Thursday, August 6, 2009

Land or Stock where to Invest

The markets are at an interesting crossroads these days..... The classic "Bear Market Rally" dilemma - Is this rally a Bear Market Rally or a Bull market. But anyways let's leave this discussion for some other day..... Let's get to same basic investment dilemma, where to invest the money: Land, Stock.........

Let's first analyse Land as an investment asset - Let us say on a piece of land one is able to produce a crop yield of 100 rupees in one year. Taking a discounting rate of 10% we can come to the conclusion that the land would then be valued at 1100 rupees. 

Now let's say there is a productivity rise next year due to discovery of some new seeds, the rise would mean that the same land can now produce 10% more. The value of land rises to 1210 rupees. However if nothing of this sort happens my land still remains at 1100 rupees.

Now let's say that instead of just buying the land, I rent it start a business to grow crops and try selling some stocks of my business... at the average level of productivity of the economy I would
make almost no money and the value of my stock would be, yes you guessed it right "zero"

However I might be better than the average and could produce the crop at a higher productivity, so let's say instead of producing crops worth rupees 100, I produce crops on the same piece of land worth rupees 120..... My business would starts to make a profit but thats not all the 20 rupees I get can be reinvested in getting better seeds and that lets say increase my productivity by 9% anually!!! well because as I make more money I can buy even better seeds so now the value of my stock would be 2200 rupees!!!......

The story is still not over looking at my production strategy all those moron farmers copy it and now to my disadvantage (but to the advantage of the economy and the asset holders) start growing more. The value of land would then rise again and would catch up to 2200 rupees. What's more next year there is a drought that puts me out of business, the land prices suffer a decline but comes back to it's normal price that following year, unfortunately the business is not that lucky!!!

Now let's go to the third and final scenario.... I buy the land and start to till it.... Sell stocks in the market for this business, even if I am growing crops worth rupees 100 but can mantain the 9% productivity growth my stock would now be valued at 12,100 rupees!!!........ and now even if there is a drought next year my stock would still be valued at something as I still hold my asset which is land.......

So what can we conclude from this whole song and dance!!!........

- While investing in land is a sure shot investment decision, investing in stock is not so....
- Never invest in businesses with lower to average productive rates
- Even if the productive rate of the business is very high when it comes to taking a call of investing in land or a business "invest in land" unless.....
- the business "own its assets" and then do their production on it... and if this is the case then owning stocks is far better than owning land.....
- Land should be owned in places higher productivity rise is anticipated and most importantly the competition level is high
- To end the discussion I would add that the productivity of the economy and which means asset appreciation would happen in a society that encourages free flow of information or in other words is an open society, else after a point of time the productivity starts to decline and all the assets become worthless, this might be happening in some countries but because they are closed we may not know so soon... you can guess which countries I am talking about.........

2 comments:

Arti said...
This comment has been removed by the author.
Arti said...

I liked the write up and at the end of the day I would still say invest in stocks....