"As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.”—Adam Smith, moral philosopher of the 18th century.
Men have waged war with kin and kith over land; countries have invaded others for territory. Battles have been fought over land and families have disintegrated over disputes over land. In fact, I guess that land and property is the cause of at least half the disputes pending in Indian courts.
What is it about real estate that fascinates us all? Recently, I met a host of people in southern India who spend a lot of time in managing their own investments. They all seemed extremely happy with parking their wealth in real estate. A few of them, in fact, went on to say that in the last decade, stocks had given far lower returns than real estate.
What is it that makes us comfortable with real estate and sceptical about financial assets? One, you can touch and feel land but not your part-ownership of a company. Two, land is not traded every microsecond, like financial assets. We are forced to be patient with real estate and forced to be impatient with financial assets. Long-term investors in equity keep checking stock prices every day! They never venture to go out and check the price of the flat they bought or of the parcel of land they acquired on the fringes of some city. Even if they hear about a land deal at a lower price in the neighbourhood, they console themselves with the thought that their land parcel is better located, in better shape, etc. The noise from the silly talking heads (I confess that I too am a part of the noise creation) on the same-sounding business channels have converted financial assets into gambling chips.
The other major difference is that while buying land, investors do far more homework. Since it is a large chunk of money for a single deal, they make their own enquiries and then take a decision by themselves. With regard to financial assets, they can buy a tradable security for a few hundred rupees. And, they do not understand what determines stock prices, so they tend to go along with either a trusted financial advisor (not that an advisor understands, I suspect) or their friend or cousin. Thus, they have someone on whom the ‘blame’ can be pinned.
Of course, you can also lose on landed assets if you do not do your homework.
In real estate, options are available to buy land or a flat or an office or a warehouse, etc. You can buy an asset yielding revenues of 6% and above. In stocks, the yields are far lower. As regards appreciation, you will perhaps get the same returns over a decade or two; but real estate may appear the surer bet.
Choice of financial assets can make a huge difference to returns. Here, the knowledge of the investor as well as the advisor is limited and subject to the company in which an investment has been made surviving, making money, etc. Land is not subject to such vagaries. Of course, property prices can behave erratically depending on the location and the changes happening around.
However, in such cases, the investor feels far more sanguine about it. He simply does not show the same tolerance when it comes to financial assets.
Without taking sides, my view is that both have their place in an investor’s portfolio. It depends on the size of your fortune and the level of your comfort with financial assets. But one thing is clear. If you want to buy financial assets, you must imbibe the approach of real-estate investors. If you want to create wealth from financial assets, think of the long term and stop looking at stock prices every day.
It is not good either for your health or your wealth. The only big question, to my mind, is whether equities as a class will deliver any returns at all over the next decade, from this point in time. That is a separate issue and I will take it up another time. Happy investing…