To Buy or To Rent? That is the Question !!

This could be a million rupee question based on what is it you intend to buy or rent? In this post I’ll try to cover various category of assets and both financial and non financial aspects of this question.

Rent Vs Buy
Rent Vs Buy

Immovable Assets :

For Most of us, the only immovable asset we will own is our home or utmost a piece of land. We have all been told stories of how somebodies grandfather bough a tiny piece of land several years ago for a tiny pittance, far away from the city and lo right now it is the heart of the expanded bustling city, fetching several crores.  We feel inspired by the story and go home hunting.

Pro’s of Buying/Con’s of Renting:

  1. EMI’s enable an automatic saving month on month. So if you are a spend thrift, this might just be the kind of commitment that you require.
  2. Appreciation of home prices is huge plus. We lock in on  the prices at time of booking and can enjoy the appreciation that comes with the property.  There are stories of people who pre-booked apartments in metros with a token amount of 1 Lakh, flipped it over during the time of possession and made several times their initial investment. Personally, I think times of such appreciation for real estate is long gone.
  3. Provides a sense of comfort to be able to choose the schools and offices/business nearby for long terms.
  4. Flexibility in decorating/modifying the house to exactly fit our needs.

Con’s of Buying/ Pro’s of Renting:

  1. The pressure of monthly EMI’s have killed many brilliant startups even before they started. So if you are planning on a change of career, starting up on your own, managing cash flows with huge EMI’s can be a big detriment.
  2. Land or property needs good maintenance over a period of time making it one of the most difficult assets to own remotely. Frequent Cleaning can cost as much as one time clean up cost of unmaintaned flats.
  3. Laws are fudgy and weak to implement. One can practically do little to evict delinquent renters from the property.
  4. Carry costs such as property maintenance, homeowners insurance, unexpected repairs are often ignored.
  5. Even though you may enjoy the appreciation in the property, interest paid is a huge opportunity cost. The increased square foot rate in the area may not translate into gains for older properties.
  6. Property appreciation is not guaranteed. New structures such as Flyover near the property or alternate highway cause the prices to fall down. Govt. acquisition for infrastructure or expansion projects can not be ruled out either.
Buy Vs Rent
Buy Vs Rent

Real Estate – My Opinion:

While increase in prices, may be a good plus for property, no non financial asset should be purchased solely for investment purpose. Would living in this house enhance the quality of your and your family members for the next foreseeable future(like till children finish school), if so go ahead and buy it. But moving out of the city, increasing the everyday commute time to work, increasing your financial burden solely to have your name board on a piece of property may not be a wise idea.

Remember most people, websites and experts that convince you that buying is unequivocally good are trying to sell you something.

Movable Property Aka Vehicles/Furniture:

In today’s era, it is very easy to rent a bike/car and even furniture and appliances. So if the supplier is making money by renting it out or we losing money by hiring it? In the long run, is it cheaper to buy or lease?

Pro’s of Buying/Con’s of Renting:

  1. Removal of dependency on some other service provider or person like a drop/travel in emergency.
  2. When Furniture/Car/Appliance is used for throughout its life time, it makes more economic sense to buy. For example, Fridge compressor come with a 10 year warranty, Teak Furniture like Beds, 20 year warranty mattress can last a very long time, even decades. To pay a fixed rent for such a long time makes  no sense. Classic limited edition cars even go up in value.
  3. While I can leave my car dented as long as I want to, I have to compulsorily pay a penalty for even cosmetic damages in a vehicle I have rented for a short while.

Con’s of Buying/ Pro’s of Renting:

  1. In Mumbai atleast, I have seen people change furniture every few years and want to be trendy, unlike south where most furniture only play a utilitarian role. So for the fashion conscious homes can consider renting rather than going through the hassle of buying and reselling furniture year on year. The same goes with the car too. It is easier to upgrade to higher end model when you are renting it.
  2. City commute is best in a hatchback, Sedan is useful on long trips and SUV’s are the go to for both family trips as well adventure trips. We do all of this in a year, and we can without having to compromise or own so many cars by renting all or buying the most frequently used and renting the others.
  3. Bike rentals have made commute possible in many places like Goa, Rishikesh,Manali and Leh in India. The bikes are well maintained and available with minimal documentation, allowing us the comfort of flying to our holiday destination as well as commuting on our own locally.
  4. In a temporary posting of two/three months, it is beneficial to rent all the furniture and appliances along with the house.
  5. Temporary needs like A/C or Air Cooler during peak summer may be more cost efficient than buying.
  6. Can be added quickly for temporary requirements like temporary live in guests for a few months.
Car - Buy Vs Rent
Car – Buy Vs Rent

Movable Assets – My Opinion:

In general, depreciable assets are best paid for on usage basis unless the pay as you go options are disproportionately costlier compared to their buy price or have heavy usage. With advent of numerous startups, everything is on hire at a reasonable price. We are lucky to live in era with so many options and we should make the best use of them.

Business Assets:

Any asset, or item that is bought with the view of making money from it or is central to the running of your business may be considered as a Business Asset. This could be a second home bought for rental income, a shop for own business, vehicles for the purpose  of renting out etc.

“An Asset is one that puts money in your pocket.” – Robert Kiyosaki

Does yours, even if not immediately, atleast soon enough.

Location dependent businesses like restaurant, salons where primarily your customers come to you because of proximity should either enter in long term leases or own their property to avoid sudden increase in costs. Elimination of fundamental risks to the existence of business warrants additional expenditure. However do not take this step in the initial days when your idea or business is still unproven.

Conclusion: Buy or Rent

The choice of buy vs rent depends on preferences and usage patterns. Buying is a high/medium impact decision, when compared to renting which is a low impact decision. The Startups that rent out these assets/services ensure optimum utilisation of the assets and is truly a Win/Win situation. Today’s thriving startups have filled our life with plenty of choices. Choose Well. Choose Wisely.

Escaping the seduction of social media

When it comes to using a smartphone, I am a vetaran. This is my 9th year with an Android phone. I started from the November of 2010 with a Samsung Galaxy S running Android 2.2 Eclair. My latest phone, Honor 7, runs Oreo 8.1. I have seen my usage patterns over nearly a decade and boy, I know what addiction to a smartphone, especially to social media means. The compulsions were many. Photos had to be shared on Instagram instantly. Wherever I was, I felt the urge to check in using Swarm. I repeatedly checked my Facebook timeline for the latest from everyone and I too constantly updated my latest status. WhatsApp was constantly buzzing on my phone. My addiction peaked between 2011 – 2014.

Since then, with the help of several habit-building podcasts and books, I have successfully set up habits to de-addict myself. These habits have been so successful that I don’t touch my phone for three hours after waking up. Nor do I touch my phone between 8:30 am to 5 pm on days when I am busy with my freelance work. Finally, I have a compulsory ‘turn off all electronic screens’ time after 10 pm. My laptop shuts down automatically if I don’t stop working.

None of the methods I suggest is radical. They are simple habits that make it hard for you to get to your social media apps. If you are an addict, then this post will attempt to cure you of social media addiction too. Please let me know if they work for you. Continue reading Escaping the seduction of social media

How well does Fundamental Analysis Work?

We have reviewed atleast three books on Fundamental analysis: One Upon Wall Street – Peter Lynch, Intelligent Investor by Benjamin Graham and How to Avoid Loss and Earn Consistently in Stock Market by Prasanjit Paul . Hence I wanted to give you a neutral perspective and show you the other side of Fundamental Analysis. Continue reading How well does Fundamental Analysis Work?

Nail your hands-off tasks to get more hands-on

If you are making a vegetable pulav, do you boil the rice first or chop the vegetables? If you want to learn Android, do you download the software first or start reading the tutorials? If you answered the first choice in both cases, then you are on the right track. You have the ability to spot invisible, trivial, but important tasks that need to be kick-started and performed in the background, while you move onto focus-requiring important tasks.

Life is full of tasks where you pay active attention to what you are doing. You can only do one, or at most two, such activities at a time. Let’s call them hands-on tasks. However, some other tasks chug along merrily in the background not seeking your undivided attention. But they need you to kick-start them before you walk away. Ideally, you want the results of such tasks to be ready by the time you are done with your hands-on tasks. These tasks are called hands-off tasks.

Often, the most productive days in your life are when you remember to start the hands-off tasks, with their results waiting for you when you need them. You sail smoothly from one activity to another in a seamless fashion.

Continue reading Nail your hands-off tasks to get more hands-on

Choices and Impact

Choice: This or That

When I was a child, No one just asked us “Who is your favourite actor?”. They always asked Do you like Rajinikanth or Kamalhassan? Our prime time debates with panels were of topics like: What is good: Nuclear Family or Joint Family? Or Who is the better warrior – Arjuna or Karna? We were expected to pick a stand and argue our best. We spent considerable time arguing over these topics without ever having one person to our side from the other.

In ancient times, the question was like – Who is the more powerful God – Shiva or Vishnu? Today the questions have just been modified and become – Who is a better cricketer – Dhoni or Kohli ? or Who is a bigger star – Sharukh or Salman? Continue reading Choices and Impact

Book Summary: What Got You Here Won’t Get You There by Marshall Goldsmith

Title: What got you here won’t get you there
Author: Marshall Goldsmith
Publisher: Hachette books
ISBN-10: 1781251568
ISBN-13: 978-1781251560
Buy here: Amazon.in | Amazon.com

Introduction

Marshall Goldsmith is a behaviour coach in leading companies. His day-to-day life involves working with CEOs of top companies, entrepreneurs, top lawyers and dignitaries. Goldsmith takes these already successful people and makes them more successful. How can he do that? Is he an engineer? A businessman? A mystic?

None of these. Goldman has discovered that for the people who are already in the top 2 percentile in their field, further growth is not limited by skill or lack of magic. Instead it is limited by their own behaviour. The way they behave with themselves, their colleagues, their families and their support group influences their success. Goldsmith describes 20 habits that act as a hindrance to further growth of these already highly successful people. With these habits, people stand in their own way. Some of them hit a plateau, while a few of them self-destruct, throwing away their careers and relationships. Continue reading Book Summary: What Got You Here Won’t Get You There by Marshall Goldsmith


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The myth of Garbage in, Garbage out

Recently, I read the post Avoiding the GIGO trap, by author and marketing guru Seth Godin. It mentions how several systems punish the user by rejecting inputs not suited for those systems. A seasoned or a highly qualified user usually learns how to use such a system properly through experience or through a high level of aptitude for that system, but the rest of the world continues to struggle to even gain entry. Usually the users come to know about these limitations ONLY after their input is rejected after a lot of hard work or when a sub-standard input causes the system to come crashing down on them.

Seth Godin points out that these systems try to obsess with ‘Garbage In, Garbage Out’ principle. He argues that is not a good thing. Examples of such systems include computer programming languages, some top-rated schools in India and Formula race cars. We’ll see why in the sections that follow. Continue reading The myth of Garbage in, Garbage out

Be your own guest

India is a country with several thousands of communities based on language, religion and native region. In the modern Indian workplace, it is difficult to tell one community from another. However, pick a few sample individuals and visit their homes. The lifestyle they live at home says a lot about the community they hail from. Given the same level of household income, some communities treat themselves like royalty, while others intentionally deprive themselves, calling it frugality. They only loosen up when guests visit them. Continue reading Be your own guest

Book Summary: Intelligent Investor – Benjamin Graham

Buy here in Amazon.com or Amazon.in

  • ISBN-10: 9780062312686
  • ISBN-13: 978-0062312686

Warning: This book is an advanced read even for finance professionals. You must have basic knowledge on capital markets to be able to understand and appreciate the book. Like high echelons of Carnatic music, this book is a God send for those obsessed with return on and of their investment, but most others may be unable to appreciate the finesse of the mentioned points.

Graham on Risk Management
Graham on Risk Management

This book is one of Investment Classics vouched by none other than the most well-known investor of our times Mr. Warren Buffett. Most revelations in the field of investment lose relevance overtime and even prove dismal in succeeding cycles, as can be seen in some of the commentary by the supplementary author Jason Zweig (more on that later) but Graham’s principles have themselves have survived several market cycles. Infact these principles thrive on the market cyclicality. So let’s go about to explore the voluminous book.

Speculation Vs. Investment

A shareholder is a part owner of the company and has to study the business fundamentals thoroughly before deciding to put his money into it. The investor must be convinced that he is receiving more value of the company for the price he is paying. Purchasing shares with the hope that it would increase in price is speculation. A non-professional who is speculating on share prices is purely gambling.  It is an exciting past time worth being pursued with only a small portion considered as fun money which you are okay to loose.

Investor’s Biggest Enemy- Inflation

A good investment must deliver an inflation beating return with an acceptable level of risk. Graham considers bonds (debt securities) as one of the most important vehicle to achieve the same. Since secure return of principal is of prime importance, Graham prefers Govt.bonds over corporate bonds as there is nil risk of default by the Government and a few additional points from corporate bonds do not justify the additional risk. However, Graham recommends buying bonds of corporates when available at a steep discount in the secondary market due to temporary adverse conditions faced by the company or market.

Two Types of Investor – Defensive and Enterprising

Myth in investing world is that you have to take higher risks to obtain higher returns. According to Graham higher returns go to the investor who actively pursues it, i.e an enterprising investor while the passive or defensive investors get average returns.

Portfolio Allocation

Between stocks and bonds, Graham recommends a minimum of 25% and a maximum of 75% allocation on each of them. Only investors who are prepared for a huge draw down(notional loss on quoted price) should allocate 75% on stocks at any point in time. Conservative investors may be better off with maximum allocation on bonds.

Rules for Common stock Component

  1. There should be adequate but not excessive diversification. i.e a minimum of 10 and a maximum of 30 stocks.
  2. Each of the selected company should be large, prominent and conservatively financed.
  3. Each company should have a long record of continuous dividend payments of atleast 10 years.
  4. Set a limit to max price one would pay for the stock. Suggested: Trailing 12 months PE of 20 or average of 25.

Graham in general advices against picking stocks individually as he considers an individual cannot do a better job at stock picking than the professionals who seem to do a pretty average job themselves. His preferred way of investment in equity is through index funds.

For an enterprising investor who is willing to put in more efforts into stock picking he advises following guidelines:

  1. Financial Condition: (a) Current assets at least 1.5 times current liabilities and (b) debt not more than 110% of net current assets (for industrial companies)
  2. Earnings Stability: No deficit in the last five years.
  3. Dividend Record: some current dividend
  4. Earnings growth: Last year’s earnings more than of prev years
  5. Price: Less than 120% of net tangible assets.

Dollar(Rupee) Cost Averaging:

Such carefully selected stocks must be purchased through a monthly purchase plan of a fixed amount every month as long as the basis premise of selection holds good.

Graham on Dollar Cost Averaging
Graham on Dollar Cost Averaging

Portfolio Tracking and Updation:

The portfolio must be reviewed atleast once a year. But frequent urge to check the stock prices must be avoided.

Dividend Policy:

Graham is extremely critical of companies that retain more earnings than required for growth. For the company managers to believe that they are more qualified in growing the retained earnings than the shareholders is incorrect, unproven and misaligned incentives.

My Critic on the book: The commentary of the book by Jason Zweig adds number of recent examples. However, the commentary is dated only till 2003. So the book completely skips the 2008 crash and the lessons from it. Jason Zweig has also recommends investing in junk funds as he says risk has been significantly reduced due to diversification. Diversification does not do away with systemic risks which while adequately addressed by Graham need to continue to be adhered too.

This book is a great read if you want to understand more on Asset Allocation in capital markets.  For more in depth knowledge on picking stocks please read ‘Security Analysis‘ by Graham and Dodd.


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Book summary: Miracle Morning

The Miracle Morning by Hal ElrodBook title: Miracle Morning
Author: Hal Elrod
Publisher: Self
ISBN-10: 0979019710
ISBN-13: 978-0979019715
Buy on: Amazon.in | Amazon.com

 

 

 

 

Introduction

In this book, the author Hal Elrod talks about how waking up early in the morning and then following 6 simple practices transformed his life. The author abbreviates the 6 things in his morning routine as SAVERS. In his 1-hour routine, he goes through 6 activities that give him the perspective he needs for the day. Continue reading Book summary: Miracle Morning