INVEST, strength by strength!

Today’s investor has plenty of avenues to invest his money in – MUTUAL FUNDS, REAL ESTATE, DIRECT EQUITIES, FIXED DEPOSIT, PPF, GOLD etc!

On top of that, every Asset class would be able to extol its virtues and others would be able to find faults in it. Any asset class, be it Equities, Real Estate, Gold etc would have both advantages as well as disadvantages.

The question arises:

 So where to invest one’s money?

The fitness analogy

Let me ask a question. If the idea is fitness, which regime should one choose? Running, Weight Training, Sports? If it is sports then which sports? Badminton, Squash, Tennis, Basket Ball? People are found to be fit and full of vitality in all sports. The fact is that we are trying to find the best in our choices, which is hardly the right thing to do:Success in anything does not depend on finding the best but in DOING the best.

Mostly, it is never a “What” question but a “Why” “How” question.

Of course, there are some choices which are obvious “No” if the goals are specific. Say for example if physical fitness is a goal then Chess & Bridge would not be effective choices. Similarly, if “Wealth Creation” is a goal then “Debt” instruments cannot be a choice.

Beyond that, it is inconsequential as to what asset class one chooses.

The success lies in choosing an asset class for the “Right” reasons and then “Diligent” Execution.

A well-chosen and correctly executed investment in Real Estate would be far beneficial as compared to a poorly done investment in Capital Markets (or in Mutual Fund, the relatively new fad) and vice versa. In the event of the investment operation not yielding desired results, the scrutiny needs to focus on what could have been done better in the investment operations undertaken. There are multi-millionaires both in Real Estate and Capital Markets and also those who have been grounded to ruins in both the places.

What to do when we do not get desired results from Investments

As a first step let us examine the reasons for which one should not invest in a particular Asset Class.

Property Advisor

  1. When it is the latest “Hot” sector. Historically “Hot” sectors usually yield “Cold” returns.
  2. When all roads lead to one destination. A bubble is formed classically when everyone finds the same “Asset” class, the same “Sector”, the same “Location” desirable and hence everyone pumps in money only for this reason.
  3. When your friends and near, dear ones are bragging about having invested their money in the latest “Big” thing.
  4. When the general consensus is that this time it is “Different”. That this time, the returns and success is “Guaranteed” etc etc.
  5. When one asset class promises “quicker”, “better” and “superior” returns as compared to another asset class without assigning any plausible reasons. The smartest and most diligent investors in the world, Mr. Buffett and Mr. Munger, have returned a compounded slightly over 18% over their 53 years of history and that has been whopping. So anyone promising returns over and above 15% compounded over a long-term period is essentially lying.

Now let us proceed to examine some reasons which should be essential before deploying “Capital” in any asset class.

Home Buying Decision

  1. Understand the “Asset Class” especially the sector. Let me draw this analogy; Mr. Buffett and Mr. Munger, one of the suavest and successful investors, have never invested in a technology company. Their reason, they don’t understand “Technology Business”. Do we really claim to be smarter than these two gentlemen?
  2. If you are not an active investor then find a good “Investment Professional”. Someone who is capable, educated and above all grounded in fundamentals and emotionally stable.
  3. Balance safety and yield, choosing safety over yield every time. Now, this demands ruling out all speculative calls.
  4. An asset class which can provide a compounded return of 12-15% will make an investor rich, very rich, in his lifetime.
  5. Go for the long haul and stay committed. Choose right, sit tight and get a handle on emotions.

…and then, execute

 The key to success lies in reasonable execution, I have not even said “flawless execution” because that would amount to self-aggrandizing.

Real Estate Companies in India

  1. To develop an understanding of an Asset class start with “Reading” and yet again “Reading”. “Reading” on 03 counts. One, general reading about investments for which one would recommend the reading of and from professionals, practitioners, and thinkers like Ben Graham, Buffet, Munger, Prof Sanjay Bakshi, Mohnish Prabrai, a blog “Safal Niveshak”, Nassim Taleb and similar. Second would be equipping oneself with the basic understanding of mathematics, percentages, compound interest, accounting etc. and about taxation too. Third, understand “Asset – Sector” specific concepts, terminology, and business models.
  2. Develop understandings of the Promoters commitment towards the business. To put it simply what is the Promoter’s “Skin in the game”. Would he go down with the business or would prove to be a fugitive like the Mallaya etc. Is he someone who is building his own equity and developing the business or is it a business expanded by leveraged capital with poor financial ratios.
  3. Develop healthy skepticism. The Humans are hard-wired by evolution to be trusting and cooperative because this behavior facilitates survival. In financial world please remember this might work against you. So discount all education (sales) talk by at least 40%. All pitches work on exaggerating the facts. A formula which has served me pretty well is to focus on verbs and nouns and discard all embellishments (adjectives & adverbs). For example “he is a very intelligent boy”. When you are buying remember “He is a boy” discard “intelligent” and thus make the decision.
  4. Keep the data and work manageable and reduce complexity. For this, it is best to work with medium-sized entities. How we do it in Real Estate is by working with Medium and Small sized builders. The projects are easier to analyze, the builders are easier to be analyzed, the structures are less complex and above all their cost structures are less layered. Except for a few exceptions, Mr. Buffet & Mr. Munger have developed their investment portfolio by keeping it simple and investing in relatively small but profitable businesses.
  5. Understand the input costs of a business. Once the input costs of a business are well understood only then valuations are possible. The simple formulas for generating returns on investments are keeping the buying price as closer or lesser than “intrinsic value”.
  6. To develop better understandings do “proxy” investments. Assume you are investing in a particular “Asset” and jot down the reasons for doing so. Then track the performance of the investment and see for yourself if the reasons to purchase hold true or do they need some recalibration.

Many asset classes are running to get your money but to sum it up, I would suggest focussing on “Choosing” an “Asset Class” for the “Right Reasons” and “Execute” your choices with “Deliberation”, rather than trying to find the Best.