Real Estate vs. Stocks - The Argument

Real Estate vs. Stocks – The Argument

It’s a well ingrained belief among Indians that real estate is the best and the safest investment that an individual can make. On the contrary, stock markets are generally viewed through a lens of skepticism, almost to the extent of comparing it with gambling. Before pronouncing the verdict in favor of any of the asset classes, it will be an insightful exercise to compare the returns generated by both these asset classes over the past 30 years.

We assume that an average investor would have no stock specific skills and would plainly invest in Sensex, the barometer of Indian stock market. For calculating the returns generated by real estate, we will use the price data generated in some of the prestigious deals that have recently happened in South Mumbai – the most mature and the most expensive real estate market in India.

The above data clearly shows that stock market returns have been as good or better than some of the prime most real estate returns in the country over the very long term. Specific stocks such as MRF Tyres, CIPLA, Titan, etc have performed much better than the Sensex as well as the real estate.

We commonly hear about crore-patis who make their fortune in real estate but we hardly hear of people who made crores in stock markets. The only reason why the common man has been unable to benefit from the stock markets is the short term orientation. People have created wealth in real estate only because they were ready to hold on to their properties for 20 to 30 years. The very same people treat stock markets as quick money making / losing machine – they will watch prices every day, get happy when prices go up and curse the markets when prices go down. Such a behavior will not allow you to hold on to your stock investments for more than a few months, leave apart 20 years.

Genuine money can be made in the stock markets only through long term investing. As the investing legend Warren Buffet puts it “Stock market is a machine of transferring wealth from the impatient to the patient”. Another aspect that can help your investments is finding a good investment advisor / manager. As we have seen, individual stock performances can be much better than the broad market and thus having a fine stock picker managing your money can work wonders. The additional advantage of investing in stocks is that you don’t need Rs 30-50lac to start with; you can start with a small amount and compound it over many years.

Note: We have not taken into account the dividend yields and rental yields as we believe they would be similar. Also, we ignore the survivorship bias in case of Sensex and the availability of leverage in buying a property.