Real Estate- Investing

Investing in Real Estate has been a global favourite. The belief is that prices can only go higher. Most of the people think that investing in equities is risky, stock prices can fall dramatically and erode wealth. They believe that if investment is made in RE, the asset stays forever and prices can only move up.

However, since the last ‘bom’ which collapsed in 2008, most of us have burnt our fingers. I know of instances where people who booked apartments in 2007-08 are now staring at same to lower prices in many cities. We may have stray examples of some locations where money has tripled in this period, but those are exceptions rather than the rule.

I was looking at a Real Estate Index named “Residex” that has been developed by the National Housing Bank. I am sure many of us may not fully agree with that. The index has a base of 100 for the year 2007. I have added the annualised return based on that numbers for each city.

CITY WISE HOUSING PRICE INDEX
CITIES	2007 Index
		July-Sept
		2014 Index	Annual returns
Hyderabad	100	93
			Negative
Faridabad	100	216
			11%
Patna	100	153
			6%
Ahmedabad	100	217
			11%
Chennai	100	362
			17%
Jaipur	100	101
			0
Lucknow	100	196
			10%
Pune	100	242
			13%
Surat	100	160
			7%
Kochi	100	88
			Negative
Bhopal	100	232
			13%
Kolkata	100	209
			11%
Mumbai	100	238
			13%
Bengaluru	100	109
			1%
Delhi	100	189
			9%
Bhubaneswar	100	197
			10%
Guwahati	100	160
			7%
Ludhiana	100	146
			5%
Vijayawada	100	161
			7%
Indore	100	188
			9%
Chandigarh	100	174
			8%
Coimbatore	100	180
			8%
Dehradun	100	188
			9%
Meerut	100	159
			7%
Nagpur	100	180
			8%
Raipur	100	165
			7%

(Source:NHB-http://www.nhb.org.in/Residex/Data&Graphs.php )

As per the table, Chennai shows a return of 17%. I wish it were true. It is for some prime pockets in Chennai, but if you look at the new extended Chennai along OMR or GST Road, the returns are closer to zero! And this does not factor in the property taxes and maintenance you have paid, if you got posession of your flat. You may say that you got rental. But if you honestly sit down and do the numbers, pay the taxes on the rents, the returns are not going to change much.

And from these index numbers, we have to deduct the capital gains, add the transaction costs. And it is an AVERAGE number. Some properties would be higher, some would be lower.

And unlike investing in shares, you cannot exit part of your portfolio. You will hang in there thinking that one day the property will come back to your purchase price. And in the meanwhile, your wealth keeps eroding. If you think you are smarter than the rest and will beat the averages, good luck to you.

Property as an investment is an inferior choice. Yes, we are socially designed to buy one own home. We probably consider our first home as a necessity. Given today’s unaffordable housing, even that requirement needs to be re-evaluated. Maybe rental house is a good option rather than buying a home for a couple of crores in the metropolitan cities.

And more important, properties are illiquid, unless you are in a prime location, where there is not much supply coming in. And do you factor in the interest loss when you buy an under construction house till you actually get the posession? Do that and the maths will frighten you.

Today, there is an over abundance of unsold homes. And the funny part is that prices are still not cracking. Banks have lent huge amounts to the construction sector and are staring at NPAs. Something has to give. Many cities will see price corrections of significant magnitude. There are many projects that have been scaled down. And projects are taking longer to complete. The money backing the construction industry must be worried.

Think hard before you buy a property for ‘investment’. And unlike the past, the newer properties come with more and more amenities and facilities, making old properties unattractive. This means that as properties age, their resale would be difficult, especially if it is a high priced apartment. Some one who can put in a couple of crores would go for a newer construction rather than settle for an older one. The older one will find it difficult to find buyers unless there is a significant discount.

Stock trading? What are your rules?- PROCESS IN INVESTING

(This appeared in the Deccan Chronicle- July 20th, 2015)

Many of us buy shares without having a ‘goal’ in mind. Do we invest because we like the company and want to own the shares as long as possible, participating in the company’s growth? Or do we own the shares, watching the price every day, hoping to make a quick buck? Nothing wrong with either so long as we know what our reasons for buying are.

The second type of buying, where we hope to make a quick buck, often does not work out the way we thought it would. When we are a short term buyer and seller of shares, we do not give too much thought to the company, its fundamentals or its prospects. More often than not, this kind of buying is based on our pet theories or from newsletters or tipsheets etc. Or it could be because we heard a one minute talk on the television set and decided to buy.

It is important to have a process when we indulge in short term trading.  The process should answer the following questions:

i)              Why have I bought this share?

ii)             What do I expect? What is the price target?

iii)           How long do I have to wait for this?

iv)           If the price falls, what do I do?

v)             What if the price does not move and my time of holding is coming to an end?

vi)           Do I buy my entire allocation for the stock in one lot? If not, then do I buy more if it falls? Do I buy more if it rises?

vii)          Can I sell the quantity I buy without moving the price much? In other words, what is the trading volumes?

Often, I have seen people buying for a quick churn and becoming long term investors even as the share price keeps dropping over years. This is real erosion of wealth.

It is useful to have a set of rules before we execute our short term trade ideas. A simple framework could have rules like these:

a)    My total corpus kept aside for short term trading is , Rs.__ lakh;

b)   Of this, the maximum in a single scrip will not be more than Rs.__;

c)    My maximum holding period is ___ days;

d)   My aim is to get a 20% return in this trade;

e)    I WILL sell earlier if the price either rises by ___ or falls by ____;

f)     I will NOT have more than five positions outstanding at any one time:

g)    I may buy half my limit in one go;

h)   I will NOT fall in love or attachment with any stock from this basket;

i)     I DO NOT need the money allocated to this activity;

j)     I do not hurt if I lose money.

You can keep adding or subtracting from those rules. The idea is that short term speculation should not be a random activity. Have a process. It is likely that you may lose most of your money over time. Or you may get lucky and make some money. The idea behind having a process is to help you be aware of the situation and not go in to panic or worry.

Also, keep a track of why you bought each share, on whose reco, whether you did any additional work to confirm etc.  Of course, I do not have anything to say to those who follow technical analyses or charts, since they have their own process to follow. But they too could do well to have a system and process in place.

I do not expect you to make a big fortune out of this. The probability is that half the trades could go wrong. The idea behind a system and a compulsory exit is to ensure that you do not keep ‘averaging’ or ‘chasing’  and get shut out.  The key is to analyse each mistake and learn from them. Respect the process and it will reward you in more ways than one.

R Balakrishnan

(balakrishnanr@gmail.com)

DC- July 14^th, 2015

SIP in Mutual Funds- Choose well- A case for Index investing(Th

People write in to ask whether it is better to opt for mutual fund route or direct equities route. To me, it is clear that a portfolio of well chosen direct equities will do better than a mutual fund portfolio.

As mutual funds grow larger in size, it becomes difficult for them to beat the benchmark indexes. This is because of our market structure. We do not have many large ‘market capitalisation’ companies. If a fund manager has a Rs.5000 cr portfolio, he would ideally like to put a minimum of Rs.50 to 100 crore in a single stock. So, he would look for companies that have a minimum market cap upwards of Rs.5000 crore, so that a Rs.50 cr investment in a company does not become a very large stake in the company. Here, the invesment of Rs.50 cr becomes a one percent stake in the investee company!

There are only around fifty companies that have a market capitalisation of over Rs.40,000 crores! So, if an FII were to want to put $ 10 million in a single stock, they would like to look at a company of at least a billion dollars in market capitalisation.  So, as investment vehicles become bigger and bigger, there is a compulsion to invest in the biggest companies and most large mutual funds start looking like each other. And they cannot ignore any stock in the index, for fear of not conforming to the herd.

Due to this lack of depth and breadth in the market, a highly focused quality portfolio of five to ten companies can do better than the NIFTY or Sensex. 

However, not all of us can spend time. Apart from this, there is another big handicap when we want to invest in direct equities. For example, if we were to pick a high quality portfolio of ten stocks, we may need a minimum monthly investment of around Rs.50,000 and upwards as a SIP commitment for ten years. Not all can afford this. So, the choice of direct equities through an SIP route, is closed if we cannot write this size of a cheque every month. And we need to have five to ten stocks rather than pick just one or two stocks. A minimum diversification is needed to insulate the shock of a single company investment going under for unforseen reasons or through a structured fraud.

A mutual fund route is good for those whose investment sizes are small to moderate.  Choosing a mutual fund thus becomes more important, though everyone says they have the same benchmark, they seem to invest in similar or same stocks.

A five year return (as of 20^th June 2015) on an annualised basis is given below:

1.     MFs that invest in Large Caps- Best return was 15% and the worst was 7.5%;

2.     MFs that invest in Multi Caps- Best was 20% and worst was 9%;

3.     Banking sector funds- The best was 17% and the worst was MINUS 1%.

4.     The NIFTY/Sensex return was around 9%.

5.     The Liquid Funds returned around 8.5% !

This clearly shows that there is a huge disparity in performance between professional money managers who are paid to manage money on a full time basis.  You could trust any one of them, but the returns are not going to be predictable at all. The disparity is surprising given that all of them have expertise in investment management and have equal access to information and research. We do get a lot of statistical tabulations on mutual fund performance and there is no assurance that if someone topped the charts in the past, he will do it in future. There is unpredicability of performance going forward, irrespective of what measures we use.  So, it becomes important to diversify amongts mutual funds, in order to hedge ourselves agains weaknesses of the investment managers. Portfolio diversion does not happen since most mutual funds look like each other in terms of top holdings etc.

Thus, mutual fund investment through SIP routes do not guarantee us market returns. Going by available data, there is a fifty percent chance that the fund we choose may do worse than the market. In such a case, if we want to be sure about being as close to the market returns, the best option is to choose an Exchange Traded Fund (ETF) on the Sensex or NIFTY.

To sum up, if you are not confident about picking stocks, it is best that you stick to the mutual fund route. And if market returns are what we are looking at, it is better to stick to an ETF.  I am not a big fan of sector funds and there is a lot of timing involved in picking those up. Maybe an FMCG sector fund or a MNC sector fund will always do well, but there are no guarantees.

 (This piece appeared in today's Deccan Chronicle)

The Greek Tragedy and the Nikkei ...

The Greek Tragedy unfolding is desperation gone berserk. Keeping the banks closed for a few days to deny the truth. Reminds me of the old days when the Nikkei used to start tanking after it touched a peak of near 40,000 (It is now at near 20,000!, after never having been near thirty or forty).
In those days, the Nikkei 30 Index computation was supposed to be hilarious. At the start of the day, the exchange officials would write down prices of the 30 stocks. The first trade in the stocks had to be at or above that price. And as prices were falling like nine-pins, the exchange authorities resorted to desperate measures.
Each day, they would write an artificially high price. As no trades would happen at that level, the stock/s would remain untraded through the day. The same price would be treated as the closing price for the day and index computed on that number. So, a false sense of the market was created. Finally....
So Greece is now trying that during the shut days of the bank, all will be forgiven and the world will come to a solution on terms suitable to Greece. And banks will reopen as if nothing had happened. Well, even Rip Van Winkle would have winked.

Compounding of Money, Rule of 72 and some basics that time forgot

(This piece appears in Deccan Chronicle)

Investing should not get complicated. You either love it or hate it.  Some of us like to spend time understanding stocks. Most of us do not want to know about its existence, but the noise bothers. We all think that either the stock market is one big scam designed to cheat us out of our savings or it is a casino where money doubles faster than we can fold a currency note.

We all need to ‘reformat’ our thinking when it comes to investing. Money is an important part of our existence ( hopefully not the sole purpose ). It is an aid to living and not an end in itself.

Let us understand that big wealth has been created mostly by owning businessess that do well. Very few people have created big wealth from stock markets alone. The fact that we find it dificult to recall more than a handful of names that made it big from investing, tells us all.

Stocks are perhaps the fastest way to growing wealth, IF risk is managed well and you have the right attitude. A bank account may give us, say nine percent annualised return. Stocks may give us around fourteen percent (a random number- assuming six percent inflation and eight percent GDP growth).  You may think that all I am losing is a five percent return for something unknown.

Unfortunately, due to our schooling system, innumeracy is rather high,.  Let me put across a table to you that shows the impact of Compound Interest:

	(Value of Rs.1000  at different rates / diff periods)
Rate	5 years	10 years	20 years	30 years
6%	1,338	1,791	3,207	5,743
8%	1,469	2,159	4,661	10,063
10%	1,611	2,594	6,727	17,449
12%	1,762	3,106	9,646	29,960
16%	2,100	4,411	19,461	85,850
20%	2,488	6,192	38,338	237,376

The first row is the rate of return at which a sum of ONE THOUSAND is ‘compounded’.  The next rows are the maturity amounts at the end of different time periods.  Thus, 1338 is the sum at the end of 5 years, at 6% Compounded. It is 5.743 at the end of 30 years,  Similarly, if we can get 12%, the amounts at the end of 5 years is Rs.1,762 or Rs.29,960 at the end of 30 years.  The difference between 6 and 12 is just 6 or it is double the rate. However, Compounding it, at the end of thirty years, 12% is 29,960 and 6% is 5,743.  Over five times!

It shows us the importance of fighting for that one or two percent return, on a longer time period.

This table also gives us another very important lesson. For example, if I were to start investing and get returns from, say age 40, at the end of 20 years, when I am 60, 1000/- would have become 6,727. If I had started just five years earlier, at age 60, I would have had  17,749!  Nearly three times. This is why everyone tells us to ‘start young’. Probably it is repeated so often, we think it is a cliched phrase and ignore it.  

You will become easy with it, once you understand something as simple as a ‘rule of 72”.  For example, you want to know how long it will take for your money to double, at , say 8%.  Simply divide 72 by 8 and the answer, 9, is the number of years it will take. Similarly, if someone promises to double your money in six years, just divide  72 by 6. The resulting number, 12, is the annual rate of interest on your money.  This is a very close approximation and not mathematically precise.  So do not let anyone fool you. Now you can easily work out the consequences of starting late in life, when it comes to savings.

Once you understand your compounding tables, you can decide when you want to save, how much etc. Of course, the table will not tell you about the risks  In fact, use the power of compounding to retire early by saving more in the earliest periods of your earning life. .

The purpose of introducing the above table was to demonstrate what it means to invest in stocks rather than keep money in the bank. I think it is feasible to look at a return of 12 to 14 percent compounded return from stocks, over the very long term. This is a conservative number. And you do not even have to choose which stock or which mutual fund. Buying the index, through a proxy, like the Nifty or Sensex ETF should be good. This will save you from the risk of having to choose a mutual fund scheme that may underperform the index.

Of stock market bubbles etc

(From "The Investmentsblog.blogspot.com)

History repeats frequently when it comes to financial euphoria. If the seemingly obvious lessons from these episodes going back almost 400 years haven't been learned yet, chances are it isn't going to be any different the next time.

Galbraith explains why these bubbles recur so often with what he calls "financial memory" (or the lack thereof). Basically every 20 years the new players involved in the financial system, the so-called smart money**, become convinced "it's different this time" because of some new innovation, financial or otherwise (ie. The Joint Stock Corporation in the 1700's, holding companies in the 1920's, junk bonds in the 1980's, internet stocks in the late 90's, derivatives like CDO, CDS etc more recently). Here are some relevant excerpts from John Kenneth Galbraith's book, A Short History of Financial Euphoria:

"The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves, in one form or another, the creation of debt secured in greater or lesser adequacy by real assets." - John Kenneth Galbraith in A Short History of Financial Euphoria (Page 19)

"All [financial] crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment." - John Kenneth Galbraith in A Short History of Financial Euphoria (Page 20)

"Let it be emphasized once more, and especially to anyone inclined to a personally rewarding skepticism in these matters: for practical purposes, the financial memory should be assumed to last, at a maximum, no more than 20 years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius." - John Kenneth Galbraith in A Short History of Financial Euphoria (Page 87)

One of the common elements in these episodes is the use of debt to finance speculation.

Historically, the so-called financial innovations from these episodes of euphoria have just been leverage in a different guise.