This article was published in Business Standard on Sunday, September 30, 2012
After lying low for a number of years, there are several reasons why retail investors should look to the stock market
For the past two years or so, if any retail investor asked a ‘financial expert’ whether this was the right time to invest in the stock market or not, the answer would invariably have been, ‘Refrain for the time being and enter when there is more certainty’. Investors appear to be taking this advice rather seriously.
We read reports in various media as to how retail investors have jettisoned stocks and fled to safer havens such as gold. This phenomenon is not restricted to India alone. The abiding global sentiment prevailing today is that stocks are ‘risky’ and should therefore be avoided. The grief-inducing headlines in various newspapers are further cementing this belief (the past two weeks notwithstanding). Everyone says that they will invest when times are ‘more certain’. Continue reading
You purchase a brand new mobile for Rs. 10000. The first year you have a free warranty. The salesman offers you a warranty for the second year for Rs. 500. You fall for the bait and buy the second year warranty. What are the chances of your mobile conking off in the second year. May be 1% looking at the track record of all the mobile phones in the last few years. So your warranty is worth only Rs.100. However you believe that the salesman is your best advisor and pay Rs.500 for something which is worth only Rs.100.
However you are in an efficient market and competition will ensure that market forces will drive out these warranties from the market or the warranty prices come down to Rs.100 as more companies start giving warranties. This is how a rational mind will think. Well you are dead wrong if you assume the above to happen.Warranty is a product no one should buy. If humans realized that they would be paying Rs.500 for Rs.100 worth of insurance, they would not buy the insurance. But if they do not realize this, markets cannot and will not reveal the situation.
Competition will not bring the prices down. The salesman plays an important role as a friend and an advisor to sell you something worth Rs.100 for Rs.500. It is difficult for third parties to enter the market efficiently as how can they make money by persuading you not to buy.
When many people are still afraid of flying it was common to see airline flight insurance sold at airports at exorbitant prices. There were no booths on airports selling people advice not to buy such insurance.
Now when the stock markets are up one must be careful. You have brokers, investment bankers, mutual funds, banks in the guise of your best friends and advisers trying to sell you dreams. When the markets are up more mutual funds and more IPO’s hit the markets. They want to benefit from irrational behavior of investors. However there will be no firms asking you not to be swayed as they cannot benefit from it.
We are in a market where firms compete for the same consumers. Some sell cigarettes and some help you to quit smoking. Some sell fast food while others advise you for diet. If all are rational human beings (econs) then there is no argument which competing interest will win. However the problem is that consumers are humans and make irrational decisions leading to bad choices. Here is how firms benefit out of their irrational behavior. In stock markets we have opposing interests like day traders v/s long term investors and stock tips v/s value investors. Irrational investors add to the chaos making it easy for firms to benefit from their irrationality. Your business news channel has become your stock advisor, the banks salesman is your financial advisor,and your friendly neighbor is your portfolio manager.
At present stock markets are going through great volatility. It is important that investors keep their cool and behave rationally. There are hawks waiting to make money out of you. Remember there are no short cuts in life. Ponder on the following questions: Why do IPO’s not come in bear markets? Why do we not get stocks tips daily on our mobile in bear markets? Why don’t FIIs buy in bear markets when the prices are low? Why do experts predict markets higher when the stocks are going up? How does one know that the Sensex will touch 25000?
My friend you are in a bull market. You are more likely to turn irrational and make big money mistakes. That’s the reason you got to be cool and not be carried away by the noise of the markets.
The BSE Sensex has crossed the 19000 mark. The sentiment is bullish with FII’s entering the markets and chasing stocks. Why not? Elsewhere in the world there are hardly any worthwhile opportunities to invest in. The interest rates are also very low. Just barely 18 months ago investors were shunning stocks when they were available at most attractive valuations. However today when the prices are rising investors are finding the stocks very attractive. How strange is it? Investors find a stock less risky when the prices are going up and everyone is buying and they find it more risky when prices are down and nobody is buying. Lest we get swayed by the herd in the markets it is important to revisit some wisdom learnt from the last bull market. Is there a build up of a bubble? Yes. Good news are trickling in and the markets are going up on each good news. Any bad news are discounted. The situation is such that there are no bad news at all. One by one like a game of musical chairs we see stocks in all sectors going up. Listen to your favorite business news channel and you become more optimistic as all the available information is positive. Analysts and fund managers show over confidence and over optimism and predict the markets. Investors feel overconfident as their stock prices are going up. They attribute this success to their ability and knowledge to pick stocks. They thus turn in to investment managers in their own sphere of influence. IPO’s are lined up to cash in on the present boom. Last year you had some IPO’s but investors did not make money on listing. Hence the euphoria did not last. However this year with the successful IPO of SKS micro finance investors experienced listing gains. Some other listing gains did follow. The index is climbing up and IPO’s are offering listing gains. Management of companies have lined up to en cash on the euphoria of the investors.Well this is a sure sign of a bubble in the making. With stock prices going up values are difficult to find. When that happens and investors want to invest at any cost the “Greater Fool Theory ” works. Investors are not bothered about valuations but they are buying because others are buying even though the prices are high. The hope is that there will be another fool to buy it from them at a still higher price. People are not investing but in the guise of investing they are trading and speculating.
So what does one do? I am in no way suggesting that one should sell of all stocks and sit liquid. Stocks are still the best investment opportunities today as they are the best hedge against inflation. Fixed income securities will definitely erode your purchasing power in inflationary situations. Knowing that equities are risky and you are still an investor you are not risk averse. However the problem is that investors make mistakes in the stock markets because they are loss averse. Now is the time not to be loss averse. Ride your winners and sell your losers. Such bullish crazy times can go for an extended period. The challenge will be to ride your winners and sit tight. Do not make the mistake of allocating more resources to stocks at present unless you see a great value. Enjoy the bull run without participating. As it is, your stocks are also going up. Be very fearful of IPO’s hitting the market. Do not chase any fancies of the market. How does one know what is a fancy? Simple; what everyone is talking about, media reporting on the same, mutual funds coming out with similar schemes and IPO’s of the same sector hitting the markets. Remember the fancies of the Power and the Real Estate sectors of 2006 and 2007 boom and the IPO’s in these sectors which made the investors a lot poorer. I can see a micro finance fancy in the offing.
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.
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 18th 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.