A large section of the Indian media, especially print, breaks into elegy bemoaning the perceived loss of investors’ wealth whenever the share market tanks which isn’t infrequent given the fact that the market alternates between boom and decline. Such dirge ignores the fact that in the mercurial share market valuations are ephemeral and not cast in stone especially when markets are driven more by liquidity than by fundamentals. That is why experts aver that unless one actually books his profits by selling, the valuations are notional. Remember, share market isn’t an open-ended fund where the fund manager is obliged to buy out the unitholders at the Net Asset Value (NAV) of the previous day. Market dynamics are vastly different from those of an open-ended fund. When shareholders move in as a herd or phalanx to cash in on the high valuations, the market crashes. Only the lucky ones, the first movers exit at the fabulous prices with excessive supply pushing down the price. The unlucky ones either exit at lesser prices or choose to bide their time till the prices climb back which might well turn out to be a vain hope. It is entirely possible that the unlucky ones may have the last laugh if the next round of boom the scrip surges much beyond peak in the last boom. The share market may not exactly be a gambling den but valuations neither have permanence nor are they rational, with liquidity often ousting fundamentals as said earlier.
Allan Greenspan when he was the US Fed chief said irrational exuberance characterized the then boom. A fellow American seconded him, as it were, by saying relentless boom can be explained away by the there-is-a-greater-fool-out-there theory. What he meant was the one who buys a share for an exorbitant price unrelated to its fundamentals does so in the belief that soon he would find a more sanguine buyer. Such credulousness goes on till the cookie crumbles. The reverse is truer – panic selling is more infectious than irrational exuberance in buying. So, in the Indian share market with its global linkages, it is impossible to cocoon the investors. The dyed-in-the-wool market operators like the LIC win sometimes and lose sometimes. Timing the market – selling at peak and buying at bottom – is well-nigh impossible.
Media also revels in the ranking game – list of the rich in the pecking order reckoned on the basis of the sliver of market capitalisation attributable to the promoter. Such compilations are as evanescent as market quotations. More fundamentally, to anoint one as the richest on the basis of such feeble criterion does grave injustice to those who invest elsewhere. Shibulal, one of the founders of Infosys, was reported to be owning 700 apartments in the Seattle area. Apparently he believes along with million others that wisdom lying in investing in real estate just as many believe that gold thanks to its scarcity value would always be at the top despite temporary blips. Again, there are closely-held companies shares of which are believed to be a lot more valuable than the shares of some of the blue chip listed companies. They remain in the realm of speculation thanks to their private character. Closely-held companies beckon when trade secrets and patents have to be harbored.
Textbooks on finance believe that market quotations reflect the present value (discounted value) of the aggregate of future stream of dividends. While theoretically a sound basis for valuation, the theory is riddled with quite a few imponderables like how to determine the life of the company and duration of its growth cycle. In other words it is as impractical as a foolproof and infallible budget. Market players therefore had therefore thrown it out of the nearest window long time ago. While FPIs and mutual funds do perform considerable research before investing or selling, the truth is they too willy-nilly yield to the here and now including geopolitical considerations and availability of greener pastures. Frequent churns are inevitable in their scheme of things which often leaves their passive followers bemused. By the time they wake up to imitate or follow the institutional investors it is too late for them.
Where do all these obtuse concepts and theories leave the small investor? Between the devil and deep sea? Pundits used to advise small investors against direct interface with the rough and tumble of the secondary or share market but instead exhorted them to invest in the primary market (IPO). But these days the woes of small investors singed by the primary market is more heartrending than the ones wantonly and masochistically foraying into the turbulent secondary markets. Because under the free pricing norms, even loss making companies dare to issue their shares at mind-blowing premiums so much so that IPO has become the easiest get-rich-quick scheme. The added bonus is the OFS or offer for sale route. Promoters and their cohorts, venture capitalists of various shades, offload their shares acquired at par for sale along with IPO at the IPO price. Primary market is crying for reforms. Very little can be done about secondary market. Foreign funds alternately lubricate it or starve it. Investors however cannot indulge in self-pity when they come to grief in the hurly burly of the share market through direct interface. They must repose faith in mutual funds, warts and all.
Day trading by the way is as dangerous as gambling including the so-called online games of skills.
The ephemeral nature of market capitalisation and ranking of the world’s rich in pecking order on the touchstone of share market quotations has been time and again brought out by thunderbolt events like Hindenburg report on Adani and collapse of Silicon Valley Bank and Signature Bank in the US. Credit Suisse suffered a more than 60% reduction in valuations overnight thus obliging it to settle for merger with its arch rival and fellow Swiss banker UBS on ignominious terms.
S Murlidharan is a freelance columnist for various publications and writes on economics, business, legal, and taxation issues
