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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Cash, Patience and Bargains

Posted by Muthu on May 12, 2012

Almost every one I come across, have a car loan running. The EMI may be say Rs.12000/- per month for 7 years. The interesting thing is that the car is being changed every 3 years, which means through out their career this 12K becomes a constant monthly payout; not to talk about fresh down payments as car depreciates in value fast.

12K invested for 120 months @ 12% interest per annum would fetch some one a Mercedes Benz itself; with our any monthly loan liability whatsoever.

When I decided to buy my first car (which is what I own till now), first I decided it would be either a Santro or Wagon-R. The next decision was to buy a used one, not more than 3 years old. I went and met a reputed used car seller and told him that I need a car with all accessories, should not have run more than 20,000 kms and price I’m willing to pay is 40% the price of new car. He said that I may get for 60% for new car’s price but if I want 40% it would be 5 years old. I said that I’m in no hurry to buy a car and asked him to let his staff contact me each time they come across a piece with my specification.

Within 2 weeks I got a 2 year old Wagon-R as per my specifications. Since it was black in colour; my wife rejected it. So one more specification was added:-)

Within a month, there was an offer for an imperial red Santro car which was 2 years old and has run only 7000 Kms. The seller wanted the money on the same day as the family is shifting overseas at a short notice. He was fine with the price I quoted. I went and handed over the cheque within few hours, the car came with all extra fittings and accessories including stereo system. The dealer charged good commission from the seller and did name and insurance transfer to me free of cost.

I always find that you can get good deals if you’ve cash and patience. This includes stock market as well.

I changed the tyres only last month after 7 years of use. Still it gives me a mileage of 10Kms per litre. I may go for a sedan (Honda City?) in next one or two years with the similar specifications mentioned above.

The only catch in the used car market is the integrity of the dealer. Otherwise you may get a bad one, re-setting the meter is a child’s play for them.

We have 2 two wheelers; a Bajaj caliber and a Kinetic Honda. The Bajaj caliber is 13 years old and gives a mileage of 50Kms per litre. The Kinetic Honda is 16 years old and gives a mileage of 25Kms per litre. I suddenly thought why don’t I sell these two and buy one new 2 wheeler like Honda Activa which can be used by both me and my wife. All I was offered was a scrap price though both the vehicles are in good condition.

So I called a good mechanic last week, told him to completely make them like a new vehicles including change of batteries etc. I spent less than 5K for completely redoing the vehicles in the way I wanted. The decision: we have decided to retain these 2 wheelers for another 5 years. Only keeping people like us in mind, the auto industry is lobbying for not allowing a vehicle to run in road for more than 10 years:-)

As you would have guessed right, caliber and kinetic was bought by me and my wife respectively (long before our marriage) by completely paying cash:-)

I came across something amusing in real estate recently. We live in L.B. Roadand our flat is now 8 years old. From what I hear, someone got an offer last year in our apartment @ Rs.14,000/- per sq.ft. The reason may be is that prominent locality, good construction, very well maintained, piped gas, all 36 houses connected with intercom with inbuilt provision for cable and net in all rooms, ample open space with plants and walkers path for daily walking, round the clock security etc. Still I would never pay 14K per sq.ft for this flat and that is not the amusing part:-)

There is an apartment opposite to ours which is more than 2 decades old. It is one of the first set of flats to be built in Adyar. The quality of construction is good and they have created covered car park, lift etc. which was thinking way ahead of time 20 years ago. When I was speaking to a real estate guy, he told me that recently a 2 bed room flat in that apartment got sold for Rs.45 lakhs, all inclusive. Initially I was unable to believe what he said. I went and enquired in that apartment. It is a spacious 2 bed room flat (may be 1000+ sq.ft) with complete wood work and the price the real estate guy told me was true. That flat is fetching a rental of 25K per month; a cool yield of 6.7% per annum which is impossible for any prime property in Chennai.

The UDS (undivided share of land) value of that flat is roughly Rs.75 lakhs. Unlike housing board flats, it is relatively easier to evolve consensus in private apartments for demolition and rebuilding. One disadvantage in town ship like apartments, where there are hundreds of flats is again evolving consensus.

Assuming the quoted rate for our apartment (in real estate, the actual price would be known only you sell), why some one should pay Rs.1.4 crores for our flat and get a rent of 35K per month; which is 3% yield. The UDS value of both our apartment and the opposite one would be one and the same.

My doubt is if people can wait and find such bargains in place like Adyar, what is the need to go to Siruseri (which may be 30+ kms from Adyar) and buy a 3 bedroom flat for Rs.80 lakhs? In Siruseri, people are finding it difficult to get a tenant and even if they get one, the rentals are not worth talking about. Am I missing out anything?

Another question, if they can hunt, bargain and get a flat like ours (we are not interested in selling:-)) for say Rs.1.2 crores or even less, would it still not be a better deal than Rs.80 lakhs+ in Siruseri?

As you guessed right, if and when we buy a next house, it would be on the above lines with full cash, a small loan from bank for more due diligence. Talking about due diligence, I would have heard from dozen people (including an intelligent and financially prudent gentleman who recently became our client) that Rank Associates in Chennai is good in real estate due diligence and documentation and their services are worth the fee they ask for.

In flat and car alone, I feel there is more value for money in buying a used one. Especially considering the delay in execution of real estate projects, a used one is much better.

Again in any item you buy, refrigerator or TV or Microwave etc., if you are willing to pay cash, you get a good discount which you would not get if you go for an EMI payment (even assuming 0% interest, which is a myth I would address in some other piece). The seller would encourage you to go for EMI because he not only gets higher margin, the finance company from which the loan is taken also gives a good cut to them.

In a piece two months ago, I mentioned how we got a better deal for Panasonic LCD TV, at 40% lesser than Sony and 20% lesser than other brands which had similar features. But don’t ask me why we have 3 TVs in 3 rooms when we don’t watch TV much. It’s just to avoid ‘conflict of interest’ and disturbing each other’s peace:-) 

If you are buying medicines regularly in the family, it is better to buy the monthly requirement from chain of shops which gives your 10% discount on MRP. They may deliver in two tranches over 2 or 3 days; that should not be a problem for planned or regular medicine requirement. Anything else can be brought in the street corner shop; who now a days do free home delivery for any value.

Since we all may live in a locality for long and can get to know about platform vendors better; buying fruits there would be a good deal. Our fruit vendor who has a platform shop in L.B.Road gives us a kilo of good apples for Rs.100/- For other, she gives it for Rs.120/-. In a super market yesterday, I casually enquired the price. It was Rs.160 per kg. When I asked whether he would reduce the price, he gave a nasty look. Gentlemen are not supposed to bargain in a super market. Despite giving to us for Rs.100/-, she has a 15% margin. Of course she has no over head costs other than fruits she gives to traffic police which any how would get rotten the next day:-)

If you go to a street vendor for first time, never use your car. I can assure you that you would never get bargain and instead be charged a premium for owning the car:-)

Even provisions too, we buy the monthly requirements from Annachi shop near by. We save at least 10% per month. Since I visit lot of supermarkets (just to get a feel of what is selling well and at what price) the only shop which offers deals on par with Annachi is Reliance Fresh. You can go to super market for window shopping and buy from local merchant. I don’t know what difference it makes to buy a Gillette shaving cream in a super market or Annachi shop where you get it at much cheaper price.

I cannot finish the piece without writing few lines about stock market. For a direct stock picker, bear markets are amazing place because you get excellent companies at a heavy discount. But the problem is even people who have been in the markets for long find it psychologically difficult to do so. As Bufett says, this approach is like binary- either you get it or don’t get it. You can always keep track of a stock and buy at a valuation you are comfortable with. Earlier I used to use the word price and now I use the term valuation. This is because of an interesting interaction with a friend who is in the market for few decades.

Say I bought a share at Rs.50/-. When I told this friend it may be good buy when it touched Rs.100/- , he said that I’m being biased as I bought the same at Rs.50/- where as I’m asking him to pay double the price. I told him that when I bought the share the earnings per share may have been around Rs.5/- implying a  PE multiple of 10. And at Rs.10 earnings now and a price of Rs.100, still the PE multiple is same. Essentially this means we are paying the same price for a piece of share. He said in no math, Rs.50/- = Rs.100/-, he would rather wait for the share to come to Rs.50/-.

If a direct stock picker for decades can speak like this, it shows we have miles and miles to go before educating ourselves in investing and personal finance. But for these people, we would never get bargains too. Thank you my friend:-)

9 Responses to “Cash, Patience and Bargains”

  1. rajapanda said

    Hi Muthu,

    Very interesting topic for the post indeed. I myself share some of the traits with you and my conviction on these thoughts are only getting stronger over time.
    One of my friend once made a nice point about the kind of people who insist to buy a stock at particular price only i.e., “People want to buy today’s stock for yesterday’s price”.I guess that sums up the mentality of people who are too fixated on the price alone without giving much thought about the value increase.
    I liked your point about the car. Will keep it my mind for my next purchase.


  2. SJ said

    I guess the difference between the two apartment rates (yours and your neigbours) is time of construction (one is 8 yrs and the other is two decade old). But how much of life is left with a two decade old flat is to be thought of. Moreover,does buying a two decade old flat (for living or renting out) is ok considering the depreciation? Am I missing anything here? If so, your thoughts pls

  3. Paresh. said

    It was a great read.

  4. Suhail said

    Hi Muthu,
    Very well written. (Came here from your comments on Subramoney’s retirement thread)

    I too believe that vehicles – especially if it’s your first one – should be a used one. My first car was a used Honda City, fully automatic, moonroof etc- $7K.

    After using for 18 months, and 2 minor accidents, and was able to sell it off at $8k. Yes, 1K of profit!
    That too because I had to sort of do a distress sale in a sloppy Dec month since I had to return in a hurry, when Americans generally don’t buy cars. Had it been possible for me to wait till Feb-Mar, when many of them get back tax-refunds I’m sure I would’ve easily got 10K.
    The sole reason I was able to get it at such a cheap price was I’d told the used-car dealer exactly my preference and I’d conveyed to him that the day the car is available I will give him full cash down. He just has to give me a call. I waited for a month.

    Cash + patience = Possibility of awesome deals! 🙂

    I know a guy here in New Bombay, my age, low ~30s, who does the same things for Real estate – and that’s his full time job! He is the de-facto investment guru for his extended family. A mini-RE-fund unto himself.

    Any-time someone in his family has a spare 5-10 lacs, they park it with him. He’s constantly on the prowl for distressed sales and when he likes something he really pounces on it. Imagine apt-purchase north of 50-60-70 lacs in one sitting, 80:20 (70:30) whatever be the white:black ratio. Sale deed/payment in local branch’s DD/registration all done in a day or two. The seller is basically stunned. And because of his ability to make immediate payment he is able to get prices which others can’t even dream of. He then immediately spends a few thousands to fix whatever needs fixing and within a week or two puts it up for rent, and then flips it around in a few months for a cool profit of 10-20 lacs depending on the apt. Sometime the buyers are existing neighbours themselves who didn’t even had an inkling of first sale!

    I asked him about his risk in paperwork. Specially because I realised what a hassle the title/paperwork can be while purchasing my own apt in same suburb.Over the years he has learnt a lot about many co-op housing societies, so he knows, which has regtd society, which has OC, which is a gaonthan plot, and which a pure CIDCO tender plot etc. But still, he admitted that’s his main risk.

    On reading your post about Rank Associates, I was wondering, do you know of any similar 3rd party firms in Bombay who specialise in due-diligence of paperwork for RE deals.
    Most of the time I see, local lawyers doing this – my own deal was done through a lawyer (suggested by my broker). But the power ratio is totally skewed incase of law firms. Even after paying fees the law firms treat the parties as if they are doing everybody else a favour. At-least that’s the situation here in Bombay. I might be wrong though, coz my sample size is 1 and hearsay.

    • Muthu said

      Hi Suhail,

      You put it very well:

      Cash + patience = Possibility of awesome deals

      If you are an equity investor, this approach with discipline would do wonders for you.

      As you mentioned, though the real estate stuff is profitable, one deal going bad or becoming illiquid can wipe out cumulative profits. I’ve no nerve to try such things!

      You may check with Mr.Subra or seek help from Moneylife to identify an ethical and competent law firm in Mumbai.

      • Suhail said

        You are correct. Mere mortals like us would never have the stomach for something like this. And rightly too. (we don’t have relatives parking 5-10L wily-nilly with us!). Anyways, it takes all kinds to make a society/market. He has simply evolved himself to be a scavenger/vulture who swoops in and out 🙂


  5. amol said

    Dear Muthu,

    That’s well presented brilliant piece of information. In the current market, CASH IS KING!

    I have one question…do you think current market is attractive to make some lump sum investment into existing mutual fund(SIP’s are already going on in these fund like HDFC Top 200, Franklin India Blue chip)

    Whats your take


    • Muthu said

      Dear Amol,

      I wouldn’t mind making lump sum investments at these valuations though I’ve no clue what could be the bottom and would know it only in hindsight. If you want play it safe, you may consider topping up over the period of next few months.

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