(My piece that appeared in Deccan Chronicle on 26 April, 2015)
The stock markets have been on a roll for the last one year. From April 2014 to March 2015, the index delivered a splendid return of 27 per cent, once again rewarding people who have faith in equities and the patience to wait. Of course, over the last few months, the stock markets seem to be clutching at straws to hold on to the highs that have been reached.
Of course, everyone tells us that we should hang in there and not panic. My advise to people is to ignore the noise So long as we are invested in stocks of companies that are doing well, do not worry. Similarly, if we are in to the SIP mode of investments, do not waver. Do not try to time the market.
The last one year has also demonstrated the damage inflicted to wealth by investing in real estate or gold etc. Alas, both are unavoidable in the Indian context (House to own and stay and gold for the daughters’ wedding) unless one is so enlightened that we understand that it is cheaper to rent a house and gold is of no practical use and not the most profitable of long term investments.
Why do I say that it is cheaper to rent? Given today’s prices, I will use an example from a locality named Besant Nagar, Chennai. A premium location. The cost of a 3-BHK, around 2,000 sq ft, is approximately Rs 4 crores. It can be had on rent at around Rs 50,000 to Rs 65,000 per month, with an annual escalation of five per cent. Now, if we keep the Rs 4 crore in fixed deposit, we would get around Rs 32 to Rs 36 lakh a year or Rs 2.6 lakh to Rs 3 lakh a month! That is if we are buying the flat for full cash. If we are buying it with housing loan, the annual costs would be far higher. The rent would be under Rs 8 lakh a year. So by postponing your buying by one year, you add around Rs 25 lakh to your kitty, as opposed to buying. Figure it out. And there are enough rentals available.
It would make sense to buy when rentals go so high that it crosses six to seven per cent of the capital cost of a house. This is my take.
The flip side of this is that it does not make sense to ‘invest’ in a second home, given the poor yield on the asset, even if one factors in an’appreciation’ in the capital value.
One more aspect to wealth creation is to preserve a decent chunk of your assets in cash or near cash form, even if it means that inflation keeps biting in to it.
We need to preserve some liquidity so that we can take advantage of any panic selling, which makes quality stocks sell at mouth watering prices.
I see this happens once in five to seven years, but can never predict when. And it need not be market conditions alone. It could be stock specific. Like for instance, there is a slow down in growth of the automotive industry. I would like to keep an eye on the price of a stock like Bajaj Auto, Hero, Maruti etc. Should there be a big sell-off, I would like to own some. Surely, it is not as if the companies are headed for a closure. Once the industry bounces back, these will once again be in demand. I am happy to buy some things at my price. For this, I need to keep some money handy.
Similarly, I will use sharp rallies in stock prices which take some stock I own to a very high price. A price at which I am never going to buy it. So, I will sell maybe a part of my holdings, to cash in.
Today, the markets are “nervous” and is easily spooked. Given the illiquid nature of most of the stocks on our markets, there is always hope that some good high quality stock may tank because of some temporary reason. That is when we should be buying. When I buy like that, I never do all my purchases in one go. I buy maybe one third or one half and then wait for a fortnight or so and then buy the rest. Why I do this is to take advantage of the market behaviour and also to give myself time to kick the tyres once again.
The writer is an independent analyst and can be contacted at balakrishnanr @gmail.com