Stock & Real Estate

I have friends in the stock market who confidently give advice on the real estate market. They are real experts in the stock market and that gives them the extreme confidence to make predictions about the property market. Most of the times, they have been proven to be wrong. That is because of the fundamental difference in these two asset classes.

1. Stock market is totally organised and transparent. All transactions are routed through a central exchange and are visible to all parties. Just imagine if there was a need to list all properties on a single exchange and all transactions had to be compulsorily routed through this exchange. The property market would undergo a drastic transformation with this one single change.
2. Stocks are pure investments. Real estate is consumption plus investment. Hence there are a lot of emotions involved in the real estate market. A person who is comfortable in Bandra (West) will not move to Bandra (East) even if there is a chance of higher appreciation in Bandra (East).
3. In real estate many times the supply is limited in certain micro markets. Hence the general rules might not apply in certain areas. To some extent, this also applies to the stock market. However, in stock market majority owners would be willing to sell at a certain price. This might not hold true in the real estate market.
4. Stock markets are ruled by fundamentals and technicals. In the real estate market, there is no place for technical charts.
5. I once heard Osho saying that unless you know God, you should not talk about him; you will ruin people’s lives. The same applies to stock market pundits who confidently advice people about real estate!

 

Real estate v/s Stock Market

I have witnessed a funny relationship between investors in these two asset classes. Each side sticks to its view about the superiority of its own investment. What’s really funny is that they circulate reports about the risks in the other’s markets and how the market is going to fall.

We must realize that in today’s world all markets are intertwined. If real estate falls, then sooner or later stock markets too will fall- the degree may vary though.

Each has its own advantages and disadvantages. Stock market investment can be unnerving at times if the stakes are high and one looks at the ticker constantly. One is not supposed to do that for long term investments; however the fact is that one tends to look and pay the price for an emotional roller coaster ride.

Experience of a Stock Trader

Recently I met a friend after 30 years. He is a brilliant guy- C.A, C.M.A, IIM(A). With such fantastic qualifications, the first thought that came to my mind was can a person derive job satisfaction from stock trading? His satisfaction came from the fact that he has been able to earn a post-tax return of over 17% over a period of 25 years. There were peaks and valleys; however a compounded return of 17% post tax over a period of 25 years is definitely great going.

Here are a few pearls of wisdom that he shared with me-

1. Stock trading is Ai. He has a fixed deposit that is kept as Margin Money with stock exchange that provides him the Pi.
2. The past is not going to repeat itself. The growth achieved in the past during liberalisation era was once in a lifetime event.
3. In this market, the “need to be right” will always ruin you. You have to respect and accept the market price and go with the trend without getting attached to your opinion.
4. The charts tell you the story. Your instincts do not matter. In fact they create “bias,” that can be harmful.
5. The trick is to improve the odds of being right. You can never be 100% right in the market. If you are right 70% of the time, you will make money.
6. You have to learn to control your mind. Fear and greed are the factors that drive the market.

I hope we learn from these pearls of wisdom.

Real Estate – is it fairly priced?

When we evaluate the price of a stock, we see the ratio of price to earnings. If the price to earnings ratio is very high, we say that the stock is overvalued. Today the overall market is priced at around 16-18 times forward earnings. Does that mean that you are paying 16 years earnings in advance? The answer is “NO.” Generally the earnings of a corporate are expected to grow. Hence if we factor the growth it means that we are probably paying for 10 years future earning to buy a stock. And that is considered fair.

Now let’s look at the price of real estate. In Mumbai, the rental yield on residential property is around 1.5% per annum of the market value. This means that price to earnings ratio is around 66 times. So either the rent is too low or the price is too high. The rent yield in Mumbai might probably be the lowest in the world. So what does it mean- Is the demand for rental properties for homes low as compared to the supply? Are there too many investors in Mumbai residential properties who drive up the price due to their demand and then drive down the rent through supply?

The yield in commercial property is high- around 7% to 9%, per annum. So is the commercial property undervalued due to low demand from investors or are the rents high due to higher demand from Corporates? There was a time when commercial property value was higher than residential. Today the position is reverse. Earlier people used to operate offices out of residential property. Now it would be foolish to do so. How times change!