Would you buy real estate hundreds of miles away from home? Most people would say, “No way!”
Would you buy a real estate note hundreds of miles away from home?
Before you say, “No way!” think about this: call the note a “stock” and you wouldn’t care where the real estate is — even if it’s offshore. Stock investors rely on the anticipated success of the company (the growth approach) and/or the book value (the value approach, i.e., the liquidation value of the assets).
Do you know that if a company goes under, stockholders are behind both bondholders and owners of preferred shares? Stockholders are, at best, third-position lienholders.
In default, which would you want to own: a stock secured by a company’s assets in which you are the last to be paid off (assuming there is any money left), after bondholders and owners of preferred shares, and you share third position with hundreds of thousands of investors? Or would you rather own a note secured by a house in which you are the first to be paid off and you share that status with nobody?
Also think about this: stocks are almost always sold above book value. Mortgage notes are almost always sold below book value. Do you want to sell a stock? Call a broker and take what the market will pay. It doesn’t matter how many you call on a given day, you will get the same number. Do you want to sell a note? Call investors and negotiate with them. You will get different numbers, some higher, some lower. If you don’t like the numbers, sell the next X number of years of the payments and keep the rest. Or sell half of each payment and keep the other half. Try that with a stock!
Some people just don’t…