In 1990, life expectancy in our country was at 58 years, while the retirement age was between 55 – 60 yrs in various state and central government jobs. Many people died before they retired. We had movies on withdrawal symptoms after retirement and how the erstwhile who’s who coped up with inactivity and lack of importance. Since that generation had steady pension and a huge Provident Fund, usually financial trouble was not one of the problems they faced post retirement. This was despite being predominantly a single income family with several dependents.
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.
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:
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.
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.
Provides a sense of comfort to be able to choose the schools and offices/business nearby for long terms.
Flexibility in decorating/modifying the house to exactly fit our needs.
Con’s of Buying/ Pro’s of Renting:
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.
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.
Laws are fudgy and weak to implement. One can practically do little to evict delinquent renters from the property.
Carry costs such as property maintenance, homeowners insurance, unexpected repairs are often ignored.
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.
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.
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:
Removal of dependency on some other service provider or person like a drop/travel in emergency.
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.
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:
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.
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.
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.
In a temporary posting of two/three months, it is beneficial to rent all the furniture and appliances along with the house.
Temporary needs like A/C or Air Cooler during peak summer may be more cost efficient than buying.
Can be added quickly for temporary requirements like temporary live in guests for a few months.
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.
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.
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.
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.
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
There should be adequate but not excessive diversification. i.e a minimum of 10 and a maximum of 30 stocks.
Each of the selected company should be large, prominent and conservatively financed.
Each company should have a long record of continuous dividend payments of atleast 10 years.
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:
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)
Earnings Stability: No deficit in the last five years.
Dividend Record: some current dividend
Earnings growth: Last year’s earnings more than of prev years
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.
Portfolio Tracking and Updation:
The portfolio must be reviewed atleast once a year. But frequent urge to check the stock prices must be avoided.
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.
We have seen finance experts like Dave Ramsay tell us to cut up our credit cards. We have seen how delinquent home loans not only caused people to lose their homes but also a systemic crisis that spread across several financial institution and countries during 2008. Repossessed cars and two wheeler are common in many low income households. To add to this trouble student loan defaults have become high all over the world as the income opportunities often don’t match up with the cost of some of these courses.
So is debt a bad thing? Should we indeed cut up credit cards? Save for 15+ years to buy a home. Never take a loan in our life?
From Shylock of ‘Merchant of Venice’ to today’s bank that offer Personal loans and credit cards with dubious terms the bankers have been portrayed as Vultures. It is often joked ‘Banks will only lend money to those that don’t need them.’. Are these Financial institutions just vultures that serve no real need?
‘A penny saved is a penny earned’ is an adage you will hear so often that its sheer repetition will make you believe it to be true. But is it really true? Sure, money not spent right now is sitting to be spent on something else later. Economics defines this as opportunity cost. But in this article, I am going to argue against ‘thrifty saving’ as a way to ‘grow your money’ or to ‘get and live rich’. Continue reading Why thrifty saving is not the same as investing
This is one of the oldest books on investments and personal finance that has survived time and covers all the basic knowledge required for a beginner wealth builder. The fable covers simple advice to start wealth building to most common mistakes committed by those in their journey to financial independence.
A book of the title ‘Automatic Wealth‘ is sure to get interest from many, however the this is no get rich quick with no work book. Some specific advice in the book, revolves around USA, however the basic premises of the book is applicable across countries and markets.
The book breaks down the process of wealth building into six steps:
India has one of the lowest penetration of life insurance of under 3.5 %. But many of us have a number of policies for which we dutifully, pay premiums every year but don’t know for sure if we it is useful or not. Even as a finance professional, I have made a number of those rookie mistakes, so I can totally understand how gullible one can be to those pitches.
So let us examine, some basic questions to help us guide through these decisions.
What is insurance?
Insurance contract ensures the policy holder is compensated for his loss when a certain event happens. So extending this definition, we can say a life insurance is a monetary compensation for loss of earning potential due to death or disability.
This simple definition provides us all the necessary understanding required to evaluate a policy. So let me try and break this done into a checklist.
From our expenses Account, we know how much money we spend/need every month. We also know where we stand today in terms of wealth, from calculating our Net worth. The next step is to know where we need to go
What are your short term and long term Financial Goals?
Money is only a means to get somewhere. Instead of simply saving money for the sake of it, we need to clearly define goals against which want to save money for.