Posted tagged ‘Real Estate’

Basics of Investing

August 3, 2008

I did a TGIF speech about investments – I met a person who told me that he clearly felt my blog was not addressing the new investor. Withing 5 minutes of him saying that one girl told me “i could not understand anything in your blog”. I hope this post removes that flaw in the blog.

Immaterial of whether you are in your 20s or in your 50s and you are looking at an investment you should know some of the basics of investing, so here it is.

By and large at some stage you must have been approached by some investment advisor. He (increasingly she) must have offered you mutual funds, ppf, unit linked plans, and thrown a lot of jargon.

Throwing jargon is one of the easiest (and impressive) way of getting the fees that the advisor earns. ALL industries do that. Take a simple English word and give it a different meaning, and then go about explaining it. Take a mouse, for example!

But what is an investment, shorn of all its jargon?

It is a sum of money that you outlay hoping to get a higher amount back. This can take two forms:

  1. Investment like a lender
  2. Investment like an owner

  1. Investment like a lender means you are giving your money to an organisation for them to use so that they can grow their business. As a compensation for using the money, they pay you interest. If you invest in PPF, NSC, Kisan vikas patra, RBI bonds, etc. you are lending money to the government of India. However if you keep money in a fixed deposit in say, Hdfc you are lending to a private sector body. Bank deposits also fall in the category of “investing like a lender”. What are the advantages and shortcomings of such an investment?

· Certainty of interest, when it will be paid and when will the capital come back

· Convenient to handle

· Simple to understand – the only thing you need to know is the amount of interest, and will the original amount that you put in comeback


  • Inflation may erode the amount, substantially. For e.g. if the inflation rate is 6%, the value falls by 44% in 10 years time. So if you get the SAME amount (back) that you put 10 years ago, inflation has eroded its value.
  • Default risk – the person taking the money does not repay. Many co-operative banks, some nbfcs, some small business owners, may fall in this category.
  • Delay risk – if the government of India decides to postpone your PPF payment by 10 years what will you do? Looks odd, but remember some politicians may decide that all amounts above Rs. 5L should be paid in installments you may have to grin and bear it.
  • You take the risk, but if the company does well your rewards do not increase.
  • Debt is not risky in the short run, but it is risky in the LONG RUN.

2a. Invest like an owner means you are joining a company as its partner. This obviously means you get a portion of the company, you get the accounts of the company, they report to you on a quarterly basis, they allow you to participate in the well being of the company, ….all the perks of ownership.


1.You get to participate in the well being and in the ill being of the company.

2. When the company does well, you get a fantastic hedge against inflation

3. You get dividends and price appreciation as rewards for holding shares


· Stock picking is not just watching TV and buying the “hottest stocks”. It takes a lot of effort to pick a good stock, to structure a portfolio and keep allocating resources to the correct companies

· It is very risky in the short run

· You require a good head, and a greater stomach to make money with shares

2b.Not enough attention is paid by people to investment in real estate (I mean actual, active investing, not buying a house and hope it will appreciate). If you can keep buying properties, rent it out, sell when appropriate, real estate will also give you an excellent inflation adjusted return. The advantages are that in a worst case scenario, you can use the assets, however it requires a lot of expertise. Also individual real estate calls are complicated (Real estate mutual funds – we have been hearing about it for long, hope it happens fast). A very unstructured, unsupervised market. If you find a good advisor, you are blessed. My real estate portfolio is with a veteran who gives me stunning returns.

2c. Starting / Partnering a small business! Small business is big business. Most of the world economy is supported by the small business owner. Most of the jobs are created by them. Their media share is much less than the market share that the small guys have!

I hope I kept is simple. My wealth creation has some formula. One of them is to do the following four:

· Invest in a good portfolio (mutual fund or unit linked insurance with a small recurring charge)

· Select a good fund manager (I mean fund house)

· Do an SIP

· Think long term – I mean 10+ years

If you do all four, I daresay you can look at Warren Buffet and say, “Sir I listened to your rule number 1. I have not made losses.” That is great!

is where you can mail me!


Inflation times: buy real estate?

July 26, 2008

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 / 9820606187

Living beyond your means

July 18, 2008

Today it is very easy to live beyond ones’ means. If you take any magazine you will find about 15 advertisements – of this about 14 will extol you to live beyond your means. If you can afford a Ford Ikon, they will urge you to buy a Honda City. If you can buy a Honda City, they will push you to an Octavia.

If you tell a real estate broker you are looking for a house for 6 million, be prepared to shell out 9 million!

All of this is easy – because there is a huge push to make you think in EMI language – not full price language! Sir a Merc is available for “only” Rs. 54,000 p.m. as EMI!

What are the indicators that you are living a little beyond your means? They are as follows:

a. Your cheks are bouncing! This is perhaps the worst indicator that you are issuing “rubber” cheques…so this is not a good idea.

b. Your credit score (currently in India you do not have a copy of this) is falling and the people who have lent or wanting to lend to you are hesitant about default and are increasing the interest rate..

c. You are saving less than 15% of your salary!

d. You are charging everything to your credit card and are paying only a part of the amount! I hope you noticed Hdfc bank has raised the interest charges to 3.25% p.m

e. You have 4 credit cards and you are borrowing from one card to pay the other 3!

f. More than 30% of your earnings are going towards EMI payments

g. You have no emergency fund, losing your job is one of the nightmares you go through regularly, one small repair like having to replace your car tyres can create hell for you!

h. you are happy visiting your parents for 10 day vacations because you can save some living expenses

i. if you will touch your parents’ kitty for your purchase of car, bike or your marriage expenses

if you have any of the above mentioned problems, you need to set your financial house in order. TODAY.


Choosing the financial adviser..

June 30, 2008

This is arguably the most important financial decision in your life you will ever make! Not too long ago life was simple. You wanted a bank account, you went to a bank. If you wanted to buy shares, you went to a sub-broker (a broker was out of reach till about 15 years back). If you wanted a life insurance, a LIC agent sold you some policy which you hoped was good.

Today you find bankers who actively discourage you from coming to a bank. Insurance agents who sell you anything buy a life insurance product. Bankers who sell you mutual funds, life insurance, broking accounts, and real estate!

And the companies that sell you financial products are dime a dozen – Reliance (Mukesh) has a loyalty card, Reliance (anil) has a credit card. A call from Reliance Money says “Reliance Bank” and offers you a loan! Airtel offers you money transfer, cell phones can be used for paying utility bills. Why do I need a bank, a cheque book, a relationship manager? I do not know!

Now into this mess comes in a financial adviser. He should tell you the difference between information and noise. He should encourage you to write down your goals. He should be able to understand the difference between a 3 month track record of a scheme and a 3 year performance. He should be able to FORCE you to buy life insurance MUCH BEFORE you need it. Your pension plans and medical insurance plans should be in place when you CAN rather than when you must. He should be able to help you prioritise your goals. He should have the guts to tell you that your goals make sense only when you allocate resources for the same.

HOWEVER, he should not sell any products to you EVEN if it is a zero load mutual fund. Because then, he loses credibility. It is like a rep of a pharma company – I cannot trust him like i trust my family doctor. Sorry, I know this is an old world view.


Equity Investments: the best hedge against inflation!

June 24, 2008

Hey frankly you do not have too much of a choice, do you?

You would hate to hear this if your financial adviser (financial product salesman) were to tell you, but it is the truth.

You have no choice in seeing where to invest for people looking to hedge against the risk of higher inflation.

Real estate is fine under ordinary circumstances. Internationally real estate is on a death spiral and in India the housing market is in a bad spiral right now. And we may still be away from the bottom.

The old relic – gold – is another good choice, usually. But gold has already appreciated from just over $300 an ounce six years ago to almost $900 today. It could be a little late, or we may at best match inflation.

And RBI Bonds yield much lesser than inflation! Assuming inflation to average 10% p.a. RBI bonds yield you about – 4.6%. That is an awfully steep price to pay!

So, hey Charlie, where can you put money to work today to hedge against the risk of higher inflation?

In shares, as the Englishmen call them or stocks, as the Americans call them. Frankly, do you have a choice? No. Nyet. Nay.

This may seem counterintuitive at first. After all, inflation devalues corporate earnings, the major driver of stock prices. But the mere presence of inflation also indicates that many companies are successfully passing along price increases to customers. This allows stocks to rise even when inflation in climbing.

During inflationary times in India – say during the 1970s and the 1980s stock market indices rose faster, much faster than inflation. And while the average rate of inflation throughout the 1980s was uncomfortably high.

An American analysis found that in inflationary periods – as measured from troughs to peaks some 6 of 10 market sectors in the S&P 500 actually gained ground.

So don’t let anyone persuade you that you should sell all your shares and invest that dough into precious metals, commodities, and real estate. Sure, these asset classes should make up a portion of your portfolio, but certainly not the bulk of it.

Dr. Jeremy Siegel, author of Stocks for the Long Run, has done a study of the returns of different types of assets over the past 200 years.

What he discovered is dramatic. $1 invested in gold in 1802 would have been worth $32.84 at the end of 2006. The same dollar invested in T-Bills, with interest reinvested, would have grown to $5,061. $1 invested in bonds would be worth $18,235. And $1 invested in common stocks with dividends reinvested – drum roll, please – is now worth more than $12.7 million.

The odds are good, of course, that you weren’t around a couple hundred years ago. And, you won’t be around 200 years from now, either.

It’s not necessary to think that long term, however. Start whenever you want and you’ll find that when measured in decades the investment returns for different asset classes are remarkably consistent. Stocks are the big winner.

Since 1926, the stock market has generated a positive return in 59 out of 82 calendar years – or nearly three out of every four years in the US of A.

Since 1980 your investment of Rs. 100 had become 21000 till a few months back and is now at 14,000. And apart from this you got good dividend returns too! This by any stretch of imagination is a great return.

For the past 200 years, nothing has come close to matching the long-term compounded returns of equity shares. However, it is necessary to remember that this has happened only in democracies. So go out and vote and hope that over the next few years of your life we are able to preserve the democracy. If you make sure that the democracy survives, markets will make money, all you need to do is ride it!

We have no clue as to which other asset class can match equity returns! Like always invest systematically in a large index Exchange Traded Fund.

PS: past performance is not an indicator of future performance. The only lesson from history is that you cannot learn from history.


Real estate prices are determined by supply and demand

May 5, 2008

What a true statement! Just remove real estate and replace it with “oil”, “gold” or “shares of Hdfc” – it does not matter. Asset prices fluctuate and is determined by demand and supply.

Only thing is that this is a true statement – however the following conditions have to exist.

1. Uniformity of the asset

2. Long run

3. Many buyers and many sellers

4. No one person (or group) with an ability to influence prices

Let us look at what is the situation in Mumbai (or Navi Mumbai).

1. Many builders have bought land at ridiculously low prices, so can hold on to their property for say 20 years without worrying.

2. The rental yields are about 3-4% and many flats are kept locked.

3. There is a huge demand for “service apartments” however a law says that only a full building can be given like this – this is a clear case of inhibiting supply

4. Uniformity of the product – the price in Mumbai changes (dramatically) depending on the broker, builder, and location – in an imperfect information market (unlike share markets) buyers and sellers work with incomplete, inadequate and sometimes wrong information.

5. Builders have bought a lot of land in Mumbai and will construct only when the existing stock gets sold. So if Ghatkopar (a suburb of Mumbai) is currently selling @ 13,000 a sq. foot, the builder will wait for the price to catch up with Powai and then sell, say @ 23k. Big builders have increased their ability to wait by holding on to land rather than constructed property.

So if you believe that in the long run real estate prices are determined by demand and supply – you also have to remember that market can be irrational far more than you can be solvent. So if you want to buy a house, go ahead and buy, or wait for a loooongggg time!


Concentrated portfolio or diversified portfolio?

May 2, 2008

If you read what John Templeton says, you will believe that you need to create a diversified portfolio – a little of Japanese stocks, lots of American, some emerging markets, etc. in equity alone. Apart from this some debt – short term, long term, etc.

Warren Buffet on the other hand says you should concentrate your portfolio if you wish to create wealth.

Whom should you listen to?


You should have a concentrated portfolio – which means in the Indian context, if you have a Rs. 25L portfolio you may not need more than 6 companies. However, once you have created some wealth, you need to protect a portion of it from the vagaries of the market.

Let us take an example. In case you had invested Rs. 10,000 in Wipro in the year 1980, today it would be worth Rs. 350 crores (assuming you consumed all the dividends). However, at various stages you would have sold some part of your wipro shares to invest in other companies too – now if WIPRO had not done well, but some other company in which you invested (say Silverline) had done well, you would have looked smart (but actually you were lucky, simply, lucky).

However if you are still holding on to ALL the shares of WIPRO, it makes sense for you to sell a portion of WIPRO and invest in a simple index fund, some real estate, some rbi bonds, etc.