The Investment Thread

[Big Daddy]

Sold the inverse ETF from post #653 and made money. There is a concept called paired trading where you buy stocks that behave exactly opposite at different times. Then when you sell one stock, you buy its pair. Market fell today and I sold the inverse ETF and bought regular ETF. This gurantees that you sell high (inverse ETF) and buy low (regular ETF). I have been preparing for a market fall for two years and this time I was fully prepared. I will beat S&P 500 index this year by 4-5%. I have never been so happy when market fell .

 

[saneguy]

As someone who owns a house and stocks, I had always believed that buying a house is the worst possible investment you can make, and it is impossible for anyone to convince me otherwise. It appears that people are also reaching similar conclusion: Want to help India? Don't buy a house

The problem with buying a house is that you don't really know what problems you might get into. A bad neighbor might make you sell it at a loss. Earthquakes and natural calamities might ruin house. Vandalism is also a possibility. The list goes on and on. There as so many unpredictables that risk is always high and returns are never very attractive.

Buy REITs, but avoid buying a house because it requires huge upfront investment which will reduce your working capital to really low levels for many years. Stocks, on the other hand, can be bought for a few thousands of dollars at a time. To me, the convenience of stocks in investments is unbeatable.

As a generic thought I dont believe in this. It all depends on what you buy / for how much / where - I bought a house a couple of years back. It has appreciated by 40% in 2 years and apart from that I am also getting rental income which is equivalent of the EMI which I used to pay (I repaid the entire loan now). But this to me was a wise call. Remember in cities like Mumbai housing is always short and prices have never really fallen at all.

On stocks - obviously everyone is not equipped to handle the volatility in the markets. Neither is everyone as knowledgeable to be able to take accurate calls. Cal me old school but I still feel one must definitely "own" a roof to live under!

 

[Big Daddy]

People quote things like these (you got 40% price increase). However, mathematically it is not that easy unless you paid cash because once you add up EMI, etc. the price increase would be much less. Additionally, if you don't have insurance then it represents a degree of risk as well. What if there is an earthquake and the building collapse. If you have a flat then there is no land that you really own. Now, compare that to stock returns from Sensex and see how you did. Also, house is a huge investment compared to what you have to spend in stocks. In fact, when I was paying for my home, I hated the fact that I cannot buy stocks for many years due to my financial obligations for paying my house. House rent also increases your total income that you have to pay taxes on. Anyway, it is a mathematical problem and most people will quote percentage price increase to make a case. Guys like me don't care for such things. I want mathematical proof. Mathematically, I am fully convinced with what I said. However, I don't mind Real Estate Investment Trusts (REITs) as they help me diversify. I own real estate that way. House, to me, is not a great investment. It is an OK investment.

Also, home price is just a perception. Stock price is real. Just because someone thinks that you can sell a home for certain price does not mean that you will get that price. You have to wait for months and then there are many other fees that you have to pay. Sometimes you will get petty buyers who would ask for lower price. None of that really happens in selling and buying stocks. In some cases, you may finalize a deal only to realize that a buyer is unable to secure a loan. Also, home prices are sensitive to interest rates. If RBI increases interest rates then home loan PMI will go up and demand will go down requiring home price adjustment.

On risk-return frontier, home as an asset is not really an efficient investment. It is good as a diversification strategy, but not really that great as an investment. If homes in India were really a great investment then I would be either running towards India to buy a home or regretting a lost opportunity. In reality, I have been consistently deterring people from this investment opportunity (based on risk return scenario, opportunity costs and working capital availability for years).

 

[Big Daddy]

There is one thing that will increase both the stock valuations (financial stocks) and home values and that is ease of obtaining home loans. Generally, bubbles get created that way. It appears that SBI is making it easy to get home loans <SBI home loans rocking at Rs 188 crore a day; targets Rs 250 crore - The Economic Times >. I am not very knowledgeable about how appropriate this SBI strategy is. It could be good or bad, but it is something to take note of.

There is always a risk of giving a lot of loans to increase SBI stock value. However, if appropriate financial ratios are not maintained then a lot of bad loans will be made leading to bad performance/market crash in the future. Even politically, it is desirable to show economic growth in the short term. SBI being state controlled, new government may have played a role in making loans available.

 

[Big Daddy]

Here is the UBS survey of rich people < https://www.ubs.com/content/dam/WealthManagementAmericas/documents/investor-watch-3Q2013-report.pdf >. From investment standpoint there are two things that appear to be extremely important. First, access to cash when needed and second, diversification of investment assets.

 

[Big Daddy]

All those statements of China taking US jobs, skyrocketing real estate, raising China and India, raising US debt, etc. are good media punch lines, in the end, US economy was still the best place to invest and make money for last five years. That is what really matters. Here is how economies stacked up in terms of stock returns.

America: The best place to invest your money - Dec. 8, 2014

Basically, it means that you doubled your money in 5 years in America.

 

[max_jeopardy]

All those statements of China taking US jobs, skyrocketing real estate, raising China and India, raising US debt, etc. are good media punch lines, in the end, US economy was still the best place to invest and make money for last five years. That is what really matters. Here is how economies stacked up in terms of stock returns.

America: The best place to invest your money - Dec. 8, 2014

Basically, it means that you doubled your money in 5 years in America.

With savings APRs ranging form .2% to .8% PA, and stock variations of upto 6% I am not sure if any once can double their money in 5 years.

Yes it may be possible for a few who invested in 2008 when market crashed, but today I feel India stock market has much more potential than in US.

Cheers !!!

SG

 

[Big Daddy]

The 15.8% per year gets compounded, so if you invest x then in 5 years it became x*(1.158)^5 = 2.08 x. So you did double the money in 5 years. I have been invested in the market since 1996 and I doubled up in 2008 so I did make the money. Now, one more thing before people say Indian market is better because it is not. Here is why. US gave 15.8% annual return with an inflation of 2%, so net yearly gain was 13.8%. India may have given higher yearly returns (possibly 18%) but India's yearly inflation was about 10%, which gives net yearly gain of 8%. Just look at fall of Indian Rupee from $1=40 to about $1=62. So to compare US market to Indian market, you either adjust returns to account for inflation or just use $US in valuing returns. If you use common currency (US $), then you have to lower cumulative returns in Indian market by about 55% (due to drop in rupee) and see that Indian market did not double in five years (even if average returns in Indian market may look higher). When you consider net gains adjusted for inflation, US is unbeatable because US businesses are free to invest anywhere to make money. With such freedom, no country can beat US in wealth creation--- unless they also adopt free markets. That takes courage that hardly any country has.

If Indian market was really giving high returns, I would not be sitting here investing in the US. I would rush towards Indian investments (which I do have a little bit but are hardly exciting).

Out of curiosity, I plotted Sensex vs. S&P 500 (for common currency). I only had data beginning from Oct. 10, 2010 till to date, and this is what it shows. Sensex returning 3.77% and S&P 500 75.13%. Now, this also gives an idea why I don't like Indian real estate market because even Sensex, barring rare cherry picked examples, beats Indian real estate market in general (when both Sensex and real estate are compared with currency in Rupees) and S&P 500 really beats Sensex, so India has a long way to reforms before it starts attracting serious money from foreign investors, and it needs that money to grow!

If doubling the money sounds crazy, how about a case for tripling the money in 5 years? This is what will happen if you consider returns in Indian Rupees. Market return in dollars: 2.08x and dollar appreciation in Rupees 55%. Total return if you converted rupees to dollars 5 years ago, invested in S&P 500, sold and converted dollars back to Indian Rupees today will give you: (2.08*1.55) x= 3.22 x. A whooping 322% return in 5 years. That is average annual return of over 60% in Rupees. This is the reality that you will not hear anywhere because it will depress people. However, this is how Capitalism makes poor, rich and rich, richer because a lot depends on the amount "x". It could be $100 or several millions.

 

[Big Daddy]

Real Estate vs. REIT

While I am not a great fan of Real Estate, I do invest in REITs. Why?

Let's take two investment opportunities: Opportunity A -Buy a house and rent; and opportunity B -Invest in REITs. Both are entirely equal (investment amount and risk) and costs us 50 lakhs. Investment A gives us 20,000 in rent and Investment B gives us 20,000 in dividends. Even from tax point of view these are equal because both rent and "non-qualified" dividends will be taxed as regular income. So they really are equal and a rational investor should not prefer one investment over other. At least that is what it seems.

Reality is that REITs are better because you can reinvest dividends and get compounding effect. It is like every month house grows in size proportionate to rent ; and rent increases next month because house size has grown. Second, if I want 25 lakhs for emergency then I can sell stock worth 25 lakhs, but I cannot sell half of my house. Third, I can buy REITs for properties built in Australia and Japan, but I almost have to buy a house closer to where I live (otherwise my transportation costs will reduce my real estate income). REITs are also diversified risk (putting eggs in different basket as REITs consists of multiple properties) and traditional real estate is non-diversified risk (putting all eggs in one basket).

However, traditional real estate gives you one advantage-- bragging rights that REITs cannot give. A person who likes to show off will enjoy telling others I have two homes. No one will care if you say, I have 1000 REIT shares. In reality, REIT guy is still ahead because he does not have a mortgage to pay off or additional burden/worry to collect rent.

 

[Dry Ice]

Real Estate vs. REIT

While I am not a great fan of Real Estate, I do invest in REITs. Why?

Thanks for sharing this with us. I was looking for some funds to invest in and this seems like a good bet to diversify ones portfolio some more. Any particular recommendations?