It is surprising the way media is creating a hype of the forth coming budget. All business channels in particular are geared up for this Friday the 26th February 2010. You have posters of emminent personalities who would be giving their views on the budget. Then you have advertisement by a business newspaper “BUY, HOLD, SELL ” strategies to be passed on by the so called experts of the markets. Newspapers are meant to give news. However now they have started providing invetment advice. Is it convergence of media and finance or just plain marketing? Difficult to say in the present chaotic world where one does not know where one is going.

What is a Budget? The finance minister will lay down a road map for the economy and give an estimate of the expenditures. He would lay down the sources of income to meet these expenditures in the form of taxes. As every year the expenses would be more than the income resulting in a deficit figure. This figure would also bloat by the end of the year as has been happening every year leading to a higher deficit. The said would be justified by giving an example of the US economy whose deficit is much more than us. Thus deficit financing goes on and on.

Finance Minister’s Compulsions: Think twice before expecting the FM to act rationally. He also understands that you can not run your household expenses by not earning. Everyday you cannot be borrowing to meet your expenses. However here he has a mamoth task on hand. He represents a political party and is a part of the coalition government. Can he make rational decisions? Votes matter, lobbies matter, what coalition partners want matter, politics matter etc. His hands are tied.

Enter Self Appointed Advisors to FM: Since last week we have been hearing so much debate about what should the government do and what it should not do. Different experts from different fields give their take on what the FM should be doing. Does anyone care to understand the stark realities. You got to be in the FM shoes to understand that. So each of these advisors are speaking from their point of view with half baked knowledge. Should we be giving such talks any importance?

Enter Astrologers on the Budget day: The budget speech starts and everyone is glued to their TVs. Stock market fluctuates with proposals coming in. Its more of reaction rather than response. Can we act on mere proposals withot reading the finer prints in the budget? However experts are ready on different channels giving their expert views on a certain proposal  that will affect the industry and this results in wide fluctuations in stock prices. There is chaos as every analyst, business head, professional become astrologers trying to predict the effect of the proposals. They give judgement on what the FM should have done and not done. This chatter ends with the closing bell of the stock markets. Viewers are now more confused: one by the predictions of the astrologers and other by the fluctuations in the stock prices. They now wait for the real experts with their comments in the evening.

Enter the Genius and the Brilliant: Evening shows after the markets are reserved for the politicians form the ruling party and the opposition, the captains of industry,  stock market pundits,the bankers and the leading advertisers of the respective medias. Each one has an agenda. If excise duty on paint is increased the paint industry will cry foul. If tax on dividend is introduced the financial markets will complain. The ruling party will defend the budget proposals while the opposition will slam it. The PSU heads will hail the budget but the counterparts in the private sector may hold a different view. The diplomats would praise the budget, criticize it and at the same time sympathise with the FM. Others would blame the FM for missing an opportunity. Ultimately all are talking from their own point of view. This leaves the viewers more confused and past midnight they go to bed wondering whether the day was well spent and what did they learn?

Here are some rational thoughts:

1. The budget had some meaning when we were in a closed environment. However with the liberalization it has lost its meaning. Its only the media that has ignited the hype to increase their TRP.

2. Making investment decisions based on informantion flowing on the budget day is akin to gambling. You only make the intermediaries rich.

3. The budget proposals need to be studied in detail before one can study their impact. This takes time. Experts shooting off their comments on the budget day are misleading you. You must avoid any activity on stock markets based on such expert comments.

4. If everyone is happy with the budget then there is something to fear. Tough decisions have not been taken. It will harm the economy in the long run.

5. If people find the budget good then it will be bad for the economy. If they find it bad it will definitely be good for the economy.

The deficit need to be curtailed. If that has to be done the FM needs to take tough decisions like increasing petrol prices, doing away with subsidies, introducing more taxes, avoiding poulist schemes etc. People will not like it and the FM will need the political will and the courage to do the right things. Can coalition politics allow that? Well in short this is the answer to the question of budget being good or bad. You just spent a week hearing crap, now dont repeat the mistake on the 26th February 2010.

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Its a refereshing change to see the investors not getting unduly enthused by the stream of IPO’s hitting the markets. Most of highly priced issues are being subscribed by the big Indian as well Foreign institutions for reasons best known to them. Off course this does not in any signify that they are making the right investment decisons. A right investment decision is always about buying a value at the right price. If the markets are bullish and the sentiment is high we have a host of public issues hitting the market as the management of these companies want to cash out on the boom and sell their overpriced shares to the public. Investors refrain show maturity and I am sure this is bad news for the investment bankers. Most of the current IPO’s have resulted in losses for investors on listing. Thank God investors have been spared as they acted wisely.

Now what does this signify for the markets? Investors are avoiding the IPO’s not only because they have become wiser but also because they are fearful. As long as there is fear, the markets cannot go down. Yes we may see some sort of volatility but investors need not worry about investing in good value stocks. Its only when there is greed in the markets that investors need to worry. How do you know that there is greed? Its simple; Stocks go up in musical chairs sequence, every other day you have a new story on a stock, sector performance and fancy do the rounds, there is a mad rush of IPO,s and they get oversubscribed, investors willing to pay any price for stocks, ” This time it is different” the most dangerous arguement to justify the bull run does the rounds. Well none of those things are happening just now so there no need to worry about making investment decisions.

Last year around this time the markets were down to a sensex level below 8000. Was that the right level? There was so much fear that people were just dumping stocks. Moreover due to bankruptcies we had liquidators selling stocks rather than wise investment decision makers. This led to stocks being sold at any prices. Now these abnormal times have become an anchor in the minds of people and they think that the markets have more than doubled and have become dangerous. I personally believe that the markets are not overpriced but fairly priced. Leaving aside the sensex stocks there still exists great investment opportunities.

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It is amazing how day trading becomes ‘respectable’ in every bull market. I am surprised to see online trading ads on mainstream television channels now. These ads were earlier restricted to business news channels like CNBC and NDTV Profit.

There is this ad where the wife gives the husband his mobile phone, lunch box and where his mother puts tilak on his forehead. Finally what the husband does is go to his ‘office’. This is a room in his house where there is a computer with online trading facility.

There have always been compulsive traders and gamblers. However the activity of being glued to the screen and continuously buying or selling something is being given a new found respectability. I wonder what these professional traders will do if the markets were to be not so kind!

When two stock exchanges fight it should definitely be beneficial to the investors. However when the game is to snatch speculative volumes from each other it does not auger well for the investing community. The stock exchanges in the real sense are vehicles which promote the healthy functioning of the capital markets enabling the investor to participate in the capital formation process. However of lately with the advent of mutual funds and institutional investors the stock markets are turning in to glorified casinos with the pressure on the fund managers to perform in the short term. The investors have also no other choice but to play the markets on a short term basis and thus end up poorer. A good investor would have a long term horizon in mind and would access the markets a few times in a year. It is the traders and the speculators( which include institutions and mutual funds) which are the regulars in the market and the most important source of revenue to the stock exchanges, brokers, banks, government etc. It is assumed that the more time they are given , the more they will trade and more will be the transaction charges, taxes etc. The stock market business is very different. Experience shows that in bull markets even if the market remains open for two hours one can have phenomenal volumes while in bear markets even if the markets are opened for 24 hours one may not see any volumes. However the stock exchanges believe that keeping markets open for longer times the volumes will increase and the new bull market will start. They are all anchored to the crazy times of 2007 and  expecting that to repeat. Instead of thinking innovative ways to educate and service the genuine long term investors, they are facilitating speculation for the short term investor. It is only a question of time that we will see the markets open for 24 hours. We lack good quality leadership. This reminds me of the definition of “INSANITY” : Doing the same things over and over again and expecting different results.

Free Market Economy: You have two choices; Respect it or Abuse it.

For our Leaders, Regulators, Corporates, Investment Bankers and the investing intermediaries, this is a big wake up call. What is happening in our neighbourhood is a big eye opener. Grameenphone, Bangladesh’s biggest mobile firm with over 22 million subscribers is owned by Telenor a Norwegian company and Grameen Telecom a non-profit company founded by Muhammad Yunus a pioneer in microfinance.  On October 4th 2009,Grameenphone opened the largest initial public offering (IPO) in the history of Bangladesh aiming to raise 4.86 billion taka($70 Million) from Bangladeshi’s at home and abroad. Until 18^th October the issue was heavily oversubscribed.

No, there were no smart investment bankers who became selling agents.  Nor were there any advertisements creating a hype. Nor was there a grey market premium to attract subscriptions. There was an honest intention to help investors participate in the wealth building process.

True value was offered to the investors. Money was left on the table for the investors. The offer price values the company at only 3.3 times its 2008 earnings before interest, tax, depreciation and amortisation. This looks very cheap compared to Bharti Airtel, India’s biggest mobile phone company, which is valued, over 10 times its EBITDA. The idea was to make the first time shareholders very happy and build trust in the capital markets. The goal was to create an equity cult among the Bangladesh people.

Kudos to Muhammad Yunus the father of micro finance for another feather in his cap. He is a strong brand in Bangladesh and he could have used it to over price the IPO and made a huge profit, but he chose not to do so. Reputation was more important than money. A true, philanthropist, to have priced the offering so attractively priced so that every investor would benefit. This is what true leadership is about. I am sure this is going to change the way Bangladeshi’s invest and it will start a new wave of the equity cult.

India needs such leaders if we wish to achieve a double-digit growth and have a healthy and a vibrant capital market.

There are newspaper reports that a lot of real estate companies are readying themselves to tap the IPO market in view of the changed sentiment in the markets. When investors turn greedy we have companies/ investment bankers ready to capitalise on that greed. Now lets for a moment stay away from the market irrationality and think like a rational human being. Lets understand the nature of the real estate business rather than be carried away by the noise in the markets. Investing is all about buying a good sustainable business which is easy to understand and which is run by a credible management. Then comes the different characteristics of the business like, strong brand, distribution network, pricing power, moats around the business etc. Lets deal with the first aspect of the real estate business: Is it is easy to understand? This is where I disagree. It is an illusion if you believe that it is a business you understand. They possess land banks which are valued and reflected in the balance sheet. Does anybody know the real value of the land banks? I doubt. In our country it is a known fact that cash money changes in real estate deals, wether you are buying land or an appartment. In such a scenario can we truly assess the value of the land banks? Then what is the authencity of the balance sheet of the real estate company? Is it giving a true and a fair picture? As a value investor the balance sheet is the only document an investor can rely on. If that is misleading how does one know the real value of a real estate company? How are Investment Bankers able to value such companies? Corporate governance issue? In spite of this we have fund managers (qualified)of mutual funds making big investments in such real estate companies. This is reported in various newspapers thus adding credibility to the issues. This should not be the guiding post for genuine value investors as they got to understand that these mutual fund managers are investing other peoples money. What incentives are given to them is anybody’s guess.  So do not be carried away by the hype of these real estate companies IPO’s. The markets are hot and this is the best time to dump their stocks at ridiculous valuations on you. Never chase a fancy in the market as you always end up paying a fancy price. Investors need to understand that investing in real estate as an asset class is very different from investing in to a real estate company. It is this misconception that makes investors flock to real estate companies IPO’s.

The markets are showing signs of improvement and slowly the sentiment is changing from one of excessive fear to one of subdued optimism. However the stock markets are more governed by excesses be it bull market or a bear market. Investors need to be equanimous and not be carried away by the noise of the markets. Don’t be too guided by what you read in the papers and what you see on your favorite stock market television shows or listen to fund manager talk shows. You tend to make decisions based on the vividly displayed available information which is hammered on to you continuously. Here is the word of caution: do not be carried away by the current fads and fancies of the market. You are bound to get trapped. The markets are showing signs of revival: What does that mean? Investors are turning greedy and willing to pay any price for stocks. So, who is hunting for these small investors? Barbarians are waiting to cash out on the greed of these investors. They are ready with their Initial Public Offerings (IPO’s). You have already started hearing of plans to float IPO’s and more is yet to come. There seems to be race to get as much money from the markets before the party ends. Every time the theme changes in the markets. In the last three years we had the themes of Real Estate and Power collecting huge sums of money through the IPO route and leaving the investors nursing their losses. These themes were the fancies and investors chased them in the hope of making money. But the Barbarians were smarter than you. Remember one important lesson: Nobody can cheat you without your consent. So if you got cheated the fault was yours as you were greedy. Keep your greed under control and you will be the winner.  Take a current example. After the election results all of a sudden the Infrastructure stocks started going up and the Infrastructure Industry became a fancy. Most of the Mutual Funds were in the markets offering Infrastructure Fund Offerings within a week. They knew that the name Infrastructure being fancy investors would be too willing to part with their money in such Infrastructure Funds. So now what would be the next fancy in the markets? Not difficult to guess if you have your emotions under control and are able to see the greed of the barbarians. It’s going to be “Insurance”. With the government willing to open up the Insurance sector we will see a flood of IPO’s in the sector. Investors would do well not be carried away by this euphoria and think ten times before paying excessive prices for such IPO’s even if they happen to be from big multinational faceless organizations or from Indian business houses.

None of the IPO opportunities were offered to you last year. Why? Because you were too scared of investing in the markets and were much wiser with your money. You would not have paid any fancy price for such offerings. If you were not a fool to pay a fancy price they were not fools either to offer you the shares at such low prices.