Real Estate vs. Stocks: When Stock Market Beats Real Estate

In the last post I said why I prefer stocks over real estate when it comes to investment. Today’s video is to compare real estate vs. stock market returns. Few months ago, when I visited a relative at his home in Trivandrum, he told me that he bought his property in 1981 for Rs. 10,000 per cent of land, and now it’s valued at Rs. 25 lakhs. So I was like WOW. 250x the investment. Out of curiosity, I calculated its CAGR (https://www.youtube.com/watch?v=Sk_em…) and I figured out that it comes to around 16%.

So how does it compare with stock market returns?

As you probably know, the base period of Sensex is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. Sensex now trades at over 36,000. The CAGR of Sensex over the past 38 years is over 16%. Or 360 times the original investment (compared to 250x). That’s excluding dividend. If dividend is included then the returns could be in excess of 18% CAGR.

So what’s the point? Actually, many!

* Long term effect of equity is least understood in this country.

* When it comes to real estate people uses X times the investment to highlight its returns. Say, I bought a land for 1 lacs and sold it for 5 lacs. And I multiplied the money by 5 times. But when it comes to equity, the returns are expressed in CAGR/ (or Compounded Annual Growth Rate)

* I have also read that equity has outperformed one of the most expensive prime properties in the country.

* Samudra Mahal building was Mumbai’s most expensive building when it was completed in 1970. At that time, bookings had then commenced around Rs 700 per sq ft. And 3 years back (Jan 26, 2015) Infosys co-founder Nandan Nilekani paid about Rs 1.29 lakh per sq ft, or Rs 22.5 crore, for a sea-facing apartment in the marquee Samudra Mahal building at Worli.

* 129,000/700 = 184.285714286 : That is, 184 times in 45 years. Or a CAGR of 12.29%.

* What does that mean? Sensex has delivered superior returns than the most expensive prime property in the country.

* So remember one thing. When you think about equities think 15-20 years and not 5-10 years (as TV channel experts would say).

* A stock’s up trend or down trend could last up to 10 years. Means, a stock can move up or down continuously for 10 years before the cycle turns around. So when you enter a stock at the wrong cycle, you will have to wait two cycles for real returns. That makes 5-10 years short term.

* We buy a property and hold it easily for decades. People do not sell their homes and properties when the demand is low, right? They sell when they need cash. But we don’t do it with equities. When you do, you will agree with Albert Einstein that: “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”

* I compared the above performance with Sensex, but good quality stocks and mutual funds have delivered better returns than real estate itself.

Video / Malayalam

I hope you have learned a thing or two from my new video. If so, do share my video with your friends and family on your social media channels!

Happy Investing/Trading! 🙂