Equity Returns or Real Estate Returns?
How many of you have grudged your friends who say “My father had bought a flat in Santacruz for Rs. 200,000 in 1977, now it is worth Rs. 30,000,000” – surely you felt pangs of jealousy did you not?
Did you think – if I had this I could have retired instead of suffering this boss? You bet!
Did you know that unfortunately you cannot set the clock back? Which means even though this information about a flat in Santacruz is accurate, it is completely (well almost) useless information!
And since you cannot cry over spilt milk, let us at least cry over Vodka or Champagne.
Instead of buying a flat in Santacruz if your friend’s father had invested this amount in equity shares of Wipro it would have been worth, hold your breath Rs. 8100 crores (apart from the dividends that you consumed for your lavish lifestyle).
I am not sure about prices in Santacruz, but surely for Rs. 8100 crores (now tax free, viola!) you could have bought a sizeable chunk of Santacruz – or so I think!
And Wipro is not alone. Bajaj Auto, Hindustan Lever (Oh yes inspite of not participating in the ’02 to ’07 boom), Reliance, Cipla, Nestle, Ranbaxy….would have all done that.
If you had done a SIP in the equity index (sensex assuming you could buy from 1977) on a dividend consumed basis your returns should be in excess of 20% per annum. Not bad even considering that during some of those years inflation was at 12-15% p.a. It is still far ahead of Santacruz. Approximately 2 times as much.
Lesson number 1: Do not cry
Lesson number 2: If you insist on crying, cry for Champagne not milk.
MOST IMPORTANT LESSON:
You cannot set the clock back for sure. Start NOW. Start saving in a good equity fund. If you cannot choose a good fund, do a SIP in the Sensex. The last time I saw Templeton had one of the cheapest Index funds (buzz me I will give you my Arn code, if you want). It is equity (business) that gives better returns than gold or real estate.
Ask yourself the following questions:
– did I have Rs. 10,000 to invest in 1980 (ok ask your Dad or Grand dad as the case maybe)
– would have I had the patience to hold it on for 34 years?
– would I have been happy with my money DOUBLING in 3 years and sold it off for Rs. 20,000?
– would I have sold it off at Rs. 50 lakhs thinking ‘It cannot go up further’ and then put that amount in a tax saving bond?
– would I have sold it partially to invest in Silverline? Worse than that would I have sold everything and invest that in Silverline or Crest Animation?
It is not easy to make money in the share market if you are too intelligent by half. It rips you apart.
Never said Equities is easy, but I can assure you, it has created wealth.
tsashok
Super article.It seems as a repeated one but very much required again and again..Thanks for reminding us..
Jitendra
For me SIP have made money, that too in very short span of time. But am in for a long haul 🙂
Thank you.
Hari
sir, Mind blowing !!!!
Karthik
I asked Financial Advisor about ” Nobody cant beat index except very rare exceptional like WB..etc. but they are very very few”. Then why we should invest in Equity funds. Why people are given choices.
He told ” it is not right”. As per statistics, it is not. As per ” Efficient Market thoery, it may be right in western. but not in India. Kindly throw some light Subra ji.
also, as per above RE example, it is 14.5% CAGR. And selling that Santacruz place will be very costly affair due to brokers and reg fee, stamp duty…etc. Whereas in wipro, One click on terminal and it is sold.
Krish
Subraji, am sure you are in the market for the last 34 years. Why should not we discuss this real life example rather than hypothetical case. With passion for equity, CA, being a finance advisory, can we assume your networth is in thousands of crores earned from the stock market investing?. It would be an inspiration for all of us as a regular readers of your blog.
subra
Yes Karthik in a less efficient market like India most fund managers are able to beat the index. However for 99% of the readers of this blog if they have say a 30 year market horizon, you are better off with an index fund. Ability to pick the right fund consistently for the next 30 years will not be easy.
Krish – my net worth does not matter, but stock market ‘discussion’ is restricted to a small circle of friends. With strangers it is just the blog.
Atul Mathur
Hi Subra. another great article.. i have been reading your blog since years now.. Just one point.. Templeton is not the cheapest index fund.. HDFC is.. 0.35% as expense ratio in direct plan…less than half of templeton..and thats where i put my money.. hope this is correct.
Paul
Hi Subra, I think IDFC Nifty Fund Direct is the cheapest with 0.22% expense ratio.
subra
Guys i have no clue about the current costs – use Morningstar.com or valueresearchonline.com to find out the cheapest Index fund. Also make sure that the tracking error is minimum. In fact the best Index fund is the one that has the LEAST TRACKING ERROR….AND the tracking error includes the amc charges..so choose the index fund with the least tracking error and invest in a fund that has decent service, and chances of the fund house being around is at least true for say a few years. Personally I do not invest in an index fund…..so my knowledge is pure theory….
Kash
What an idiotic article and idiotic comparison. Why you did not gave example of companies like Suzlon, GMR Infra, Himachal Futuristic, SKS Micro finance etc..
Selvan
Subra: Great article and been a follower for many years. As you said we can’t change the time clock and pondering about what I haven’t done in 1980/1990’s is useless. I know a specific example of RE invested in a City of Tamil Nadu in 1980 yielded a CAGR of about 16.5% point to point without including any expenses paid every year. If we have to include all & find an IRR it would be less than 16.5%. As you said with index investment if achieved 20% then the amount is about 3 times the amount of current RE value.
3%+ over 30 years is phenomenal that too tax free. Time lost is lost and can’t gain any!!
subra
Selvan
for all practical purposes and past comparisons you should draw from your own examples or from the index. Now if you DID buy a property at a good location and actually got 16%, good. There is no RE index to go back and do long term comparisons. So one will have to take generic examples or specific examples of people.
People without equity management skills obviously cannot get great returns, they are better off with an index fund. Unfortunately there is no equivalent of this in the RE space.
bharat shah
great post and some great comments ! out of curiosity , i just calculated the cage of wipro from the figure and found more than @40% cagr. even 20% cagr, which may be the case of the scrips you mentioned, the a/m could be @ 27 crores! in one blogs i read that there is need of some basic finance/investment education during graduation. i think , some examples like this along with power of compounding on longer term (say person’s working life) can be starting point for such education.i think , lot of young people would escape from becoming scape goat of f. & o., day trading etc. as means of becoming crorepati.
Pooja R
bharat shah I guess people draw examples from their own portfolios…hence Kash has different ones and Subra has different ones. I just checked even in the Sensex, one would have made more money than a flat in Santacruz…which is the best kinda region in Mumbai. If S had taken an example of Mira road it would have been negative on the RE front!!
bharat shah
young people have to start without any experience and so, such education by formal ways( as a subject) or through informal ways ( through such blogs) would be helpful, i think.
Mira D
Ok, my 2 paise worth.
Look at these stocks Subra has been sporadically mentioning — look at 2008/03 data and 2014/03– adjust for splits and bonuses– calculate the CAGR. 🙂
(I’m not even adding dividends here)
sanjiv
Real estate has lot of other drawbacks like maintenance cost, painting, capital gains tax, illiquidity, tenant headache etc. You cannot part sell it either as per your requirement. Its price depends on a lot of other factors. Moreover one needs a lot of money to buy it in first place.
gunda
If one example in Santacruz can be taken, let me give an example in Bangalore. A residential site in a pure residential area (it still is) was selling at less than Rs.1000 per square feet in the year 2002. It is now more than Rs.10000. CAGR works out to about 21%
It is the same or a better story in most of Bangalore.
subra
Bangalore? gunda i have heard much more horror stories about Bengaluru than even Gurgaon. You must ask people who are desperate to sell. I know somebody who bought in 2011, got delivery in 2012…now WILLING TO SELL AT THAT PRICE…cannot find a buyer.