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Is the best proxy play always a better investment?
May 13, 2015

"I will be receiving my first salary soon! And I will buy a Gucci bag with it" said a friend of mine recently, with a very wide smile on her face. Having graduated from a B-school not so long ago, she is excited about her entrance into the corporate world. But being her first job, and her desire to buy expensive 'branded' merchandise, she would require some help from her folks to fund the balance amount.

"Instead of taking the money from your parents, why don't you save up now and buy something even better later, when you can afford it?" was my response.

"Itna time kidhar hai. I want the bag now!"

Then I showed her a message that I had received from a friend a while ago.

It goes as follows:

"Hello Long Term Investor,

How Many People are riding ROYAL ENFIELD BIKE ? or wish to ride it ?

Look at the company's growth

Eicher Motors (Makers of Royal Enfield).

Share Price on September 2001 = Rs. 17.50 Price of Royal Enfield bike in 2001 was Rs.55000/-

If anyone would have bought the shares of Eicher Motors instead of a bike then he would have got 3143 shares ((Rs. 55000/ Rs 17.50 (share Price) = 3143 Shares)) Eicher Motor's Share Price as on 23rd January 2015 is Rs. 15,109 (Just for 1 share) Value as on 2nd February 2015 = 3143 x 15,109= 4.75Crores

55000/- is worth 4.75 Crore in 13 Years.

Now he could have bought a Rolls Royce."

That she disposed off this idea is another matter altogether. "Who will wait for so long for the value to rise?" was her response.

Just an update on the above message though - as of noon today, the value of 3,143 shares of the company would have been worth almost Rs 5.7 crores!

We came across an interesting article in the Mint today that was somewhat relevant to the above topic.

As you would know, real estate had become the "go to" asset class over the past decade. The odds would be high of you or many of your acquaintances having indulged or thought of investing in a property (by taking on debt) over the past decade. And why not! After all, India has a shortage of homes. Demand will remain strong for years. Real estate prices never fall! - were the general arguments.

However, take a look at this...

"If real estate was your investment idea between January 2007 and September 2014, there was a smarter investment option: buying shares of India's largest housing finance company, Housing Development Finance Corp. (HDFC)." read the first line of the article.

Today's chart of the day shows the average returns one would have earned from investments made across cities, the Realty Index and in the shares of HDFC Limited.

It goes without saying that if one wants to make a bet on real estate in India, among the many options, a housing finance company could be considered. And when it comes to consistency and stability, it's hard to beat a strong institution such as HDFC.

You may argue that stock of HDFC would have seemed expensive at the time. However, the compounding mammoth that it is would have provided a strong cushion to one's investment - even if one had overpaid for the stock then.

In the words of Albert Einstein "Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it." a very relevant and apt quote, I believe.

Have you ever benefitted by investing in proxy plays of a particular investment theme or asset class?

Data Source: Mint

This Chart Of The Day was published in The 5 Minute WrapUp - On your marks...Get set...Compound!

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