The Bubble and the Pin

A whole lot of local stock pickers have come crawling out of the woodwork in the last few months (or years). Most of them spout advice on buying Mahindra & Mahindra or Tata Motors (i.e. some megacorp that any fool knows is fully valued) or some totally obscure company (Shaw Shipping was offered to me last week) which every fool hopes to find a greater fool to sell to.

After my own financial misadventures in 1994-95 (Powmex Steel / Stencil Apparel / Apcotex Lattices), I sought solace in RBI Bonds, overseas assignments and some profound quotations from the investment sages. When we see history do its usual rounds again, I thought this would be a good time to share the learnings.

Below are some of the most profound and hilarious comments from two of the best investors of all time. Warren Buffet of course is well known and bears no description. The other, lesser-known as an investor is John Maynard Keynes, a British economist who over a 20 year period showed 13% annual return in a market that returned negative over the same period. Of course they have been embellished with some of my own comments. So here goes -

Markets can remain irrational longer than you can remain solvent - John Maynard Keynes

This is really the reason why even when we see a bubble in front of our eyes, we cannot make money out of it. Distilled, this means do not time the market. For example, any one who lives or even visits Bangalore knows there is a massive housing bubble unfolding there (may also be true of Pune, Gurgoan and so on). You just need to compare rentals and PSF rates with the quality of infrastructure and employment opportunities. Can you short the market by selling property today and buying back in 10 months? No one knows for real. It could be 10 months, it could be another 2 years. It could segue into another bull run. The only sure thing is that the bubble will burst. But don’t hold your breath for it.


A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons. - Warren Buffet

The old fox this time. A feeling I get from investors about this current run-up is the infallibility of the India story. Commodity prices go up - the international companies will be hit harder than Indian companies, so it is a net positive. Interest rates go up - Indian manufacturers are more efficient or Indian IT companies are zero-debt and won’t be affected as much; and so on. The thing about any rise in input costs is that the customer is hit as much as the manufacturer. If more money goes towards servicing the loan or filling the gas tank, there will be less money to buy mobile phones or shampoo. Companies may insulate themselves for market forces (doubtful) but they cannot insulate a whole market (definite). The very old lesson that a whole lot of people are going to learn is that when factors of production go up, then cost will go up and unless the item is price inelastic, the demand is going to come down - Economics 101.


The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do. - WB

There is a wonderful hindsight theory why investors lapped up the dot-com IPOs that followed the first wave of Amazons and Ebays. The theory goes that, investors having the missed the original bus, wanted to get onto whatever dumpster for leaving town. Most of them were headed to the garbage refill unfortunately. We see this again and again - websites that promise to identify the next Infosys or some Pharma company that is hailed as the next Dr.Reddy. A couple of summers back, Biocon itself promised to be the next Infosys plus Dr. Reddy combined. It had the vagueish Bangalorean background that is so highly prized. It made prostatins and enzymes which is impressive in the opaque manner of Cold-Fusion technology (does anyone here remember) or the old DMT-PTA wars. Quite a few who were not alloted during the IPO rushed out to buy on listing at 700 odd, even at this time not knowing their prostatin from their cortisone. Three years later, the share languishes in the low 300s even as the marker has surged 200%.


Read Ben Graham and Phil Fisher, read annual reports, but don’t do equations with Greek letters in them. - WB

Double tops, Candles, MACD and market beta could not save Infosys from losing 50% of its market cap in one week in 2003. The real reason was a weak guidance that spooked the markets. In truth, the market is not the sum of anticipations of its players despite solemn assurances to the contrary. What the market is - is a set of reactions to how earlier anticipations and actions have played out. Did Ranbaxy do worse than you thought? Had you on your original hunch bought some shares? So is this the time to sell? Greek equations and the like suggest you can actually buy (or sell) something just because a whole of lot of people collectively did it in a certain way. Would you run your family like that?


When management with a reputation for brilliance tackles a business with a reputation for poor fundamentals, it is the reputation of the business that remains intact. - WB

One wonderful evening, three years back, Rana Talwar decided to acquire Centurion Bank. This was the man who had headed one of the largest banking organization in the world, the canny global banker if there ever was one. He hired a first rate team consisting of hotshots from HDFC Bank, Citibank and so on. Meanwhile, Centurion Bank languished in its own niche of the small-scale marginal lending player caught in a double-bind of high liability costs and a suspect target market of dubious repayment capability. Despite two mergers and various capital restructuring, certainly the niche of small scale player has its reputation intact as a highly avoidable one. It is Mr. Talwar whose reputation (and maybe Sabre Capital’s balance sheet) that is in tatters. A lesson Kotak and Yes Bank are rushing headlong to learn.


The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll. - JMK

One of the most difficult things for any investor to do is to sit on the sidelines and watch. It can be excruciating to watch stock prices ramp up and see opportunities missed out and cash lying around unutilized. Possibly, this is one reason why Systematic Investment Plans are so popular. Investors like the feeling of having constant recurring action. A fund manager in an interview claimed SIPs were good because the investor bought more units in a bearish market and less units in a bullish market which is sound investing principles. A foolish logic from the investor point of view who antes up the same amount no matter what the market.

In truth, if specialized knowledge is the reason why investors should not invest directly in the equity markets, then the same logic should also hold them from investing into mutual funds. Who knows what cozy deals are struck between fund managers and CEOs, distribution brokers and fund marketing officers and so on? The solution to ignorance will always be education, never intermediation.