Buffetology: Mantras for Investors

The grand old investor 'Warren Buffet' was in India recently. He has once again reiterated his opinion on India as a compulsive investment destination for any investor. He has returned to India to scout for attractive investment opportunities for his companies. It would be worthwhile to revisit the investment philosophy of the legendary investor.

The term 'Buffetology' has been coined by authors Mary Buffet and David Clark in their book titled 'The New Buffetology'. The greatest contribution of Buffet to the cause of Indian investors has been his passion for bringing the gains from long term investing to the centre stage. Unfortunately, in India the focus of investment has been on making money through short term gains, which is detrimental for the psyche of investment. The idea of long-term investment is treated somewhat like a doctor’s advice to start exercising and eat healthy. Most people agree that it’s good in theory, but few actually get around to doing it. Buffet's life and his success demonstrates that all you need to do is to understand a few simple things and do them faithfully over the long-term, with the long-term measured literally in decades, not years.

Here are a few pillars of the so called 'Buffetology':

• Invest in companies companies with consistently high rates of return on equity, preferably rising.
• Rule No. 1: Never lose money.
  Rule No. 2: Never forget rule No. 1
• Invest in a business that even a fool can run, because some day a fool will.
• Time is the friend of the wonderful company, the enemy of the mediocre.
• Simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
• You only have to do a very few things right in your life so long as you don't do too many things wrong.

Let us derive inspiration from these words of wisdom and create wealth for ourselves through the concept of 'Value investing' propounded by the legendary Warren Buffet.

Pitfalls of a Real Estate Market Crash

Is real estate market in India headed for a crash? The answer is an emphatic 'yes', and the reasons for this conviction are far too many. Real Estate prices worldwide generally follow a lag effect: they are the last to sell off in a declining business cycle and the last to revive in a recovery. The primary reason for this is that a large chunk of the surpluses generated in a booming stock market find their way into real estate investments, leading to an increase in speculative activity in the real estate sector. Stock market decline that started on November 5, 2010 (some may call it a bear phase) is now over 4 months old, but real estate prices are still to witness a significant correction. The real estate prices in India  (especially in the residential sector) have bounced back after the 2008 global meltdown, and are currently ruling at around 20-30% higher than the peaks attained during the 2007 boom. But a severe correction is not far away.

According to the analysis done by property consultants including Knight Frank: dipping sales, inventory pile up, rising debt and jittery investors (in the aftermath of various scams) is a sure shot recipe for an impending crash. The tough stance taken by RBI on roll over of loans to the real estate sector points to the fact that RBI is not comfortable with the exposure of banks to the sector. The developers have themselves to blame for the supply demand distortions in the residential real estate sector. The herd psychology of developers for constructing luxury projects have pushed the residential market towards a state of free fall. Sales in this segment have fallen as much as 70% over the past few months. Most developers have been offering discounts, concessions, freebies to sustain themselves, but there are few takers yet. It is often said that when the roadside hawker starts investing in stock market make no mistake about the market crash, similarly when you find increasing number of SMS in your mobile from real estate agents make no mistake about the impending real estate market crash. Just count the number of messages received by you recently and you would know the answer.

Having convinced about the impending crash in the real estate sector (residential market) what should an investor do at the current juncture:

• Postpone your decision to buy a second house for investment purpose or speculation (no problem if you are buying a first house), you may get a better price six months down the line.
• Do a due diligence on the builder before locking your money into an under construction property. Paucity of finance could delay the projects indefinitely.
• Stay away from real estate stocks (especially those into luxury projects), these beaten down stocks still have a long way to go on the downside.
• Be wary of financial sector stocks: They still are over owned by the market players, but a real estate crash could dent their margins considerably.