Its just mean Baby!

Any trend usually tends to converge to its mean. In stock markets the index which represent weightage average of basket of stocks is no different. Indexes are made of individual stock prices. Stock price is a measure of valuation of the company's business. It simply says what investors are willing to pay for an equal pieces of residual interest in that company's business. Residual interest is the value left for common shareholders after all the debt and other obligations are paid to respective holders. So its a value of the company's business and sum total of all such companies businesses give an indication of what economy of a country is worth, or at least the trend of that economy. That is, if in long run companies are more profitable than previous years, economy would more or less be positive and these companies would attract increasing valuation or higher stock price as time goes. So in a nutshell the trend of economic growth and stock markets growth should co-relate in long term.

Our country's economy is usually measured by GDP numbers. GDP comprises of agricultural sector, services sector and industrial sector. Most of the companies listed in stock exchange are in services or industrial sector which today comprises 80 - 85% of GDP numbers. Thus any trend of stock market index should match the trend of GDP growth. However we all know this is far from true. Stock marks gyrate from huge bullish rallies to great bearish depression. How can we use this gyration to our advantage in making investments decision. Answers lies in 'return to mean'. Any significant deviation from the mean is followed by reversal which converges towards that mean.

Before showing on how this is valid or how we can use it, first let us approximate the mean growth of business of companies which would translate to growth rate of stock market's index. Our GDP would grow at an average rate of 7 - 9% for foreseeable time in future. Even long term average of past 15 years of growth is around these range. We add to that 4 - 5% of average inflation. That makes growth in business of companies around say 13%. Which is roughly the rate at which one should expect stock market indexes to grow.

Now lets see how as our Stock Market's most prominent index, BSE - Sensex has performed since start of 1991.
Blue line is the index value and red line is what index should have been if it strictly followed the 13% growth.
So you can see at times it was greatly above this red line and at times was much below it. However every time is crossed this mean, it eventually reverted.

1992 - 1994 were bullish times followed by a bearish market 1997 to 1998. Markets again turned bullish briefly during 2000 (dot com bubble) and then engulfed in a prolonged bearish market during recession of 2001 - 2004. We again saw economic revival post 2004, thanks to trillions of dollars pumped into the market by central banks across the world. This money trickled into India via FIIs and then we saw an unprecedented bull market which lasted till 2008. During this time markets deviated from its mean like never before. What was the result, as markets deviated from its mean like never before, they fell towards that mean like never before. The recession of later half of 2000 caused panic worldwide. If somehow we could have avoided the temptation to commit ourselves at start of 2006 when this frenzy began and had lot of patience then we would have again had the oppertunity to make some wonderful investments three years later. Anyway hindsight is always 20/20, but does offer some lessons.
Come start of 2009, we were at last seeing some sanity towards valuations of companies. However they were still not at those juicy level witnessed in 2002 - 2003 (just look how low below mean markets fell that time). However this sanity lasted only few months, thanks to next round of even bigger chunks of money pumped by the very same central banks. Much of this money was pumped in to revive the economies worldwide and now this money is moving into the emerging markets like India. As you see markets have again bounced back away from the mean. So when would they return back to the mean, no one knows, but as history has shown they eventually would.

As an investors what we can do is, be wary of lofty promises and projections made by some companies to eat up this new pumped in capital. You would get a chance in future where once again you could buy pieces of wonderful businesses at attractive prices. There are good businesses around even now, however your returns from investments are largely dependent on the price you pay. If you are paying too much price for a piece of good business you may still loose money or better still your recovery horizon may last far longer than hoped for. So by stretching the time, why lower the rate of return.

I think what has been mentioned so far is nothing new. It has been iterated many time before and is something very simple to understand. So is investment, its simple but needs lot of temperament and patience. Its very easy to be swayed by next bull market, by looking at your neighbor making pile of money by dabbling in worthless stocks, but that's not a winners strategy. What would lead you greater wealth is stay clam, have a realistic expectations and do your homework right.

Remember:
It is more important to say "no" to an opportunity, than to say "yes".

Sachin

Investing - the web 2.0 way

We are using web 2.0 to collaborate, network and share ideas increasingly in our lives. We would be members of some or other social networking sites, registered to some or other groups and forums based on our interests. These activities may or may not help us in our professional and personal lives. All depends on how effectively we use the tools provided these platforms. Here is a look through on how web 2.0 can help us in making investments decision.

Firstly, join few forums or groups that have active discussions related to stock markets and investments in general. These may be found on some or other social networking platforms or sites that hosts forums and groups (like Yahoo and Google) or sites dedicated to stock markets itself.

Next, start screaming your stock tips in these boards, luring investors or traders to invest in your stock tips. This would lead to run (up) in the prices of the stocks you recommended. When they have sufficiently run (up) offload your holdings making a decent profit. (Ha Ha, just kidding)

Markets are usually gripped with excessive optimism or excessive pessimism. There are times when investors are ready to pay anything to get a piece of that worthless stock, and at times they are ready sell for anything to get rid of that blue chip stock. Market's behavior is very erratic and sudden. It takes no time to reverse the sentiment. If somehow we are able to watch and measure this very behavior we stand to make right investments decisions.

So how can web 2.0 help us here. In this connected world, news and sentiments travel quickly. By being part of right forums and groups, you can get access to information about markets. This would include personal views and opinions of fellow members, links to new articles mentioning what experts are saying that time and then many research reports by various investment houses. These give you holistic view point of what market mood is. Key lies in measuring the market mood. Its very much like thermometer is used to measure the body temperature, these forums and groups measure the markets temperature - how heated or how cold market is.

If you would have paid attention from start 2006 to end of 2007, views were generally optimistic in these forums and groups:
1. There were more board members participating.
2. There were more and more personal opinions and so called stock tips.
3. The links which posted (so called) experts take on market were generally positive.
4. Research reports in some or other twisted way project much higher growth and optimistic targets.
In short the good times were here to stay forever. This was different (was the undertone)
Such signs usually indicate market temperature is running high and time is to stop making further commitments (without much deliberation) into the market.

Come later half of 2008 to couple of months back, views were almost pessimistic now:
1. There was declining to the point absolutely nil participation from board members.
2. Every one was predicting doom and you could hear sad stories of they portfolios.
3. The links which posted (so called) experts take on market were now revised to new (further) lows.
4. Research reports in some or other twisted way project everything to a lower level than what currently was.
In short it was like end of the world has come and we are going to stagnate forever.
Such signs usually indicate market temperature is running low and time is to start making further commitments (with deliberation of course!) into the market.
So those who gauged the market sentiments correctly and did invest when no one was investing sure must be feeling lucky and happy today.

Also you would notice that now market temperature is slowly rising as the activities in these groups and forums is coming back to previous highs (so are the markets!). Whereas economy has still not recovered.

So being glued to right piece of information on web 2.0 and using that information in making investments decision helps (or not), only time would tell. In my personal opinion this does help. You don't need to watch those TV channels or spend time and money on countless seminars and workshops, just the ubiquitous web 2.o is enough to bring everything to your screen. Whats important is how you like to use that information.

I end by famous quote by Mr. Warren E. Buffet:
Be fearful when others are greedy and greedy only when others are fearful.

Sachin

Raise, don't Earn - seems to be the motto of the street

Indian stock market's sentiment turned bullish from (a prolonged) bearish one in the month of May. Single event responsible was the Left parties failure to gain any significant seats in the parliament to influence government formation or its policies. The 'Dalal' street was euphoric with this development. They perceived it as a major boon to our economy. Now government would be able to implement privitisation in many select sectors (even upto 100%), and disinvestment of many Public Sector Undertakings (PSUs). This would eventually lead to more foreign money in form of FDI and FII coming into Indian markets. So far they have not been wrong. Awash with fresh capital, thanks to trillions of dollars pumped into the system by developed countries, insitutional investors (FII) brought in record 3 billion dollars in just 2 weeks, with 1 billion dollar in a single day. Result was obvious, major stock market indexes have run up 25 - 30% in this time.

With so much of 'hot' money sloshing in the markets, everyone is racing to grab it. After over one and half years of severe winter we have seen spring. No one knows how long it would last till next winter sets in. So just get your hands filled with whatever you can! Raise, don't earn is the new motto of the street these days. Today no one is talking that are going to earn this much in coming season or if companies earn this much then markets would rise these many points. All the talks are in the lines of we are going to raise this much or market pundits saying if markets can raise this much then it would rise these many points. Suddenly it looks like future earnings no longer play any role in valuation or growth of a company.

Around two years back, some promoters of some companies were raising capital, today these are the very ones who are once again back to raise more. That time taking advantage of bull market, these shameless promoters sold worthless papers to gullible and greedy investors. When tide turned these promoters went into hibernation, nothing was heard from their companies in announcements as what their future plans are. What happened to the capital raised - no clear answers were provided. Meanwhile the investors holding their paper scrambled to dispose it. Now when (it seems) that market is out of woods, these very promoters are coming out of their hidings, again making the same old lofty announcements and using same old cheap tricks out of their dirty bags to once again raise the money.

We all remember these promoters issued themselves warrants worth millions of dollars when the market was bullish. Their 'purported' argument was that they believe in long term growth of the company and are committed to invest their money at some future. When market tanked and the price fell below the warrant issue price, they let it lapse. Talking about long term investment horizon of these people! They were just interested in cashing in the bull market, believing that market price would be higher than issue price at the time of conversion. Just after a month of getting their warrants lapsed, they are again issuing themselves these warrants albeit at a lower price. Who are they kidding! With so ease they let these warrants lapse (and then re-issue, like a library book) that some time I wonder that do they really make the upfront payment of 10% at the time of issue. No serious investor would let his hard earned money go down the drain this way.

So trick is so easy, claim to invest some by issuing warrants to themselves, then bring in more money by QIP and hope market price remains high. It mostly does in a bull market as issue price is higher than the current market price. If things don't go as planned then renounce the warrants and start the exercise all over again.

I think issue of warrants to promoters should be banned. If money is to be raised then it should be done the right way, i.e. let all shareholders participate via 'rights issue'. In many ways, I see these warrants are much worse than stock options scheme.

Well, till there are loopholes in the system which lets promoters take their company and rest of the shareholders for a ride, all we can do is be more watchful of events happening around us. With all focus shifted to raising money and earning none, be wary of such companies and promoters. We burnt our fingers once, but lets not do it twice.

Earning growth may remain muted for some years to come, as lot of trash piled up in the street has to be cleared first, which would take time.

So till then remember:
The higher they rise, the harder they fall!

Sachin

Floyd Mayweather jr. vs. Juan Manuel Marquez and the winner is Manny Pacquiao

Every decade of professional boxing witnesses extreme competition in some or the other weight category. In 70's it was heavyweight division with Mohammad Ali, Joe Frazier and George Foreman fighting for the top crown. We witnessed some of the best boxing bouts among them in that decade. Come 80's and the action sifted to welterweight-middleweight category with Sugar Ray Leonard, Thommas Hearns and Marvin Hagler giving us some of the best bouts among them for this decade. Come this century and clearly focus has shifted to the lightweight-welterweight categories. These weight divisions are extremely competitive with some of the best rated boxers fighting here. Well some day I would try to list great bouts to watch and believe me list would be very long!

On the day of Hatton Vs. Pacquio fight a big announcement was made. Mayweather Jr. decided to come out of a 16-month retirement to fight Marquez on July 18th. With now 1 1/2 months left for this bout it has started gaining interest of boxing fans across the globe. Bout is on HBO PPV and maybe fought at catch weight of 144lb. This is a non-title bout and I think Marquez would still be keeping his lightweight WBA and WBO titles. Mayweather is a younger, bigger boxer here and is 3/1 favorite to win this bout. However predicting in boxing is also dangerous and upsets happen all the time. Remember when Buster Douglas being 40/1 underdog defeated Tyson for the unified heavyweight crown. Anyway we are not here (right now) to discuss this fight. We may do so as the due date approaches, we would like to study the impact of this bout on next big fight that may happen towards end of the year.

Irrespective of the outcome of this fight the person to gain maximum out this is Pacquio. Today Manny is the best pound for pound fighter in the world. A fighter whom everybody would love to challenge. He has a very large fan following, his bouts would directly go as PPV and would guarantee few million dollar purse to the challenger. If you are looking for retirement and would like to make decent money to support rest of your live, challenge Pacquio! Today both Mayweather and Marquez would like to challenge Pacquio and who would that (first) person be, is this fight all about. So person to gain for this for a even bigger fight is Pacquio.

Lets look at Marquez. He is a great fighter, probably towards end of his career. He has fought Pacquio twice. First in 2004 where he came back from three knockdowns in first round to notch up a draw. Second in 2008 when he lost a close split decision. A re-match is definitely in line and fans and boxing pundits eagerly waiting for that. Professional boxing is all about negotiating right contracts and right fights at right time. Pacquio's promoter Bob Arum said, the fight will happen but only after there is time to "put a little air" under it. I think there is no better time then now and all the air is under it! If Marquez wins he would get to challenge Pacquio and Pacquio would fight because this would be the biggest fight he can get.

Lets look at Mayweather Jr. He is no doubt a great boxer. He has clean record, never lost a single professional bout and was best pound for pound fighter before his retirement. The title which now belongs to Pacquio. So who is the best pound for pound fighter? Whole boxing world is eager to know that. Mayweather is perhaps the best boxer whom Pacquio would like to fight. This fight would again be a big fight with both boxers having a large fan base. What would make the fight even more interesting would be completely different geographies/culture each boxer represent. Good enough to generate right kind of hype around this fight. So if Mayweather wins he would get to challenge Pacquio, more so Pacquio would like to fight Mayweather as this would again be the biggest fight he can get.

Pacquio is at a stage where his team should choose best of fights for him. He is right at the stage where if everything executed professionally would take him to the path of greatest boxer in the history of sport (both fame and fortune wise), and more pre-challenge fights like this one is what he would like to see.

And we'll keep on fighting - till the end!

Sachin

Second tsunami of greenbacks

Stock markets worldwide are booming. They have notched up record gains since march this year after a record free fall since start of last year. As usual markets participants and observers are divided in two camps. One say that this rally is for real and is going to continue, the others say that its nothing but suckers rally. Both have put forth cogent arguments to prove their points and its hard to side with one. One thing I have learnt in stock markets is that its a very futile and dangerous exercise to predict the direction or quantum of market movement. Your chances or being right are around 50%, which is as good as a coin tossing experiment. What we can do instead is to analyze the causes of market movements. That does help is in taking informed decisions for future.

Last bull rally ended somewhere in 2000 - 2001, with the burst of tech bubble coupled with social/political disturbances around the world, caused markets across the globe to fall. There was an economic slowdown and the central banks responded to this by lowering the interest rates and pumping in lot of money. Leader in doing this was the central banking system of USA, commonly known as the "Fed". It lowered the interest rates to record low of 1% and pumped in lot of greenbacks. From a negative issue of T-Bills in past 4 years preceding 2002, it issued around $1 Trillion T-Bills in next three years from 2002 to 2004. (And I am not including other GSE backed securities like raised by Fredi and Fannie and muni bonds). With so much of money raised, it started percolating into the system, where it should not have gone. First it went down the lane of less credit worthy borrowers, which today we all know as sub-prime and Alt-A mortgage crisis. There was still lot of money supply left and it then started moving into emerging markets. These markets which usually ran a thrifty economy, were not used so much of "hot" money into their system. All this barrage of freshly minted greenbacks created a sort of tsunami in their economies. Asset prices of all types of assets rose to dizzying heights. We all remember crude at $150 per barrel and not to speak of property prices in your neighborhoods.

This eventually led to inflation and then to combat inflation central bankers fired another arrow from their quivers. This was raising interest rates to suck the abundant liquidity. This had another fallout, which resulted in huge default in mortgage loans, as the interest payment rose, and this led to sub-prime crises. With asset prices falling world wide, interest rates rising, one thing lead to another and soon we were in another economic crises (worldwide). Economies across globe went into tailspin around mid of 2007, with some countries even declaring bankruptcies. Crises which emerged from developed economies actually affected emerging and under developed economies far more that developed ones. This recession was (or is) much deeper than the last one of early 2000's and some drawing parallels with the great depression on 1930s.

So it looks like the life came back in full circle to bite us in the rear. Once again central banks resorted to lowering the interest rates to all time low. Much lower than the previous recession. Even the money pumped into the system by central bankers was far more that last time. Some estimate that around $4 trillion has been pumped world wide so far. The issue of T-Bills by Fed itself amount to $1.5 - $2 trillion in past two years. This so far has done some work (or at least have appeared to) have done some work in ameliorating the disastrous impact of this economic crisis. So the question here is, once again doing the same things which were done last time which resulted in even a bigger crises, won't lead to a even bigger crises next time.

All this money, now in the system is finding ways to be allocated. In west especially US, credit worthy borrowers don't need loans. Lenders being just bitten from the sub-prime bug don't want to lend to credit worthless borrowers. So again all these greenbacks floating in the system are waiting to hit the emerging economies. Is a second tsunami of greenbacks waiting to happen? We have got some trailer of this in past two - three months with stock market indexes rising as much as 75%. Around 30% in just this month alone! Question we need to ask is won't it lead to another inflation bubble and to combat that once again excess liquidity would be sucked so again money would move out of these economies leading to another crash.

When would this happen (if at all it would happen), what would be the story next time (like sub-prime last time), no one knows. What we do know is similar experiment is past yielded some results and those are the results we should watch out for or anticipate for, or at least worry for.

Happy new world!

Sachin

Dare to be different - what BJP should do now

Circa 1999 - coalition politics was at helm and India had witnessed 5 general elections in past 10 years. BJP along with NDA became the coalition to garner most seats i.e. 270 out of 545. With support of TDP of 29 seats it comfortable got the majority and formed the government. This was first time in 10 years a party or alliance was given such a clear mandate and without much doubts this government looked to last whole 5 years which it did.

Another thing happened around the time was Congress or (UPA - the coalition), got a new leader, Ms Sonia Gandhi. Firstly congress did not have much bargaining power in terms of seats to threaten the formed government and secondly under the new leadership it decided that there was not much long term gains in de-stabilizing the whole democratic process. What it decided was to behave like a responsible opposition and strengthen the party and its alliances. So it went for long terms gains at the cost of shot term gains, which today when we look back sure worked out to be a perfect strategy.

BJP on the other hand had a very big coalition, it had to appease all in a hope for five years at center (for the first time). This in many ways backfired the future prospects of BJP and weakened it internally. There was lot of internal dissatisfaction among its members and in order to appease all alliances it angered some to an extent they left coalition in coming elections. BJP was never able to put forth its own agenda that displeased some of the party members and above all displeased the great Indian voter class which showed it the boot in next elections.

Next elections was in-fact no surprise, BJP went in with fewer partners, angry voters and lot of internal instability. No wonder it lost. However there was a blessing in disguise, it was given a chance to be a responsible opposition and win back support of voters (which Congress did this time). However BJP was far from being a responsible opposition. It constantly opposed government in its every development efforts, and to top it all when we needed the whole India to unite against foreign attacks, it did just the opposite. Instead of showing solidarity with the ruling government, it constantly blamed and bickered with them.

India has come a long way in past 20 years. We have a lot higher literacy rates, much better education system and lot lesser poverty as compared to those times. There is a still long way to go. The point political parties should notice that today there is no way to win voters with usual histrionics and firebrand speeches. People or the voter class are lot smarter and want results. If you give them clear objective results, they are with you else you are shown the door. There is no tolerance for incompetence anymore.

These facts are very evident in current elections results. States where ruling parties (irrespective of the alliances) did good development work, stayed in power, rest were shown the door. This elections have marked the emergence of politics at national level and local politics fighting for a narrow cause have been defeated. So looking at the changes in the social scenario of India, if BJP at all is to have any chance of success it should do the following.

Firstly, dare to behave responsibility. One has to be a bigger person in order to win greater support. First thing BJP can do is support the current government in coming vote of confidence. No one has done this kind of act before, this sure is going to send a strong message among Indian public. Be a responsible opposition, in times of distress to nation, show solidarity. Oppose and oppose logically where you feel current government is wrong. Remember Indian public is now smarter to understand a good argument.

Secondly, dare to be alone. Let the Indian voters know that its working for the cause of whole nation and just a particular sect of people. Further in its current coalition there are many parties which only fight for narrow local causes and if nothing they are slowing the BJP down. I think BJP (or matter of fact any national party) has better chances of succeeding alone in future.

Thirdly, dare to say no. Today maximum politicians in current lok sabha with criminal background are from BJP. Say no to such people in deciding whom to give tickets next time. Infact this practice should be followed by every political party. Remember in democracy government is by the people, for the people and to the people and not vice-versa.

These bold steps may not grant a chance of success in next elections or even elections after that, but one has to loose something in order to gain something. So in order to gain long lasting support of the people, one has to let go some of the popular practices which are actually not that effective.

Where do we go now!

Sachin

Is Oscar De La Hoya most overrated boxer in the professional boxing's history?

We all know professional boxing to be an individual sport. A sport where brawn wins over mind. However it is one the strategic professional sports I have seen, somewhere in line of motor racing or golf. Individual sports where whole game depends upon performance of one individual (whom we all see perform and cheer for) are more mind involving as against team sports. We do not see a team upfront here, but behind the scene its the team (of thinkers) that is responsible for success or failure of that one individual who is there to earn fortunes not only for himself but for the whole team backing him.

Professional boxing is a sport where success and fortune has not solely depended upon the talent of the fighter. There have been instances when some of the greatest champions of the world have struggled to make ends meet where as some of the lesser known boxers have basked under the glory, fame and fortune which at times many critics doubt that if they deserved it at all. So what makes or breaks a boxer. Its the team surrounding him, his trainer, manager and promoter. If you look at some of the successful boxers (financially too), they always had a great team around him. There have been also cases where unscrupulous managers and greedy promoters have destroyed the career of some great fighters and robbed them of their well deserved success and fortune.

There are many many examples from history to verify this but lets focus on boxer under question.

Oscar De La Hoya is perhaps one of the most financially successful boxer in the history of this sport. He has earned around $700 million from this sport. However what about his talent as a fighter. Its far pathetic then many many lesser known boxers. In his last 14 bouts in past 9 years he has lost six of them. He has lost to all the strong contenders of his era like Trinidad, Mosley, Hopkins, Mayweather, Pacquio. Even some of his later victories where quite controversial like with Felix Strum. In his earlier career he had some success fighting lesser known boxers, or older boxers like Chavez who were way past their prime and also mostly near his home town ie states of California and Nevada. In fact he has never fought outside US, and fought way less (14 times in past 9 years) which shows how selective or narrow was his fight pickup criteria. All great boxers right from Jack Johnson to Ali to Tyson have had bouts around the globe with diverse fighters. They fought just way to much so as to be beaten at near end of their careers.

So what made him so successful. It was his team, which negotiated right contracts with fellow fighters, TV channels, picked up right and safe fights and above all created a media hype around him right from his pre olympic or amateur days.

So its lot more than raw talent to be successful in this sport or for mater of fact in any professional sport, and Oscar sure has shown us the way.


Keep on rocking in the free world!

Sachin