Inflation times: buy real estate?

Even as I send e-mails regarding investments in Real Estate , I get a worried response ,” is this the right time to invest ? “. I am a die hard Real Estate Investor and just as Yash Raj Films cannot help churning out movies, I like to keep ” Investing “.

But back to the situation at hand, with all the ” Value” destruction happening around us, should we wait for a correction ?. I would like to digress a little to take us back to the time when our parents took Real Estate decisions. Back then only one thing mattered, you bought if you could afford to and let go if you could not. The word ” Correction” was unknown in the Real Estate context. Believe me when I say this, that things remain the same, only our way of looking at it has changed. The amount of Media noise has only served to confuse all of us.

To take a proper decision, we need to drill down to specifics :

1. Are you buying a flat for self use ? . If yes,then the following factors predominate

a. Location. i.e proximity to School, College etc
b Layout of the flat. Does it serve the immediate and future needs of your family.
c. Proximity to the Extended family viz: In laws etc
d. How many flats remain to be sold/ occupied. In ready Buildings this has a major bearing on the price.

Developers tend to hold on a inflated price if he has only a few flats to sell.

I have brought this up because lots of “users” come back to me with feed back saying that contrary to Media Reports , there are no bargains available. To these people, I say bargains are available, but this information is often known to ” Brokers ” etc. In times like these, a Broker/ Consultant’s service is useful. When a slowdown occurs, developers who in good times cartelise on rates, break ranks and there are huge variations in price in the same locality. Expertise and inside information is required to get the right ” Rates ”

The situation, when it comes to new projects is very different. Lot of people who look at Real Estate as an investment avenue prefer “launch” projects . This is because it offers the following advantages :

1. Easy payment schedules.
2. Lower rates which rise as the project gathers steam, which gives good scope for capital appreciation.
3, Better and wider choice.

To the question, whether one should invest in a new launch now, the answer is a resounding yes. It is a foregone conclusion that we are in for troubled times. Only well equipped ships will sail out in stormy weather. Similarly, only developers with strong fundamentals will venture with a launch in these trying times. Regarding the pricing, it is very certain that it will be reasonable. This is because, even great developers have anxiety pangs. Unlike share prices which plunge after the listing, it is catastrophic for a Project to be launched at high rates only for rates to be corrected later.

If one were to wait for a correction in Real Estate prices, the funding gap will widen . Let us say that you had intended to sell shares worth 50 Lacs to fund a Real Estate purchase of the same value. As you wait for a correction, your share portfolio value dips to 35 Lacs while the Real Estate corrects to 45 Lacs. In my limited experience, Real Estate corrects/ goes up with a lag , that is to say, when share prices start moving up, Real Estate moves up after some time. This is because, investors first need to make money on the Bourses, gain the necessary confidence and resources and then diversify into Real Estate. This process gets mimicked in a downturn. Investors are in denial when the stock market goes down and it is only when they start losing money on the stock exchange for some time, they cut their exposure to Real Estate. Developers and other participants in the Real Estate also hope against hope when things start to go downhill, that the decline is an aberration. This is another reason why Real Estate is slow to correct.

Just as justice delayed is justice denied, investments delayed beyond a point often results in missed opportunities. Each one of us needing or desiring to make a Real Estate Investment need to look out keenly for the ” Golden Hour “.

this has been authored by prakash natarajan who can be contacted at prakashn2007@gmail.com / 9820606187

Risk is : when it happens!

For many people understanding risk and preparing for the same is unheard of and non-existent. Here we are talking about a nice educated class of people who hold high positions and handle a lot of money.

Like a friend says “Risk for these organisations is the quality of people they have hired to look after risk”. One risk manager says that risk for these organizations arises from the fact that they have employed such poor quality risk managers (Oh, they have fancy designation right from Risk officer to Director, Risk!)

It might shock some readers to know that for a long time (no clue whether it is now rectified) Citibank had no director level representation for risk. Shocking, I should say.

But after spending 20+ years in the financial services industry, do I understand risk? Not really.

I pride myself in choosing clients with whom I will do business – Hdfc mutual fund, Hdfc bank, Kotak, Icici, ING, SBI, Templeton, Hdfc standard life insurance, Icici prudential, …etc. However in a weak moment I did one small assignment for a Real estate marketing company based in the suburbs of Mumbai. My bill was a small amount. However for the assignment done in April, I am still awaiting for my payment!!

My father in law had a fixed deposit in Shriram Transport finance. When it came up for renewal I suggested he withdraw the same and put it in South Indian Co-operative Bank Limited. My logic was if there is a group whose MF has been stopped by SEBI it cannot be a good place to keep a Fixed Deposit or buy a life insurance product.

However South Indian Co-operative bank closed down (my FIL, as a senior citizen has recovered most of his money) but Shriram group is doing well, prospering and is paying on time.

However my father in law has stopped asking me for advice!! Luckily whether it was with a real estate marketing company or with my father in law, both the risks were managable because of the size of the transaction.

falling markets what to do?

This is the time that most retail investors lose patience, panic and hit the sell button. If you did that, you may not be wrong. But then you may not be right either.

Remember the best money managers (no not a businessman like Warren Buffet) have done well by protecting the downside in their clients portfolios.

I sold Tata power, L&T, Hdfc not because these were bad companies but they had got ahead of their fair valuations – and by a mile. I was proved right in L&T and Hdfc (they are down more than 20% of my selling price) but I am not much in the money in case of Tata Power.

I have no clue as to where the market is headed – I have a “Technical Report” predicting a Sensex of 9800 and another report predicting 9000. I do not know whether this will happen. However I am convinced that there is enough alpha (or how a fund can outperform an index) and some smart managers can capture that.

You could be smart and continue your SIPs (like I am doing) or be foolish enough to stop the SIP. However, if the market stays down for say 4 years your stomach will be tested. For most investment returns IQ necessary is less than 100. However, in real life IQ above 150, harms your investment returns.

Big firms understand markets?

For most small investors the guys who come on TV with a slick suit are “more knowledgeable” than the guy in a dhoti. That is because as Indians we like “phoren” rather than Indian. So is our quest for knowledge.

Those people who have been long enough in the market know that one man who used to come to the “ring” to buy and sell shares or just to the BSE building as a visitor was Mr. K R Choksey. His ability and fundamental knowledge about creating wealth is legendary. He wore no suit. You must read this post by Alexander Green in a news letter to his investors. It talks about his experience at Merrill Lynch

Unmasking the Bull at Merrill Lynch

Dear Investment U Reader,

Let me tell you about the dumbest career move I ever made.

In 1999, Merrill Lynch began aggressive recruitment efforts. I really wasn’t interested. But, ironically, the more I begged off, the more money I was offered.

Unfortunately, my old firm provided the necessary nudge by informing me one day that I was prohibited from selling the shares in my pension – which had soared during the Internet mania – unless I left the firm.

Because I was one of the largest employee shareholders – and felt the technology bubble was likely to end badly – it provided a strong incentive to take Merrill’s offer.

Eventually, I did.

Big mistake. For starters, I was astonished to see that Merrill was pounding the drum for the very Internet darlings I had abandoned my old career to sell. For example, it had a “Strong Buy” on Lucent, Nortel, JDS Uniphase and Global Crossing – not to mention WorldCom, Enron and Adelphia.

I fired off a note to the analyst recommending JDS Uniphase at $150 a share. “How can you recommend a stock with such an insane valuation?”

“Valuation is only one of our metrics,” was his curt reply.

“But if that’s all wrong,” I wrote back, “what difference do the others make?”

I never heard from him again. JDS declined 99% over the next several months.

Merrill also has an unparalleled record in hiring and firing chief investment strategists. In the late 90s, Charles Clough was pushed out for being too bearish. His successor Christine Callies remained stubbornly bullish throughout the bear market that followed. That led to her being replaced by Richard Bernstein, who bragged at the market bottom in 2002 that Merrill had “the lowest equity allocation on the Street.”

Despite its blue chip image and gold-embossed brochures, Merrill reminds me of the computer HAL 9000 in Stanley Kubrick’s “2001: A Space Odyssey.” Completely calm, completely rational – and totally out of control.

I’ll never forget my first day at the firm. A broker on my floor stopped by my office to welcome me. After chatting a few minutes, he told me he had a great investment idea to share.

I told him I was all ears.

“Get your clients to pull out the equity in their homes and invest it with one of our Internet and technology managers,” he said, his face beaming.

“Why would I do that?” I asked.

“Don’t you get it?” he said, looking a bit surprised. “First you get paid on the mortgage origination. Then you get paid on the assets under management every quarter. It’s brilliant.”

So brilliant, in fact, that nine years later his clients have likely paid tens of thousands of dollars in fees and lost most of the equity in their homes.

I could go on, but I’ll stop here. Merrill wasn’t my kind of place. After a few months I resigned, returning most of the big signing bonus I received.

My experience with the firm may have been atypical. I’m sure there are capable, qualified people at Merrill who are doing their best to serve their clients.

That wasn’t my experience, however. My experience was that most investors need Merrill Lynch like a fish needs a bicycle.

Of course, it’s not just Merrill. The standard line on Wall Street is that the capital markets are so complicated and your financial circumstances so unique, you can’t be trusted to run your own money. You need a professional.

But do you, really? With a little education and a bit of discipline, you can run your portfolio yourself at a fraction of the cost of using a full-service broker.

And when you manage your own money, you don’t have to worry about conflicts of interest, self-serving advice, or hidden fees and expenses.

This story is obviously Alexander’s. The story is not about Merrill. Just cut and replace this name with Bear Stenrs, Citibank, JP Morgan, or in the Indian context with names like JM, Kotak, Icici, hdfc. it really does not matter – it will all sound the same. This leads us to the story I heard at the India Equity show – “it is difficult to teach something to a person, if the learning goes against his making a living”

Mutual funds? Myths surrounding SIPs

What is a Systematic Investment Plan (SIP)?

An SIP is simply; a method of investing a fixed sum, regularly, in a mutual fund. It is very similar to regular saving schemes like a recurring deposit. An SIP allows you to buy units on a given date each month, so you can implement an investment / saving plan for yourself. Once you have decided on the amount you want to invest every month and the mutual fund scheme in which you want to invest, you can either give post-dated cheques or ECS instruction, and the investment will be made regularly.

As is customary I have I have started with describing what an SIP is. Let us break some myths on SIP.

1. Investment in equity mutual funds or unit linked insurance should ALWAYS be done in SIP mode: I remember in 1999 when Templeton Mutual fund talked about SIP – the market looked at it skeptically. And it would take a lot of convincing for customers to accept it. Now, life has come a full circle. Everybody wants to (ALWAYS) invest using SIP. If you have the maturity and calmness to realize that equities are for the long term and are willing to give your funds about 10 years, AND you have a lump-sum, you can afford to give the SIP route a go by. However if your horizon is less than 5 years, you MUST do an SIP.

2. I do rupee cost averaging in a single equity – that is a kind of SIP is it not? This is a question I face every day. NO a rupee cost averaging in single scrip cannot be equated to an SIP. When the market brings down the price of single scrip it is giving you information. You need to react to that. Let us take 2 examples – Lupin laboratories – has moved from a high of Rs. 700 to Rs. 100 and back to Rs. 700. The question to ask is not whether SIP would have worked. The question to ask is whether you would have had the stomach to continue the SIP through the period. Silverline technologies moved from 30 to 1300 to 7! If you had started the SIP at a price of Rs. 1300 – today you would be licking your wounds. SIP works in a portfolio, not in single scrip.

3. You CANNOT invest a lump-sum in the same account in which you are doing an SIP. I have no idea why this myth has got into people’s head. Many people think if they are doing an SIP in a particular fund, and suddenly they have a surplus, they cannot put that lump sum in that account – far from it. In case you are doing a sip of Rs. 10,000 per month in equity fund, and suddenly you have a surplus of Rs. 100,000 and clearly you have a 10 year view on the same, just push it into your SIP account. SIP is just a payment mode, not a scheme!

4. If I miss investing for a particular month, will they prosecute me? This is the EMI fear that people have. In an SIP you are buying an investment every month (or quarter) – there is no question of prosecuting you for not missing one investment. As a matter of discipline, you should not miss any month; however, missing one month’s investment is not a crime!

5. When you have a surplus (accumulation stage of your life) you should do an SIP and during retirement you should do a SWP! No. you should keep your withdrawals only from an income fund or a bank fixed deposit. You should sell an equity fund on some other basis – say deciding to sell 20% of your portfolio in a year that the return is 4 times the 30 year historic return. SWP, by definition cannot work in an equity fund!

6. SIP works for everybody, but does not work for me! Another myth. SIP works in a well diversified equity fund in the long run. When people put forth arguments that it does not work for them, they have either not chosen a good fund or are looking at a 12 month horizon.

7. SIP is only for small investors. Nothing can be farther from the truth. I have a client who has invested Rs. 42.66 lakhs using SIP – starting from Jan 1998 till date. Obviously he has invested much more in later years as his income went up – and the funds together are worth Rs. 127 lakhs – substantially higher than his provident fund.

8. Market is too high to start an SIP – I have heard this when the index was 3000 also. I have no clue where is the market headed, but I know SIP works!

9. All fund houses are now charging a full load on the SIP, so now SIP will not work. Why not time the market? Introducing an entry load was expected to happen and it has happened. What actually hurts the retail investor is the asset management charges – 2.5% in most cases is a bigger threat to compounding!

10. If a do an SIP in a tax plan, can I withdraw ALL the money on completion of 3 years? Another regular question almost all day! The answer is every instalment has to be with the fund house for 3 years. The lock-in comes from the Income tax rules which say that a tax saving scheme should have a 3 year lock-in.

You cannot escape that by doing an SIP!