Why Buying a Home Scores Over Investing in Stocks...

I am no fan of real estate, and certainly won't advise investing in property to earn rent. However, I strongly believe that one should own a debt-free house in which one will live in. Most of us have read about how Rakesh Jhunjhunwala sold his Crisil shares in 2005 for Rs 27 crore to buy a flat at Malabar Hill in Mumbai. Had he remained invested, his shares would be worth Rs 600 crore in 2015. The flat, on the other hand, was only worth Rs 65 crore. This story has hindsight wisdom written all over it. If instead of Crisil, Jhunjhunwala was holding Hindalco shares, his Rs 27 crore would now be worth Rs 18 crore. This story has too much of survivorship bias.

Putting all your eggs in the equity basket is not a good idea. Another ludicrous suggestion is to invest in equities in the formative years and then buy a property in the late forties, assuming that you would have built wealth by then. The assumption that you will continue with your job and draw a high salary to pay EMIs in your late forties or early fifties is quite cute, especially when I see voluntary and forced retirements all around. By the late forties, you may have gotten used to a certain lifestyle which could be difficult to cut down with the huge home loan EMI. If the house is bought early, you learn to live within your means. 

Leverage is a beautiful financial concept. When used to buy a property, leverage fetches us tax exemption. But the same leverage used to buy stocks (popularly known as derivatives) is a dangerous game. Can you imagine leveraging heavily year after year to buy the most convincing stock ideas? It is an extremely specialized field and requires phenomenal skill to make money out of leverage trades in the market. But owning a house does not need any special skill. After paying a certain number of EMIs, there is surety that you have a roof of your own. 

What is important is to keep the leverage multiple in check when you buy that mortgage. Stretch it too far and suffer sleepless nights. Keep it too low and you will probably look foolish a few years later for having bought a property much below your aspirations. On the other hand, rent is nothing but a sunk cost. Even if you are claiming tax benefit, it remains money spent which did not build you an asset. Staying on rent forever with a great equity portfolio sounds quite exciting when you are young. But when you get old, the idea may sound criminal. One does not have the energy, patience, willingness or strength to endure the burden of a rental home. All said and done, you are at the mercy of your landlord who may send you packing. 

Another argument against owning a house is that a young person may relocate in future. It's a valid argument, but once you decide to settle down in a city, buy a house quickly. Of course, this will also depend on the buyer's occupation and income. If he is a salaried employee with a regular income, buying a house makes more sense. But if you are living by the adventures of self-employment or upcoming business, it is more logical to live on rent. The return on capital employed in your business will be far higher than blocking money in a house. 

Reverse mortgage is another fantastic financial innovation. A couple gets a stipulated amount every month depending on the value of their property and when they both die, their heirs repay the lender the accrued interest and principle of the annuities given to the owners. This may not be the most efficient or cost effective tool, but it is very useful. It allows a couple to live a better life even when they get old without burdening their children. 

Your wealth can dwindle, plans can go haywire, money can be philandered or lost, businesses can get wiped out, medical ailments or court cases can leave you broke, but a house remains. When I was a child, my dad suffered a huge business loss which stripped us of our savings. But the house which he had bought earlier stayed. He was desperate to sell it to repay debts, but my mom did not allow it. She would send prospective buyers away, saying the house was not for sale. The house gave us a reason to fight it out, giving us comfort. The house was our strength. It can be yours too. 

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Eight Tips on How Not to Invest

Despite loads of information available, investors often jump into the stock market without much of an idea on what lies ahead. Here are a few tips on how not to invest.

1.       Not Knowing Why to Invest: Is it for capital protection, capital appreciation, returns, risk diversification, hedging or pure safety?

2.       Avoid DIY Investing: Investing requires being alert about the state of your investments and calls for active participation - a feat which not many can achieve.

3.       Not Actually Investing: Most of us begin investing with a long-term view, expect returns in the medium term, and end up trading in the short term. So, the grand goal of investing practically gets reduced to trading and speculating.

4.       Stock Tips: It's not the tips that are the problem, it's from whom and how you take them. However, any tip actually means that you don't invest without doing your own research.

5.       Not Asking the Right Questions: Why should I invest in the stock? Is it the right asset to invest? Do I know enough about the company to remain invested? These are worryingly missing from the popular narrative.

6.       What Looks Cheap may Not Be: A stock priced at Rs. 20 doesn't necessarily make it cheap to buy. Price-to-earnings, price-to-book, and price-to-sales ratios will help you judge the true value of a stock.

7.       Succumbing to Hype: Consulting financial advisors, investing in time-tested companies or investing based on personal experience as a customer are more effective ways.

8.       Repeating Mistakes: Time-tested classic principles of investing, such as not to follow the herd, buying low and selling high, are forgotten in the rush to make a quick buck.

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How to book stock market losses and make money

Booking losses at the right time forms the most important part of wealth management strategy.

Do you book profit or book loss?

You have bought the shares of ABC Ltd at a rate of Rs.100 per share. The current market price is Rs.150 per share. Also you have bought the shares of XYZ Ltd at a rate of Rs.200 and the current market price is Rs 125.

Do you book profits by selling ABC or book losses by selling XYZ.

Rule No.1: Never lose money. Rule No.2: Never forget rule No.1: Warren Buffett

This quote from Warren Buffet is the essence of selling loss-making investments as part of wealth management. However, to the contrary, most of us tend to sell those investments that make us money and prefer to hold on to those that are already making losses. It is just probably a feeling that we could not have gone wrong and the investment would revive, or on the other hand a feeling that we have been fooled and do not want to be fooled again and do not want to take action.

What to do with loss making investments?

"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong" - George Soros

I recollected this saying when an investor told me that he always invested in right investments at the right time. I acknowledged his prudent nature, but felt that he and many other financially prudent persons needed to know that they also required to regularly review their investments to eliminate non-productive ones for productive and paying ones.

Wealth management is all about making money work best for you.

George Soros's lessons of prudent wealth management lie in not allowing your investment to depreciate (fall in value).This involves being ready to leave your comfort zone and revise your investment decision with the right attitude of being proud of the right investment and at the same time not being disgraced or regretful in making revisions or corrections in decisions already made.

Review your investments with the current outlook

Most of us make investments that are based on the information available to us at a given point in time. But it is important to know that with times the profitability or loss of an investment could change. It definitely proves useful to review and revise our decisions when we find that we are holding on to something that no one would buy or invest in now.

It is right that it is human to make mistakes, but holding on to a mistake just for emotional reasons cannot be pardoned. Subsequent events might alter the attractiveness of the investment.

Should we be possessive in our attachment to those investments for which the outlook has changed now? So I would say that if you need to create wealth and manage it, there is nothing wrong in being a fair weather friend; investments have to work for you and not accomplishing this goal means getting out of these investments for better avenues.

Do I need to book losses when the market is falling?

However I wish to be excused when I say it is not good to sell when the prices on the whole have fallen down. However it is again important to believe that poor stocks would surely be losing more than good ones; fall in price just does not indicate a downturn, it is a combination of various factors like production, sales and profits also; so poor stocks or small companies may find it difficult to recoup even when we experience favorable times in the market.

Again during the fall in the market it is common for us to see that even good stocks may be available at a discount. I would say such times are ideal to liquidate poor performing stocks that are not doing well and purchase good stocks.

Why should you book loss?

Booking losses in poor performing investments has got some advantages. So as to quit the poor performing investments, you are forced to quit your ego and admit that you have made a wrong investment decision.

As you admit your mistake, you learn a lesson. As you learn a lesson you do not take similar wrong investment decisions in the future.

The advantage of booking losses is you move out of poor performing investments and moving into better performing investments. So you will be able to recover your losses faster.

How to Get Tax Gains from Your Losses in Shares

For the purpose of tax computation of total income of an individual, all incomes are classified under five heads, under the Income Tax Act: Salary, Income from House Property, Income from Business or Profession, Capital Gains and Income from Other Sources. The total income under all these five heads of income are added and after allowing deductions the total income tax is calculated based on the tax slabs.

However, tax laws allow setting off of losses against gains in the same category, based on different criteria. If an income is tax-exempt, it however cannot be adjusted against any loss from an income that is taxable. For tax computation, profit or losses in shares are clubbed under the head of capital gains.

If an investor has held shares for less than 12 months from the date of buying, then the resulting loss on its transaction on stock exchanges, if any, is termed as Short-Term Capital Loss (STCL). On the other side, if an investor has held shares for more than 12 months, then the resulting gain/loss is termed Long-Term Capital Gain/Loss.

This loss can be adjusted against the Short-Term Capital Loss (STCG) or Long-Term Capital Gain (LTCG) from shares, if any, thus lowering the tax outgo. Short-term capital gains from equities are taxed at 15 per cent.

If the short-term loss cannot be set off in the same fiscal, then the balance can be carried forward to subsequent eight years. In each of these, the said short-term losses can be set-off against short-term capital gain (STCG) or long-term capital gain, if any.

To reduce outgo, many investors set off gains made from equities in the fiscal against losses occurred in same year or previous year. They book losses, if any, on existing holdings and then later repurchase the stock to keep their holdings intact.

For example, an investor has already booked short-term profit (by selling within 12 months) of Rs. 10,000 in some stocks. At the same time, the investor is sitting on un-realized loss of Rs. 4,000 in some other stocks.

In that case, the investor has to pay short-term capital gains tax at 15 per cent on Rs.10,000 profit. To reduce short-term capital gains tax liability, the investor can sell the stock on which he is incurring Rs. 4,000 of losses. In that case, the investor's has to pay tax on Rs. 6,000 (Rs. 10,000 - Rs. 4,000), not Rs. 10,000. To keep his holding intact, the investor can later repurchase the stock.

However, long-term capital losses on shares can only be set off against long-term capital gains, if any. Further, any long-term capital losses that cannot be set off against long-term capital gains arising in the same fiscal can be carried forward to subsequent eight years.

Disclaimer: "Investors are advised to make their own assessment and counter checks before acting on the information. - Tax Rules are subject to changes”

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Stashing Your Cash: Mattress or Market?

When stock markets become volatile, investors get nervous. In many cases, this prompts them to take money out of the market and keep it in cash. Cash can be seen, felt and spent at will, and having money on hand makes many people feel more secure. But how safe is it really? 

Read on to find out whether your money is safer in the market or under your mattress.

All Hail Cash?

There are definitely some benefits to holding cash. When the stock market is in free fall, holding cash helps you avoid further losses. Even if the stock market doesn't fall on a particular day, there is always the potential that it could have fallen. This possibility is known as systematic risk, and it can be completely avoided by holding cash. Cash is also psychologically soothing. During troubled times, you can see and touch cash. Unlike the rapidly dwindling balance in your portfolio, cash will still be in your pocket or in your bank account in the morning.
However, while moving to cash might feel good mentally and help you avoid short-term stock market volatility, it is unlikely to be a wise move over the long term.

A Loss Is Not a Loss

When your money is in the stock market and the market is down, you may feel like you've lost money, but you really haven't. At this point, it's a paper loss. A turnaround in the market can put you right back to break even and maybe even put a profit in your pocket. If you sell your holdings and move to cash, you lock in your losses. They go from being paper losses to being real losses with no hope of recovery. While paper losses don't feel good, long-term investors accept that the stock market rises and falls. Maintaining your positions when the market is down is the only way that your portfolio will have a chance to benefit when the market rebounds.

Inflation Is a Cash Killer

While having cash in your hand seems like a great way to stem your losses, cash is no defense against inflation. You think your money is safe when it's in cash, but over time, its value erodes. Inflation is less dramatic than a crash, but in some cases it can be more devastating to your portfolio in the long term.

Opportunity Costs Add Up.

Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. Put another way, opportunity cost refers to the benefits you could have received by taking an alternative action. In the case of cash, taking your money out of the stock market requires that you compare the growth of your cash portfolio, which will be negative over the long term as inflation erodes your purchasing power, against the potential gains in the stock market. Historically, the stock market has been the better bet.

Time Is Money

When you sell your stocks and put your money in cash, odds are that you will eventually reinvest in the stock market. The question then becomes, "when should you make this move?" Trying to choose the right time to get in or out of the stock market is referred to as market timing. If you were unable to successfully predict the market's peak and sell, it is highly unlikely that you'll be any better at predicting its bottom and buying in just before it rises.

Common Sense Is King

Common sense may be the best argument against moving to cash, and selling your stocks after the market tanks means that you bought high and are selling low. That would be the exact opposite of a good investing strategy. While your instincts may be telling you to save what you have left, your instincts are in direct opposition with the most basic tenet of investing. The time to sell was back when your investments were in the black - not when you are deep in the red.

Buy and Hold on Tight.

You were happy to buy when the price was high because you expected it to go higher. Now that it is low, you expect it to fall forever. Look at the markets over time. They have historically gone up. Companies are in business to make money. They have a vested interest in profitability. Investing in equities should be a long-term endeavor, and the long term favors those who stay invested. Serious investors understand that the markets are no place for the faint of heart.

This is also the time to review the strength and weakness of our portfolio and make necessary reshuffling to make it ready for next up move. Don't hesitate to sell the stock of a company in loss if we could find a better opportunity in another one considering the changing business environment.

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