Wednesday, May 1, 2013


People are looking for you!

Plenty of investment advice is available today in the form of books, blogs and bhashan for anyone who cares. The space taken up by the Investment Experts in the media is directly proportional to the rise in the SENSEX or NIFTY or Dow Jones. Buy this or buy that is the usual refrain. This is usually the exact time when the retail investor should exit the market and buy an asset like a car or a house which has some day to day utility to the person. This is a hypothesis the writer has formed after observing investment cycles or better said, ‘asset trading cycles’. I shall now try to convince the reader on the logical basis of this contrarian view.

Basically, whatever the commodity or asset, may be gold or stock, one is leveraging on a commodity called information. We, loosely speaking the middle classes, or the salariat, are at the bottom of the investment pyramid. The information on basis of which we are to act is second hand or third hand. Naturally the person who gains most is one who engineers the events. The investment magazines which supply ‘tips’ are back-numbers by the date they are out of the press. Investment is not our bread and butter, and one just expects to make some good money like the ones above us in the pyramid have already made, knowing at the back of the mind that risks are high. In a sense, the Investment Gurus or the brokers or the traders are like owners of casinos in Las Vegas or today, Bahamas or Manila, and the retail investor is like the tourist who has to face the Pro~s and should not mind losing a few hundred dollars. It’s not that they are smarter than us—only that they are sharks, and basically they are following their dharma! To come back to the contents of the italicized sentence above, what is implied is that the retail investor exists at the fag end of the information pyramid, and his entrĂ©e is designed to materialize at a time when the Professionals are all set to offload their stocks and count their money all the way to the bank, to be kept in the locker, not in an account!  

But unfortunately, every frenzied investment phase comes to an end in a scam, and the scam is the result of the greed of the RI, whose appetite has been whetted, and some unfortunate retail investors end up losing their everything. They are so to say, ‘left holding the baby’, or in crude Hindi, they are the ones who are the ultimate topi pehnne waale. In the following paragraphs, we intend to study various ramifications and implications of the theory regarding passing on the baby or topi to the RI.

People have heard the phrase popularized by the late Padma Bhushan Sri. Coimbatore Krishnarao Prahalad, better known as  Prof. C. K. Prahalad, “fortune at the bottom of the pyramid”. What it means is that the people at the very bottom of a consumer pyramid far outstrip in numbers the more affluent people at the top, and when those at the bottom combine, their purchasing power multiplies to many times of that of the affluent sections at the top of the pyramid. An example that readily comes to one’s mind is the market for pre-paid mobile recharges. Kunal Shah, the promoter of the fast growing ‘Firstcharge’ has this to state about the telcom market in India:

98% of the Indian mobile telephony market is prepaid. As per data, about 15-20 million people recharge their phones every-day, mostly through offline channels. We sense huge opportunity here as internet penetration in increasing and about 5% of people use internet banking for transactional purposes.
That illustration is given only to demonstrate the immense financial importance of the retail segment, who, individually will be looked by the affluent sections with disdain, but as a class, command respect with Marketing Gurus.
Let us now look at the significance and the behaviour of the class we are labelling ‘retail investor’ here. When a rally starts, to begin with, it is fragile and unpredictable, but it acquires strength and depth when retail investors throw in their hats in big numbers. This can be likened to the arrivals of hundreds of birds to a tree under which the shikari has strewn tasty morsels, and patiently lies in wait for more and more birds to arrive, so that his chances of a bagging a good quarry multiply. Let us have a look at something more concrete, the actual numbers.
According to Moneycontrol estimates, today there are 2.45 crore retail stock-market investors in India. It is likely that active investors in gold will be much in excess of the number, and let us assume for the sake of simplicity, that is 5 crores only. Of course there is lot of overlap.
If half of that number buys only 10 gm. of gold in one year, the quantity bought will be 250 tonnes, which is approximately 30 % of the country’s annual gold imports. This is only the spending of the middle classes and less affluent sections, and shows the power of the people at the bottom of the pyramid, when they act in consonance. It can therefore safely be said that retail investors are very important for a rally having depth.
Now see the following graphs of gold prices, nominal and inflation-adjusted, for 48/49 year-end figures. The graph is available in various forms on many sites, but this one is crisp and clear, and is taken from A. Damodaran, who is Professor of Finance in Stern School of Business, New York University.
It can be seen that 3 year after the last prominent peak was achieved by gold in 1980, the nominal prices fell to less than half. Inflation-adjusted prices have a habit of diving deeper, as per the green bar chart below the line in the same picture. We were already in the service of the Bank by 1980, and remember the misery that befell society on account of the fall in gold and silver, and the frauds that occurred in Banks due to the crash. You will today find numerous reports of Jewellery frauds in the press.
A similar cycle of retail rush ending in periodic massive crashes can be seen in the stock market also.
The investors who survive the crash discover that there is no free lunch, and that the investment in Bank FD is the best combination of safety and returns, particular in the Indian context where the monetary authority RBI tries to ensure a post inflation positive return, topped by instant liquidity. To extend the analogy of the shikari and birds, the stage comes when the shikari fires pellets at the birds, some birds fall prey, and the rest fly away, vowing never to return to the bloody tree. Fortunately, the losses are spread over crores of people and society somehow manages to swallow them.
After a decade, a new and upbeat crop of young people more affluent then their parents  comes up and the stage is set for the same or some-new-some-old shikaris to attract a fresh crop of birds. And so on,… like the cycles described in Upanishads.
Similar cycles are noticed in Terrorism (10 year cycles), and as my friend Raj points out, in the behaviour of young political agitators- witness student uprisings occurring periodically in our country (Nav Nirman Movement- Gujarat; AASU- Assam; Jaiprakash Movement- Bihar; Anna Hazare- Delhi, etc., etc…) The lily white boys join the old gangs and nobody remembers that Lalooji and Mahantoji used to be anti-corruption activists.
The analogy of birds and shikari is universally applicable and we would only advise enthusiasts that while investing in the risk-laden assets, it is best to keep an eye on the finger of the shikari on the trigger!

1 comment:

  1. Nice essay. Came and read it by accident. Curious to know your background