock or Amazon stock or bought the S&P 500 Index fund from a big mutual fund company… I mean… do you know anyone that ever created wealth from stocks? Or do you even know anyone that ever knew someone that created wealth with stocks.
I'm talking about creating wealth. For example, someone that started at a level of either "just getting by" or starting at a level of "middle class" and then transitioned to "wealthy", simply through shrewd and savvy stock investing.
I think a lot of people invest in stocks just because that’s what the herd does.
But they never ask themselves at all… "Have I actually met anyone that's ever created wealth from stocks?"
And if you run with the herd, you don’t get ahead.
So why is this? How come virtually no one gets wealthy with stocks?
Well, look. We all learn and understand the world through different lenses. I'm about to share the thought paradigm that shifted my own personal journey… and why I have not personally - or through an LLC - or in any way, owned any stock, or mutual fund, or ETF since the year 2014.
Right now, major stock indices are flirting with bear market territory. This means a value loss of 20% from a recent peak.
Recently, the Dow Jones posted its eighth straight weekly loss. That's its longest weekly losing streak since 1923.
Could we say that misery loves companies? Big Tech has shrunk to Medium Tech. Even staid reliables like Apple, Target, and Walmart are tanking.
Other than a one-month virus "flash crash" in March of 2020, many Millennials and Gen Zers have zero experience with a sustained bear market.
None have occurred for thirteen years, which is an unusually long time frame.
Perhaps these investors will "sell low"; maybe they'll stay the course.
Now, investing in the stock market is so common - and so herdlike - that if you’re talking in a general conversation and say: “the market” - people just assume that you mean the stock market.
Well, shouldn’t “the market” be creating wealth for people.
After all, the S&P 500 has averaged a 10% annual return over time. In order to emphasize compounded returns, something that traditional, old school advisers often cite is "The Rule of 72".
You've probably heard of it.
What you do is take the number 72, divide it by your annual percent return (10), and that's how many years it takes your money to double.
Therefore, an S&P 500 investor should double their money every 7.2 years. Well, that sounds pretty good to most people..
Then over the decades, several doublings should ensure a fantastic retirement and perhaps even a taste of wealth.
But why doesn't it?
Why doesn’t it provide a fantastic retirement most times?
And why doesn’t it put people on that wealthy echelon… ever?
This is due to five chief drags—inflation, emotion, taxes, fees, and volatility. I’ve glossed over that before. But lets see how this all negates what so many investors think is some kind of good return.
Let's subtract each one from this 10% unadjusted stock return.
Inflation
Many experts agree that the CPI, currently 8%+, understates the true rate of inflation. It could be 15% now.
But let’s just say that long-term, true inflation averages 5%.
Yes, you could make the case that it’s more. But let’s just use 5% inflation. Well then...
…your long-term 10% stock return minus 5% inflation = 5% inflation-adjusted return.
Emotion
Everyone knows you're supposed to "buy low" and "sell high". But many do the opposite.
Why?
One has difficulty buying low because prices have often fallen for a long period of time before the dip. The predominant emotion is discouragement.
When stock prices have gone down, down, down, like they have this year, so many people get emotional and sell low… and they justify that by saying… I’m sick of losing money… and if I sell, I guarantee that I’ll stop losing money. So many sell low.
But on the flip side, why isn't everyone selling high? It's because prices have grown. It's hard to sell out of upward momentum. Up, up, up, up, up, friends are making money. You’ve got FOMO. This emotion is euphoria. This makes people buy - maybe not at the peak - buy they often buy higher that what they sold for.
But despite all this, most people believe that they're above-average investors—despite the statistical impossibility. This effect is called illusory superiority.
It's like how 7 out of 10 people believe that they are above-average drivers.
People often sell lower & buy higher.
We'll just say this takes one's 5% inflation-adjusted stock return down to 4%. That's being kind.
Taxes & Fees
Long-term capital gains taxes start at 15%. The highest ordinary income tax rate is 37%, which is the short-term capital gains tax equivalent.
Those percentages are what get taken out of your profit - that’s what eats into the entire 10% return that we started out with here.
Even if your funds are sheltered in a 401(k) or many retirement account types, yes, you could get tax-deferred growth. But you must begin paying taxes in retirement.
Fees are something that vary quite widely.
So… an S&P 500 investor's return adjusted for: inflation, emotion, taxes, and fees is often below 2%. Maybe far below 2%.
We're not done.
Volatility
So many people miss this.
The Rule of 72 and other projections are based on a fixed annual rate of interest.
It's called the compound annual growth rate (CAGR).
Our example… with this Rule Of 72 assumed a smooth, exact 10% return every single year.
This is irresponsibly quixotic. The real world doesn't work this way.
Let's say that a price falls 20%—which again is a bear market. Now, you must gain 25% to get back to "even". That's just math.
Now, if it falls 40%, it must gain 66.7% just to return to sea level.
Using a smoothed CAGR diminishes the damaging effect of return volatility.
So let's take our 2% return that's already been adjusted for: inflation, emotion, taxes, fees. Now subtract out this volatility.
And now, you can see why real rates of return are often less than 0% for stock, mutual fund, and ETF investors. Maybe they’re minus 3%. Maybe they’re minus 12%.
Real stock returns often crumble faster than a Nature Valley granola bar. They're not good for you either—full of sugar and canola oil.
Note that I even used what many consider "good times" in my example—where we started with a 10% unadjusted return.
This is an audio format here on GRE Podcast Episode #399 so my analysis wasn't deeply technical nor replete with formulas for pinpoint accuracy.
You might remember when we had Garrett Gunderson here on the show a few times. He really goes deep on how stock & mutual fund investors typically lose prosperity year-after-year and Garrett thinks that I’m being kind when I say that a stock investor’s real return is “0”.
It helps you begin to understand why you rarely—if ever—met anyone that acquired wealth with these vehicles.
About ten years ago, while working at the state Department of Transportation in an 8' x 10' blue cubicle, I began to realize some things:
- Investing in retirement plans makes me safe and normal. I don't want a life that's safe and normal. That’s not extraordinary at all.
- Every dollar invested in stocks and mutual funds is a dollar that cannot leverage other people's money.
- Retirement plans provide zero income until I'm old.
- I won't get ahead by following the herd.
Later, I interviewed the actual man that invented the 401(k) plan, Ted Benna.
Benna told me directly that the plans don't serve people the way they were intended. This helped complete my catharsis.
And my interview with Ted Benna is recorded. You might remember that episode. That was GRE Podcast Episode 197… if you haven’t heard it.
Yeah, the guy that actually invented the 401(k) in the late 1970s. That’s here on Episode 197.
So, now you understand much of why I haven't owned any stock, mutual fund, or ETF-based investment at all since 2014.
This show is called “Get Rich Education”. So I could talk about anything related to wealth-building and stay on-point.
But now you understand why I don’t discuss stocks.
Real estate has some drags too. For example, investors often underestimate their maintenance and repair costs.
Ultimately, the fact that Real Estate Pays 5 Ways™ is why it's superior. It's how anything less than a 20% to 25% fully-adjusted rate of return is disappointing (learn more).
Because real estate is an illiquid asset, this acts as a healthy barrier against "panic" buying or selling. Illiquidity diminishes the deleterious effects of emotion and volatility.
I do know investors who have created financial freedom through real estate, a lot of them, and I'm one.
If I can distill it down into one word for you, the short story about why I've met countless people that have graduated from middle class to wealthy through real estate is leverage.
Some of this is natural bias because I hang out in real estate circles, so I just tend to meet more of these people.
To stock investors, leverage is only available to more sophisticated types. Even then, it often comes with margin call risk. It's in a more limited measure than its wide availability in real estate.
Bear markets… like we have right now in stocks make people re-evaluate things.
To a younger investor that's potentially experiencing their first sustained stock bear market now, it's important to understand that...
...generally, stocks are not a game designed to build wealth for everyday people anyway.
Times like these make people revert to fundamentals.
Ultimately, your success as an investor hinges upon your ability to provide others with value.
Be a person of value in the world.
There have been few times in modern history when owning real estate demonstrates more intrinsic value than it does today.
You're providing others with what has increased in usefulness and is historically scarce in supply… at the same time.
Wealth comes down to your ability to be valuable.
When it comes to residential real estate, there are so many ways that we can segment it. Later on today, we’ll discuss new-build properties vs. existing properties and what’s going on in those markets today.
We can also parse the space with LTRs vs. STRs.
When we define that, of course, as the name would allude to, it is based on the duration of resident stay.
Depending on the jurisdiction and more, a rental period of under 30 days could be considered a STR (some people refer to these as AirBNBs or VRBOs)… or even up to lease periods of less than 6 months could be considered STR.
LTRs have more predictable long-term income… because a tenant often signs on for a lease period of one year or more… and LTRs are also more recession-resilient.
STRs have lower occupancy - but because the daily rate is so much higher, they can be more profitable than LTRs.
When you look at any investment, it’s so fundamental to understand who you serve. Back to my point about stocks, it helps you understand how you can be a person of value.
In LTRs, you serve families, roommates, and everyday mom & pops.
Until just five years ago, STRs principally served two groups of people - Vacationers & business travelers.
With what happened in the world starting in 2020 with the virus, the STR community was concerned that the business traveler would go away & not come back.
But it didn’t seem to matter, because increasingly, over the last 5+ year, you have more & more digital nomads and WFA-types that rent STRs.
LTRs - Midwest & South, away from city center
STR Location - resorts, beach communities, ski resorts
HOA limits are something that you have more of with STRs.
STR lodging or rental tax to the resident, you also get to charge the resident with the cleaning fee
Property Mgmt. costs tend to be 8-10% of each month’s for the owner of LTRs.
For STRs, you’ll often pay 20% or more since there are more resident turns & more advertising & listings to manage.
When it comes to financing, you’ll often find LTRs to have more availability than STRs. This is huge… since leverage is what really creates wealth.
Damages: STRs tenants pay upfront and usually place a CC on file to cover any damages. So there is some more protection that way.
One great piece of REI guidance is that the best STRs are the property types where if that market dried up, you could fall back onto them and use that same property as a viable LTRs.
To summarize what you’ve learned so far today…
- The definition of a bear market is when a market has lost 20% or more of its value from a recent high.
- Stocks don’t create wealth due to inflation, emotion, taxes, fees, and volatility. A lot of people miss that until it’s too late and it’s nearly retirement time - or when they thought they could retire.
- LTRs and STRs have a lot of trade-offs. LTRs are easier to finance and have more recession resistance. STRs can provide more income when its dialed in just right. LTRs have the longer track record.
Coming up, a guest & I are going to discuss today’s opportunity on brand new construction rental property.
That’s straight ahead. I’m Keith Weinhold. This is Get Rich Education.
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Oh, yeah. Some good content from our guest on the pros and cons of using a construction loan with these new-build rental properties. You sure don’t have to go that route if you don’t want to.
For this batch of properties, and it is an ongoing batch of constantly refreshing properties, if you want to get to the front of the line, go ahead and e-mail our investment coach Naresh.
You not only get access to available properties - SFHs up to four-plex & sometimes larger, existing build & new-build, some properties conducive to STRs at times - though most are LTRs… some really inexpensive properties, at times less than $150K - they would tend to be existing, renovated properties, not new ones.
For access to all those property types and free coaching, contact Naresh here.
You can do that at: naresh@getricheducation.com
Coming up here on the show… next week, for milestone episode 400 - it is Miracle Morning author Hal Elrod & I, discussing investor mindset and relationship-building in real estate. Yes, it look longer than I expected to get Hal & I together at the same time. That finally happens next week. Our Operations Lead here at GRE, Aundrea, is expected to be here with you & I for that show next week too.
The week after Hal Elrod, the “International Man”, Doug Casey joins us. Last time he was here, we discussed ideals like liberty & freedom. This time, it’s going to be about economics & it’s usually pretty gloomy commentary with Doug… but he keeps it real.
Then, down the road, Rich Dad Tax Advisor Tom Wheelwright is back on the show with us yet again to help you cut your taxes toward zero.
So with Hal Elrod, Doug Casey, and Tom Wheelwright coming up… I’d say that one inspires you, one depresses you, and one informs you.
Hal being the inspiration
Doug being the source of the depression - he knows that I kid, I was joking with Doug Casey about that last time
And then, Tom Wheelwright being informative with… seemingly… some new tax plan that he has to tell you about.
Then after that, negotiation expert Chris Voss returns to the show. You might have seen his masterclass course.
So… GRE is so stacked with great shows in the near future here.
In inflationary times, there is no better place to invest than in real estate.
I mean, even if you bought a property with no loan & with no tenant in it, real estate would be an inflation hedge just based on that alone… just based on it’s capital price tracking inflation.
But then you get the leverage where you can 4X or 5X inflation… while also having your debt debased… while also having your cash flow OUTPACE inflation since your biggest expense - the mortgage - stays fixed.
This is just one of so many reasons why real estate is what’s made more ordinary people wealthy than anything else.
I really encourage you to get started… not only do we have this new coaching service steeped in GRE principles… but it’s also free… and we also have available properties.
I encourage you to reach out to our friendly GRE Investment Coach, Naresh at
Until next week for Episode 400, I’m your host, Keith Weinhold. DQYD!