Its the Quantum that is Important

Real Estate has given some crazy returns in the last few years and there is not denying that. We can always pick and chose stocks that have maybe given even better returns, but the big question is, are they even comparable.

While there is always the case of stocks like Infosys / Wipro / Motherson Sumi, the net results if one looks at the Index itself is not as promising.

Even taking the most optimistic scenario that is used by most fund managers (investing in 1979), the returns come to some 17%. On the other hand, I know of properties that have (at current market prices) given a return of similar proportion for a much longer time.

But as usual, I am digressing from the subject on hand. On Twitter and elsewhere, I constantly hear about investors making 2x, 4x, 10x their investments in certain stocks.

The returns are fabulous if one were to put it, but the question is, is the return really worthwhile in money terms?

Let me give a example of my own. In 1997, I bought a certain company called Indo Count Industries. It was a penny stock at that point and remained one for a very long time. In fact, when markets collapsed in 2008 / 09, this stock traded at around 2.50.

Things started to change in 2013 and in 2014, this stock galloped 800%. This year, it has already gone up 80%. For me, this stock is near to a 100 bagger. Theoretically speaking, I should actually be able to retire on just this stock alone.

But as usual, there is a caveat. I invested 700 bucks (in 1997) and today while its worth 65,000, the sum is pretty low for thinking of any dream purchases, let alone retiring.

Lets assume instead of buying Indocount I had bought some real estate (of course, I could not get something for 700, so amount of investment would need to be higher) and it became a 100 bagger, I could actually have retired for a comfortable life.

The key difference is the amount of investment that is required / invested when it comes to the stock market vs the investment we do when we enter into real estate.

In Real estate, not only do we invest every Rupee we have got but actually leverage ourselves by taking on loans that magnify our returns.

When it comes to investing though, we rarely invest what we can (our Liquid Networth), let alone investing it all and then adding some leverage on top of it.

The key reason is the lack of conviction. While we are convinced that Real Estate markets shall not drown us, we aren’t so sure when it comes to the stock market.

The reason we aren’t convinced that stocks comes down to the fact that most of the time, we are clueless as to how to analyze companies / investment and even when we are, having either burnt our own hands or seen the destruction suffered by others, we worry too much about what if it goes wrong.

A friend of mine has a couple of crores in investment in real estate while having a couple of lakhs into the market. Even if his investment in the market doubles / quadruples, the returns are literally are literally a drop in the bucket so as to speak when compared to what the returns (a big IF) that are generated if his real estate investment doubles.

Of course, I am not advocating real estate. I strongly believe that while we may not see a crash of the kind we saw in US, the forward returns from Real Estate will be pretty low (and this even before Indexation) for the foreseeable future.

On the other hand, if India grows in the way countries like United States / South Korea / South East Nations / China have grown, there is a lot more to look forward to.

But you will only build wealth if you not only invest significantly but also be willing to stay through it through thick and thin. But that requires a lot of discipline since its not easy to stick to our process when the times are tough.

At PortfolioYoga, we introduced a Asset Allocator model sometime back. We believe that rather than invest everything when the markets are high, it makes sense to have a lower exposure and increase the exposure if market gets cheaper. Else, while returns will be lower than complete exposure shall provide, at the very least, you shall be able to sleep well at night.

Big money, both in markets as elsewhere, is made by those willing to bet it big. That of course does not mean take un-necessary risks. But with the right risk models, you should be able to build your wealth without having to go through the pain of having your investment stuck with no way to exit in a hurry as is the case with asset classes like Real Estate.