Tuesday, August 24, 2010

The End of Making Money From Money ?


I had a young visitor from New York the other day. He was exploring openings and opportunities in investment banking. Back there, he told me, everyone was talking about India. And having landed here, he was struck by the exuberance and yet, couldn't help contrast the potholes against Mumbai's property prices. I thought as we spoke, that financial services, often the business of making money from money, depended on such exuberance. And give or take a few blimps, we've had it in abundance. But how long would it would last in the present form ?

In the past I have often pitied banks and their seemingly vulnerable savings accounts. After all, I am bombarded with a continuous stream of messages telling me how to make more money from money. "Take your money out of your bank, DON'T leave it lying there," is the essential text hammered consistently. Invest in stocks, bonds, mutual funds, gold, silver, property and of course, clever insurance schemes.

A Vast, Global Industry

There is a vast, global industry which thrives on this way of life. It includes most of the financial markets, the really smart people (or are they ?) who work in them, financial media, communicators, independent advisors and government regulators who are always trying (I stress the word) to ensure that you, the saver, is not separated unjustly from your hard earned money.

The role of any financial market is to allocate capital and connect those of us craving to multiply our savings with those who want to multiply their wealth. Yes, in the process, keep a small portion aside for you as well. Actually, I do mean that genuinely. And yes, there is nothing stopping you from participating either. You should, if you think you can.

To return to my conversation with my visitor, it was two articles in the New York Times patched with some interesting stastics back home that got me thinking. All bear examination, inasmuch as they could tell you where opportunities could lie, versus not. To be fair, India is unlikely to face the same problems as the US economy, at least now.

"The Turnabout Is Striking"

The first, talks about small investors fleeing stock markets in the United States. Investors withdrew a staggering $33.12 billion it says and even quotes a Credit Suisse analyst (an integral component of that global community) saying "Small investors are losing their appetite for risk." And investors, as this article, will tell you, are selling on the way down as well on the way up again, presumably the smarter ones or with more guts.

Its the long-term trend that the NYT is pointing to.."One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks." "So," says the NYT article, "The turnabout is striking."

Now, lets look at the other article, also in the NYT, which speaks about property. This one argues that it (housing) in the United States will eventually recover from its great swoon. "But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg."

Era Is Gone For Good ?

Moreover, says the NYT, "the wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming. More than likely, that era is gone for good."

Now I can pull quite a few data points which will show you that the Indian investing mania never reached American proportions so the question of the return journey does not arise. On the other hand, did the return journey begin long ago..? An interesting article by Sucheta Dalal suggest as much, at least in equities.

She argues that investor population has plummeted from a high of 20 million in 1992. She quotes figures shared in Parliament that show some 3 million investors traded in the National Stock Exchange's cash market between April-June 2010 but 90% of the investment came from only 192,000 investors !! Moreover, 50% of turnover comes from just 451 investors, of which 156 were proprietary traders.

Sold On Growth

This is not to argue that you can't make money in India. Of course you can. And many do, quite wisely. But as Sucheta's piece says and I infer - statistically, not everyone has much of a chance making money from money. So careful with the hype.

Property is another story. We need roofs over our heads and we buy houses for long term security, unlike stocks and other financial market instruments. But at current values, particularly in the metros, housing is plain unaffordable for most Indians. One reason (galloping real estate FDI) is provided in this Times of India article. There are other reasons as well. So some sort of reversal must happen. Soon.

Im still sold on the India growth story, allowing, of course, for frequent ups and downs. There is very real consumption happening in the country. And people's lives are improving for the better, across strata and across the country. And there is need for capital and capital allocation too. And the market discrepancies ? Well, market forces will take care of them. That's what I told my young visitor as well.

6 comments:

Woman At Work on 1:05 pm said...

Real Estate prices are unreal in Mumbai. And from what I read in WSJ, property prices in Mumbai will continue to soar. There is no bubble that will burst.. there is a bar thats being raised year on year, making affordable housing a dream. To come to my point, money can generate money in india, if you are investing in Mumbai real Estate! The returns are likely to be much higher than what you'd expect from equities.

Arvind Srinivasan on 6:34 am said...

Glad to see you back in action!

Govindraj Ethiraj on 11:45 am said...

Hi W@W, would say the general feeling is not that a bubble would burst but a contraction could and perhaps should follow..there is no affordable housing in any metro, at least for any normal wage-earning citizen of this country..!

projenator on 7:41 pm said...

Also the mumbai real estate market is very shady with cartels and what have you. In fact I read an article in the ET a few weeks back how cartels were artificially jacking up prices. I used to work for Fannie Mae and I know a bit about real estate which helps me intelligently follow the real estate market. The Indian real estate market, especially the metros is extremely shady and unless you have political or muscle power, you rather stay away.

Specifically @Woman at work, if there is no bubble how come there was a 30% correction, on average in the mumbai and delhi real estate markets ?

In absence of any regulation, brokers and builders have a free run and most home buyers feel cheated the way they have been dealt. ET now and economic times has been coming out with such stories regularly, there is also an interesting video on youtube posted by a NRI homebuyer who bought a flat from Unitech, Gugaon in 2007.

projenator on 9:42 am said...

http://economictimes.indiatimes.com/features/financial-times/Why-we-need-the-real-estate-regulator-in-India/articleshow/6536274.cms?curpg=2

I think this confirms partly what I said in my previous post. The article on cartelisation in the Mumbai real estate can be found on ET website if searched.

projenator on 9:50 am said...

Just a quick comment on GROWTH, growth is important for improving living standards and getting people out of poverty provided growth is managed well which happens less often than one would like. Mismanaged unregulated growth will lead us to another America where the middle is being gradually and systematically wiped out as the following article illustrates through an extensive video presentation by Liz Warren.

http://www.declineoftheempire.com/2010/07/wiping-out-the-middle-class.html

 

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