Real Estate: Creating asset for generations.

Real estate is a concept that has not been yet tapped by Millennials in India. It takes generation to understand how real estate helps us to beat inflation, create wealth and asset for generations.

To make you understand this I will take 3 book references.

Intelligent Investor by Benjamin Graham (Helped me to understand what investment really means)

Factfullness by Dr. Hans Rosling (Helped me to understand how a country grows from an underdeveloped nation to a developing nation to a developed nation).

Rich Dad Poor Dad by Robert Kiyosaki (Helped me to understand the real asset and liabilities).

Mr. Grahm in his book suggests "the best investment is the investment which guarantees you the protection of your principal money". I think its very difficult to understand anything in this world which guarantees you the protection of principal money. But let me explain how real estate is different. Lets take an example of house made up of iron, steel and cement. It also include years of manufacturing by engineers, labours and architect creating a hidden value for house. Not to mention all the clearance from the fire department, forest department, and aviation department you have to take in oder to create a house. As the year passes, iron prices increase, steel price increases, engineering prices increases. Everything including land prices increases. Now after 10 years if you want to create a house is it going to cost you the same. No, now creating that house will cost you more money and more clearances. Hence people decide to rent or buy an old house even at 4-5% less to any newly launched project. A newly launched project will cost more as the prices of raw material has gone up. This is how real estate never let your principal money devaluate. Not to forget the rented income you earned over the time.

My next knowledge comes from book Factfullness. In this book, author starts his story by saying his childhood story. He was once playing near the riverside in his small village. While playing he unknowingly falls into the river, but fortunately his grandparents were able to save him. His chances of surviving during that period of 1930 was very less as sometime children die due to animal attack or due to medical reasons or falling into river. But as he grew up animal where in jungle or zoo, river where fenced and lot of medical cure was found and as a result children surviving rate increased. This is a small example of how a country develops and you can notice that by seeing a small examples around you everyday. All parent now want their children to grow in a safe environment. Thats why we see people in India migrating from small town to big cities in search of good facilities and livelihood.

Indian is a very diverse country. Some places in India have grown with an immense pace. If you see the metro city in India and a remote village of Bihar, there is a lot of difference. When you go and buy real estate in the metro there is a story that will play in the coming future. There is the plan of government that the first step is land acquisition, then allotment of plot, then giving basic needs like electricity water and other needs. Then private builders develop properties. People come from different places buy properties. Then commercial comes, then the metro and public transport come. These things take 10-15 years to happen. In India, it is a slow process. But if you go to a remote areas of India this story may take a generation to complete.

Buying real estate is all about playing the story of development, which is going to take place in the coming future. I have seen people saying Chandigarh property is in the boom and then the other person says no no Mumbai property is on a boom, someone says Delhi is on a boom. But it is very important to understand the story of growth. If you invest in Mumbai without understanding the story of growth you will end up devaluating your money. If you understand the story of even remote location of Bihar you will invest with the best decision. 

For example, the land as an asset has a tremendous return in states like Bihar. So every place, every city has a different story of development. You have to understand the story and then play that story. Your return totally depends on how well you understand the story. You will understand the best story of the place you have grown up. So as Mr Buffet say "Invest in bussiness you understand". I say invest in real estate whose development story you understand.

Sometimes, people make mistakes even when they buy property at the place where they have grown up. It's because they have not worked on the development story and verified the story from different government sources. 

People debate stock gives you the best return and real estate gives you a bad return. It's our understanding which creates differences, not the property. If you buy a bad stock you will end up losing money. If you buy good real estate you will make money. As I say it is about understanding the story of development. If you understand the business of an company then you will make money. The stock can perform bad if demand of that companies product goes out of market and hence business can end. But everyone will require roof on their head and as the population grow the demand for house will increase.

Mr Kiyosaki helped me to understand what is asset and what is liability. If you buy a home on loan and you stay in that home then it is not an asset, its a liability as it is taking money out of your pocket. If you buy a real estate with earned money and then you earn rented income over that, then it is an asset. People generally get confused that if they buy house that is an asset. But what they don't understand is the important of location. People think they buy house in so and so remote area, that is an asset. But that is not an asset. Who will take your property on rent if you put it in remote area. As a result you will only end up giving maintenance cost. Location is very important. When you buy property in prime area even in covid period when there was reverse migration, the property at prime location was on demand. If you are buying property buy at the best location. Think like that, if someone comes to take rent in your locality your house should be the first on demand. Now you will find number of reasons to choose right property like market is near, metro is near, easily assesible to main road, police facility, hospital facility near by and school facility near by. These requirement can vary in different areas according to different development story.

With time in India people will migrate to metro city, as metro city is the place where jobs are available. Everyone wants to work a white collar job. Everyone wants to give their children best education, best medical facility and they need best people to socialise with. People want a place with best social security where they can go anywhere without thinking of their home security. Place having these things will always keep on pulling the demand. When demand is good the price will be good. 

So to become a best chooser of real asset you must understand the story of development. Its all about understanding the story of development. I would request you to read these books mentioned above. 

Thanks for reading. For more knowledge and update follow me on my Instagram. Paisaconsultant.

Nifty 50 PE Calculation

 What is PE?

PE is a price-to-earnings ratio. It is the amount of money we pay for a company in order to earn 1 rupee. 

Suppose you buy a house of 50 lakh. Now you have rented that house for 15000 per month. Your annual income from that house is 15000 X 12 = 180000. Now PE of this asset (house) is 50 lakh / 1.8 Lakh = 27.7

Here the conclusion is that you have paid 27.7 rupees to earn 1 rupee. Is this a fair deal? I leave this question up to you?

As the company grows its earnings keep on increasing, so as its stock price. But on average PE remains the same.

But these PE values can change if the company is expecting big profit in the coming future. Vice versa its PE can decrease if has no further growth plan or expected loss.

These values help us to decide when to enter stock or exit stock.

In my below analysis, I am trying to compare the companies current PE with its average 5 years PE.

The PE values in RED are overvalued companies. If you are not expecting any big earning in the upcoming future, you shouldn't buy those stocks any further.

The PE values in Green are undervalued company. If you think these companies are stable and will continue to make a profit in the coming future then it's a good buy.

This is not a buy or sell recommendation. This is only for educational purposes.  Analyze the future growth of the company then only invest.

Currently, Nifty PE is at 41. 

Thanks for reading. You can follow me on Instagram: paisaconsultant

PROTECTION AGAINST INFLATION: What to do when inflation is high.

Your 1 lakh in the bank account will devaluate to become 98000 next year. Shocked! well, as inflation will rise by 5% and saving account interest will give a 3% return, you will lose 2%. So it is very important to understand when inflation starts going to 7-8% what should we do?

What is inflation?

Suppose this year price of tomatoes is 10 rupees. Next year this price becomes 11 rupees. So there is the rise of 10% inflation. Inflation can be healthy sometimes depending upon the countries economy. 2-6% is considered to be healthy inflation. 

Why it is required?

Suppose you work very hard for one year and then you asked for an increment next year from your boss. If you do not get that increment then you become demotivated. So there is a need for a raise in salary. So there is a need for rising inflation to keep the country motivated to grow. 

How inflation happens?

Earlier when gold was the currency the countries were allowed to print the note according to the quantity of gold. Suppose a country has 1 kg gold and they printed 100 rupees. Now the price of gold is 100 rupee per kg. The government thought to print more currency in order to create more liquidity and jobs in the market. 10 more rupee was printed. Now gold price will become 110 rupees per KG. So there is a rise in inflation of 10%. This is one of the simplest ways to raise inflation.

Current situation.

This year due to the pandemic government all over the world has started to print more currencies in order to buy the vaccine and to create infrastructures that more jobs can be created. More jobs will give money in hands of people. When people have the money there purchasing power will increase and hence the economy will grow. Within this process, if things get out of control then inflation can go out of control and hyperinflation will be created. So in order to preserve your money you have to do proper investments so that you don't lose the buying power.

What is hyperinflation?

When inflation goes out of control like in Zimbabwe where to buy bread you have to sell your house. In the last 3 years, zimbabwe's government has printed 90% of the total money circulated in the economy. When money went into the hands of financially uneducated people they start putting money in the stock market. As a result, the Zimbabwe stock market gave a 600% return in the last year (left image). Well is Zimbabwe creating Google facebook in their backyard? No, it's shocking how this bubble is created. So it is very important to understand the right investments so that you don't get trap into these bubbles.

 

What is real Investment?

We are giving up a certain amount of buying power now in order to have more buying power in the future. For example, we are investing 1 iPhone money in order to purchase 5 iPhones after 10 years. This investment has increased your buying power.

In the 1979 annual letter of Warren Buffet it was written: "Just as the original 3% saving bond, a 5% passbook saving account or an 8% U.S. Treasury note have, in turn, been transformed by inflation into a financial instrument that chews up, rather than enhances purchasing power over their investment lives, a business earning 20% on capital can produce a negative real return for its owner under inflationary conditions not much more severe than presently prevail."

Inflation can be bad times for business too. Inflation eats away their purchasing power as well. Businesses general need to buy a lot of stuff to keep operating. If this stuff is now all of sudden very expensive they are trapped in a dilemma either they pay the higher price to operate and make less profit or they try and raise the price and hope their sales volumes doesn't shrink because of it. Inflation can also put pressure on interest rates which can make it harder for companies to excess loans or make pre existing loans more expensive to pay off and this makes for investor more harder to find stock that are going to compound our money over time. So what kind of business should we buy ?

Here Mr Buffet suggests "A business which has ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume. A business should have ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with minor additional investment of capital."

Take an example of a software company that is providing service to XYZ company. Software company increases its annual subscription charge due to inflation. can XYZ company switch to the cheaper alternative. No, as going to other software or platform requires its employee to train them and training again comes with a lot of time constraints budget, and more extra cost. So this software company can survive inflation as it can keep on increasing the price of its annual subscription. So look for a company that can raise prices without consequences.

So I would like to end my examples by one of the buffet speech where he explains what should be the protection against inflation.

"Inflation is an invisible tax that only one man in a million really understands and it attacks the people that have had faith in currency the government issued. The best protection and the best investment against inflation are to improve your own earning power and your talents. Very few people maximize their talents and if you would increase your talent they can not tax it while you are doing it. They can't take it away from you. So if you become so useful in your activities, your profession like doctor lawyer or whatever it may be that is the best protection against inflation."

Thanks for reading. For regular updates about the Indian stock market follow me on Instagram at @paisaconsultant.