Saturday, March 27, 2010

Is the investment in your house an Asset or a Liability?

Let us debate if you consider the investments made in buying your flat as an asset or is it a liability? I am not expecting consensus on this as a Home is a very emotional subject. But emotion generally degrades Financial Wisdom. There is a stark difference in investing in real-estate and investing in a house. I had invested in a house in 2002 and today if I look at the returns it generated, it might have doubled or a little more. If I analyse a bit further, I need to take into account the interest paid to the bank over the last many years, the society maintenance paid to maintain the complex, my own house maintenance, property taxes etc.
The asset has only lost more money than having made any returns. An asset that generates returns is what an asset is. Now I know of other friends who live in a better and bigger house. So I have decided to buy a new home that costs 3 times more. How do I make it happen now? Well I am going to look out for a better pay job, I should get at least a 50% Hike. I have got a Job. So what has happened? I have increased my Income to meet with higher expenditure, out flows and EMIs. What have I exactly done? Have I invested in an asset? Is it going to generate more income for me or is it going to deplete the Income from my new Job for which I am going to work harder? I realise now that I am stuck in a Rat race. We are in a race, a race of which most of us are a part of. More money is definitely not the solution to Money Problems. The solution is to consciously reduce expenditure, avoid investing in liability because that causes more expenditure like interest payments, maintenance etc., and instead invest in assets which generate income. That’s the secret of the turning wealthier.

Many investors with a strong equity portfolio in early 2008 remained spectators when the portfolio took a hit due to the events that unfolded during the year. They had then exited at lows. The portfolios eroded by almost 60-80 percent. As the markets turned the tide and rallied, many of these investors did not buy any stocks with the belief that the rally will be a short-lived one. The rally, however, was not a short-lived one and is still going strong nearly a year after it began.

The US Fed's decision to keep the interest rates low for an extended period indicates that the higher liquidity will probably extend the rally by a few more months. In that case, what should investors do? How should they get back into the stock markets to start earning returns? Let me know your thoughts.

Best Regards,

Thursday, March 18, 2010

Road to the Future

The road to the future was contemplated to be written in the back drop of the major investments our government is planning to incur to spearhead a one of its kind project in the world. The minister for Roads & Highways has set a huge task, a task to put India in the fore front of International Road Infrastructure. A project that can transform the way we live and travel. The Program plans to create 50,000 Km of highways across the country in the next 5 years.

I would like to share what it means in terms of change. The entire industry that gains from this is gearing to meet business. It entails a spending of 100,000 crores every year. And the entire gamut if industry like the cement, project concreters, real estate developers, entertainment, food & hospitality are all having a stake in this project. The economic potential is for all, jobs, entrepreneurs, direct & indirect employment and for investors like us. As I discussed in the previous post, there is an imminent consumerism wave breaking out with per capita income exceeding USD 1000.

I am excited about the times ahead. Knowledge about it, is what we need to invest wisely. The US economy has seen such unprecedented growth in the 1860 and many entrepreneurs who stood those waves have made it.

We are going to witness in the next few years a similar growth and let us not miss this opportunity. There are a dozen of companies listed in the exchanges which are going to make it Big in this wave. Let us have Patience and develop Knowledge, two skills required to create wealth. If there is one show stopper, that could be the mounting levels of debt which is currently at 80% of GDP. Unfortunately the current budget has done little to address fiscal deficit, which is widening with every passing year.

Every investor in the market fears a correction. The years 2009 has seen a sharp rise in stock prices, and a correction this year should be expected. I know of wise investors who are holding on to their cash. I am in cash majorly and invested in 20% and I have set my eyes on some valuable companies that are not available cheap as of now. But if you can find some wonderful long term opportunities trading at attractive valuations even in a volatile market like this, nothing should stop you to go ahead. Keep your War Chest filled with cash and very soon we are going to have the opportunities come our way.

Happy Investing.