Real Estate, Equity, Liquidity & Stock Brokers

By July 30, 2012 October 7th, 2014 Blog

Investor: I could prioritize to listen to your talk only yesterday, and I went through it in a single shot. Then I went through your Question & Anwser session today. You have vast knowledge about the field of Investment and you are able to communicate it in a clear and simple manner.

I was always hungry for knowledge about investments for the past 25 years. I make time within my busy business schedule to educate myself a little on a continuous basis. In the late ’80’s I stumbled on to “In the Wonderland of Investment” and later “Tax Payer to Tax Saver” by Mr. A. N. Shanbhag and was a great fan of his then. (I even met him in person at his office in Sion – Mumbai). I continued with my search for truths by trial and error, getting into the hands of sales people, trying out my hand on my own, burning my fingers, getting into mutual funds and coming to my own conclusions.

By the time I came to you for Investment advice, I was one of those whom you call “There are one set of clients who want the advisor to confirm the belief they have.” And you confirmed the beliefs I already had. I am so happy that my search for proper advice led me to you.

You also say that “One of the best investment strategies is to buy a piece of real estate, give it out on rent, then invest the rent in equity.” which is what I am doing by putting major amount of my rental income from a commercial complex into buying stocks directly through you. I bought the land and constructed the commercial complex and you advised me into putting the rental income into equity. I am so happy about the strategy. Thank you so much.

Mr. Gerard Colaco: Thank you for your mail and your kind response to the video of my talk on “Mutual Funds – 6 areas where I see value”. In fact, all sufferers of insomnia who tune in to this one, are guaranteed a cure.

It is rare to find clients who seek genuine knowledge about personal finance and investment. I want to do everything in my power to encourage such people.

Investor: I would like to add a small observation of mine during all the years. Lot of people talk lot of good things about Real Estate. I find that in earlier years, before Open Ended transparent Mutual Funds came into existence and Dematerialisation came into being, investing in equity was cumbersome and needed lot of physical work. Also, since most people do not have discipline, some of them squandered whatever gains they had in equity, due to the liquid nature of the instrument. But for all these lazy and undisciplined investors, the ‘not so liquid ‘nature of Real Estate has worked well. Hence my observation is “There is some merit in ‘not so liquid’ nature of this particular vehicle of investment.”

Mr. Gerard Colaco: Your observation about lack of liquidity actually being a good thing in growth investments is very perceptive. Today, financial instruments and securities such as stocks, commodities bonds and derivatives have become liquid that they can be traded by anyone with an inclination to do so and with an internet computer.

Brokers have also encouraged clients to trade in and out of the markets, because brokerage is generated every time a transaction takes place. On the other hand, real estate suffers from lack of liquidity. Many times, you cannot instantly liquidate even a prime property during a real estate boom. It is only that the sale is much easier at that time than in a real estate recession.

If the piece of real estate that is sought to be sold is a residential house in which the family of the seller is staying, many times even though the head of the family may want to sell it, he may be vetoed by the other members of the family, if they are happy with the location and area in which their current home is. This further impacts liquidity adversely. Capital gains tax on the sale of real estate and relatively high registration costs on the purchase of new real estate may put people off further from transacting in it.

On the contrary, trading in equity has got to the point where investors have almost become extinct. Even if someone enters a broker’s office with a faint notion that equity can possibly be an investment avenue, he is quickly disabused of this notion by the broker or sub-broker who misleads him with nonsense like equity research and technical analysis. I remember the old saying: “If you can’t dazzle them with your brilliance, baffle them with you bullshit.”

Before the investor even knows it, he has joined the vast army of losers who will ruin themselves financially by indulging in day trading, margin trading, commodities and derivatives, under the “advice” of brokers. As someone said, the business of the stockbroker is not to make money for you, but to make money from you.

I am also reminded of an old joke. A guy is asked by his friend: ‘What were you before you met your broker?’ Guy: ‘Broke.’ Friend: ‘And what did you become after you met your broker?’ Guy: ‘BROKER!’

A classmate of mine was advised by me on equity more than 25 years back. He took the advice but entrusted a princely sum of money in the late 1980s to a sub-broker in Mumbai who had married his cousin. He explained to me that he was under an obligation to give some business to him, in view of his being ‘family’. I had no objections whatsoever, because I prefer NOT doing business for close friends and family in any case.

My classmate’s instructions to the broker were to invest as per our advice. The broker read our paper on equity investment and told my friend that this was not the way to invest, and that equity investment required constant study, oversight and trading. (What can some small fry from Mangalore teach us veterans from India’s financial capital about stocks?) Two decades later, my classmate, now older and wiser, insisted upon his shares and accounts, since he had heard nothing in the interim, despite requests from time to time.

My own guess is that the sub-broker had churned the client’s portfolio to the point where there was nothing left, but this was a case where the sub-broker’s wife was my classmate’s first cousin. The sum of money entrusted to the broker sometime in 1987 or 1988 was approximately Rs 5 lakhs. The sum returned to my classmate in 2008 was Rs 6 lakhs. I think this Rs 6 lakhs was desperately gathered by hook or by crook by the sub-broker and returned to my classmate to ‘save face’ before ‘family’.

How do you like it? An equity investment grows from Rs 5 lakhs to Rs 6 lakhs over a period of 20 years! The story does not end there. This Rs 6 lakhs was now handed over to us for investment in a buy-and-hold strategy in a well-diversified equity portfolio, exactly the type you are used to. After one year of this, I suddenly got a concerned call from my classmate in Kuwait. His mother had written up his pass book and found several dozen entries crediting small amounts to his bank account.

His old mother had absolutely no idea what these entries were, and was understandably agitated. Since the particular bank account was not being used for anything else, he asked me whether these numerous entries had anything to do with his equity portfolio. I told him to relax, that these were only dividends paid to him by companies. His answer was revealing: “Do companies pay dividends? In the 20 years that I had invested with ……………., I did not receive a single rupee of dividend”!

The main task of the perverts in the stock broking industry today appears to be to subvert investment.

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