February 3, 2008

If you can, invest to become an entrepreneur instead of investing in stock markets!!!

It seems that Anil Dhirubhai Ambani Group’s Reliance Power issue was launched to take away the complete sheen from the Indian stock markets. In fact, it is a strange coincidence that since the day of the issue, Indian investors have lost more than Rs 17 trillion in the stock markets!!! It has been, by far, the sharpest fall for the Sensex. After scaling a new high of 21,206 on January 10, it crashed to 15,322.54 at 11.55 am on January 22, before some recovery. But by then, the markets had already lost a fourth of their worth. Like on most such occasions, the fall was triggered primarily by the Foreign Institutional Investors (FIIs) who had gone in for a collective selling binge. In five days, the FIIs collectively pulled out a staggering Rs 10,500 crores from Indian stock markets, stripping most of the blue chip stocks. Though domestic investors tried their best to hold the markets at sustainable levels, they too failed in their efforts. Incidentally, the fall was not unique to India alone, as other Asian markets were also going through a similar downturn – Japan’s Nikkei and Hong Kong’s Hang Seng losing almost 5.7% and 8.7% of their value in one trading day. It was only after Ben Bernanke, US Federal Reserve head, came up with this surprise lending rate cut by 0.75 percent on January 23 that markets across Asia saw some recovery.

The bigger question that arises, now that the dust is settling down, is who really triggered it all off! Yes, the Reliance Power issue did make various indices fall due to considerable liquidity being reoriented. But that fall was a discounted normal fall. For example, from January 15 – the day the Reliance Power issue opened – till January 18, the Sensex fell by a daily average of around 425 points. But the biggest factor on January 21, the next trading day (that resulted in a fall of 1,400 points on a single day) was the selling overdrive by FIIs. And once that started, the market headed for a downward spiral, as a majority of retail investors who had been operating on margins (that is, those using almost 80% borrowed money against 20% of their own to trade) were forced by their brokers to square off their over-leveraged positions immediately.

In fact, the situation on January 22 was so grim that most of the brokerage firms had become net debtors on both the Exchanges, whereby they had to resort to selling their holdings to square off their debts. But why did FIIs go on a selling overdrive? Was the reason the impending US recession, an excuse being given by most experts for the crash? While the chances of a real recession in the US are very high, but then, to attribute the current crash to the slowdown would not be completely correct as there has been growing evidence of an American slowdown for quite sometime now.

Given the quagmire they have been putting themselves into through uncontrolled sub prime lending, unmanageable current account deficit, and indiscriminate expenditure on a so-called war on terrorism, a US slowdown was inevitable. The severity of the vagaries of sub-prime lending is now getting noticed with many top notch US banks reeling under huge losses. Reports state that Citibank posted sub prime related losses to the tune of $18 billion followed by Morgan Stanley with $14 billion, Merrill Lynch $8 billion, Bank of America $3 billion. In fact, this literal banking crisis has not been restricted to US banks only. Many of the major European banks like UBS have lost $13.5 billion, HSBC $3.4 billion, Deutsche Bank $3.2 billion, Barclays $2.6 billion, Royal Bank of Scotland $2.6 billion and Credit Suisse around a billion dollars. Such is the extent of the crisis that most of these banks and securities firms have had to sell off their equity for matching the loss of capital. And all this eventually has to get reflected somewhere. So as of now, with the rate cut by the US Fed, timely assurances both by the Prime Minister and the Finance Minister coupled with some brisk buying by the domestic Financial Institutions, there has been a temporary relief at the bourses; but then this question would always keep haunting the Indian investor – where do Indian stock markets go from here? Well, our exposure to and dependence on the US economy is not big enough to shake the economy as a whole. Our domestic economy is growing and the fundamentals of India remain strong. Most Indian companies are today more transparent than what they were during the Harshad Mehta era. And their growth story is for real. So once everything settles down, things will definitely improve, and most importantly, they would improve despite the US slowdown.

As a matter of fact, being a management consultant myself, invariably in all my workshops, I advice participants that if one has to invest, one should invest in entrepreneurial ventures instead of in stock markets. Researches across the world state that in general, returns in successful entrepreneurial ventures are almost always significantly more than investments in stock markets. Other than this, entrepreneurship has its own advantages – like generation of employment – which goes on to add to overall economic prosperity. And if you still have to invest in stock markets, it would be good for you to become friends with the term, ‘shock market’!

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1 comment:

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