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Here’s why shares may be a better investment than property

Due to the greater risks involved, investing in the stock market has the potential to deliver far greater returns than investing in other securities, including property. And yet, history has shown that so many investors reap greater rewards from property than from shares.

Before I show you one stock which I believe will greatly outperform property in the coming years, I want to show you – with reference to Peter Lynch’s One Up On Wall Street guide – four reasons why people are often more successful investing in property than investing in shares.

1)  Time Spent Researching. When buying a family home or an investment property, people spend months researching which property would be the best of the best for them. For instance, they’ll consider the location or the size of the property, the condition of the home itself and even the neighbours (nobody wants a noisy neighbour). Yet despite the additional risks that come with buying shares, many investors will spend just a few minutes researching – often blindly putting their faith behind something they know very little about.

2)  They know what questions to ask. To expand on that point, investors will often neglect to ask themselves some of the most important questions about a stock. As an example, they should be asking questions regarding management’s competence, or whether the price of the shares is reasonable or fair. When buying a property, on the other hand, people will ask questions regarding how solid the foundations are, the growth prospects in the nearby area and even whether the area is prone to termites.

3)  Long-term commitment. If your family home were to suddenly drop in value, would you sell it in a state of panic? Would you get it on the market as quickly as possible so as to limit your losses, then buy another house to re-settle in?  Presumably, your answer to both of those questions was a firm “no”. Shares can also fall in value and even long-term investors can panic and sell at a loss. It really is no wonder why so many people lose money on the stock market.

4)  Liquidity. In one sense, the liquidity of the stock market could actually hinder investors’ returns. While a property can take months to sell, shares can be sold in a matter of seconds, resulting in a constant temptation to sell and move the proceeds into a stock which could offer more excitement (often, “more excitement” refers to a stock which has already risen considerably in price).

There’s no doubting the risks that come with investing in the stock market, yet so many of those risks are eroded when a long-term commitment is upheld. This requires discipline, patience and conviction.

As a perfect example, just look at the returns from companies like Commonwealth Bank of Australia (ASX: CBA) or Woolworths Limited (ASX: WOW) since their inception into the ASX in 1991 and 1993, respectively. In that time, Commonwealth Bank shares have returned more than 1,700%, while Woolworths has delivered returns greater than 1,500%, both including dividends.

By applying as much effort to investing in shares as most people do in buying property, the potential for gigantic returns from the share market is greater than that from buying property.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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