Are we heading towards Great Depression?

Among all the talks, predictions and doomsday theories propagated by the economists, people of this era are going to be more financially literate than any of the generation in the past. The way India has come on the global scene , our markets unfortunately got coupled with the global economy and the crisp reporting of issues done by newspapers, nobody can ignore global cues anymore. 

One of the current debates is “Are we heading towards Great Depression “. If we analyze both the scenarios,there are actually lot of similarities between the great depression of 1929 and Sub Prime Crisis the world is facing today. The prominent similarities include the similar crash of asset price including housing and stock markets, defaults by Banks, global nature of crisis, movement of prominent economies away from capitalism, likely increase in taxes by USA in times of crisis etc. If you see the similarities the chances of subprime turning into depression are indeed very threatening but on the brighter side the intensity of the economic downturn is much lesser this time than in 1929. If we actually see the stages of great depression, it started with black Tuesday (Oct 29, 1929) when the markets crashed heavily .The reason being high level of public debt caused by destructive WW - 1and reduction in income which was leading to defaults of loans by people . But economy recovered again in 1930, the next phase of downturn which lasted for few years was even more severe. The prime reason for it was seen as low investor confidence. People wanted to stay away from financial markets and institutions to avoid any future financial problems. Demand for goods and service dipped because of that and it lead to massive crisis. Comparing it to the present scenario where we have high inflation in half of the world countries, robust demand for products and services, the fundamentals of the economy are not that bad. There may be slight downward pressure on the demand in US but still most of the countries have good demand and people still have lot of confidence about the strength of the system. 

Certainly the lesson learnt by the great depression are helping central banker in facing the situation. They are pumping huge money in the system to bring back the liquidity and investor confidence. It will help in reviving the state of economies.

On a lighter note, one of the popular Jokes now days on internet is ‘Q - What the difference between recession and depression? , A- Recession is when your neighbor looses a job and depression is when you lose your job! ‘

It wasn't only 3 mistakes

Chetan Bhagat, author of '5 point someone’ fame came out with his new book ' 3 mistakes ..'. The deterioration of a author to respect the popular sentiments of people is quite evident in the book. It looks like a very loose story of 3 youngster from a small town in Gujrat. All the plots are predictable and phony, which any one can guess even while reading initial few pages. Infact Bhuj tragedy followed by Cricket match commentary looked more like pieces of diary rather than a narration.

The worst part was so many gross mistakes which were committed in the 144 pages short novel.

The whole plot seems illogical and phony if you think of these ponits which I thought of while reading the novel yesterday: -

1 Maths exam for medical entrance exam , that too readings from ML Khanna ( a IIT Entrance Guide) ? 

2 Resnik and Halliday for Medical Entrance? When even 12th class standard book works?

3 Chetan Bhagats way of spicing up the story, 1 sexual scene is a must ! 

4 Flamboyant use of F word by Gujratis that too from a small town!

5 The narrator of the novel was a Msc, I could not understand this line ‘What an MBA type would call a 'paradigm shift'. Its totally out of place.

6 Over doing of math freak funda, the guy is talking maths even while he is romacing and life threatening situation at the climax.

7 There in 2001 how many Indians could have afforded 15 Rs call/min mobile phones. The non earning students, kids all are having mobiles in the story in a small town of Gujrat ! Wow 

8 The dress of Ali suddenly changed from Jeans T shirt to White Kurta Paijama without any reasons in climax scene.

9 Govind sees Ishaan crying for first time twice in the story 

Cricket Field Entightenting ...

A welcome break from run of the mill life, we have the sports week coming up. The enthusiasm is on top, something I love about Mba Junta . Somehow they manage everything with full energy and commitment. So we have a match tomorrow and today we had the practice session. I really found myself out of practice but anyway I was never a great exponent of this art.

Cricket in Mumbai is different from other places , In a small ground roughly half the size of a football field there were around 10-12 independent cricket matches taking place . Half of the time in such conditions you will find yourself worried that the ball from other games might hit you on your head, especially when you are not used to this mode of Cricket. But somehow everyone was managing everything really well without any altercations or hostility.

After few overs I was directed to field at deep square leg. There was a interesting match going on there .I was more engrossed in that match rather than our practice session as the ball was rarely getting hit in my direction. I was listening to their conversations. It was real interesting conversation :-) ,the kids there in half torn clothes ,roughly in the age bracket of 10-16 , were fully engrossed in the match . It made me think with amazement how sports and cricket can take your mind out of everything and provide you healthy way of recreation. Those kids may not be sure about their next meal or their future but still enjoy the game with full concentration. 

I sometimes feel that it’s the educated and learned who waste more time in fretting about future and opportunities rather than people who just live life without any fears and high ambitions.

Value Investment revisited in Troubled Times..

The value investing was losing relevance off late due to global Equity markets reaching new heights. When market was breaking all barriers and going high every day who would have given a thought to the precautionary principles of value investing like margin of safety, splitting of investment In debt and equity etc. Benjamin Graham, Guru of celebrated investor Warren Buffet and writer of ‘The Intelligent Investor ‘ is the originator of value investing Philosophy. 

The most important principle of value investing is margin of safety .Margin of Safety is a conservative investment strategy. By margin of safety, Mr Graham meant that any stock bought should be worth considerably more than it costs. The worth of the stock can be determined by checking the book value of the share although there is no generic rule to define it, as per Mr Graham if the market value of the share is less than or in close vicinity of the book value it provides good margin of safety. If we look at the present valuations of the Indian equity market, there are so many stocks with good margin of safety. It was tough to spot such stocks when Sensex was at 22000 but at present valuations many good companies like ICICI Bank, DLF etc are all trading below book values.

Mr. Graham was a conservative investor throughout his life and strongly felt that the money invested should be splitted into both debt and equity as it provides a natural hedge against each other. If we check the present scenario the stock markets are plunging but interest rates are increasing proving good yields. 

As per Graham a shrewd investor is one who bought in a bear market when everyone else was selling and sold out in a bull market when everyone else was buying. But I don’t know how many people will actually have courage of buying in bear conditions.

I think history repeats itself over and over again and the core principles which were valid before are valid even now. The whole environment, technology etc may change and these principles may lose significance or ignored by investors for some time but they keep reappearing to upset us all and remind us the significance of basics.

Kudos !!

So it’s finally over today .The Tata’s have decided to move on and finally decided to stop all of their plans of continuing operations of NANO project from Singur .There are reports that even other companies are considering to abandon their plan of continuing their operations from the state.

Ms Benerjee told the press today that “It hardly matters to us. It is a joint gameplan of the CPI(M) and the Tatas to leave ... The allegation that our agitation was violent is bogus,"

I think with leaders like her no country needs outside funds, technology or help in the growth and development of the state. It shows the clear signs of self sufficiency which we were trying to achieve from so many years. We are proud of you Mamta Ji!

Under Pricing of IPO’s

When we were taught pricing of IPO’s in class of Management of Financial Institutions I found it very interesting. The concept was that the primary aim of the merchant banker should be to get the full subscription of the shares and leave enough gravy on the table so that even in case of strong bear sentiments in market the investors to the IPO don’t lose money. 

Our professor told us that there is phenomenon of overpricing of the IPO’s by the Indian merchant bankers. They overprice in order to get merchant banking contract from the company going for listing as there is lot of competition among the merchant bankers. The banks which can get the shares fully subscribed at the highest price are the preferred one in the industry. It clearly brings more funds for the company; hence companies want to overprice. This phenomenon causes lot of loss to the IPO investors in case the listing price of IPO is less than the IPO book building cutoff price. The overpricing of IPO’s happened throughout 2008 in Indian stock markets including the likes of Reliance Capital. Hence the IPO’s should be under priced. 

Today I came across a piece of statistics which confused me about the whole theory. The American merchant bankers in order to have full subscription repeatedly followed this principle of under pricing. IPOs were underpriced by 11 percent between 1990 and 1998, but that gap soared to almost 70 percent during 1999 and 2000. In 1999 and 2000 alone corporate America left more than $60 billion on the table money that could have been invested in the development of the newly listed companies. Now thinking that the promoters of the company are the major subscribers in any equity issue, it’s not the common man who is only benefiting out of these under priced issue. Infact it can be seen as a major issue of corporate governance. 

So what should be the correct strategy of the pricing of the IPO’s? By looking at the demerits of both under pricing and overpricing I think fair pricing of the IPO with regards to the risk and relative to industry peer might be a good way of pricing. But the question remains, deciding the fair value is very subjective and there is nothing like fair value of any company.So confusing !

About Critics and Criticism….

Today Oct 02, a national holiday, each one of us is very happy atleast for the holiday we are getting in the name Gandhi Jayanti. I too very relaxed woke up at 9:30 , sipping coffee and sitting in front of my laptop , thinking of the significance of this day for us with my sleepy eyes.

Actually it’s a thought which visits me every year. I still remember good old school days when I first heard about Mr Gandhi, I was amazed by the description given in NCERT books of the father of the nation. I wondered how one person can lead such a great movement for independence, without any selfish motives, so selfless. His patience and persistence were always the quality I thought will make any one a complete man. All of this adulation was contested as I started getting information from my friends and teachers which was in stark contrast with the information I earlier absorbed. I started interacting about it with other people who I thought could bring more clarity on the topic, but there was no consensus on the controversies attached with Mr Gandhi. It was an unending debate and a disappointment for that child who was seeing a hero in Gandhi Ji.

All those ugly thoughts didn’t lasted for long time and I still think even if all these controversies associated with him are true which I believe are not, He is still a Hero, a forcing personality, a person who contributed greatly to the cause of the nation . How can we forget that we all are vulnerable to do mistakes in life? Everyone is criticized on the unintended mistakes one commits, it’s the way society works. Nowdays even people who buy cell phones from grey market, who have done nothing for the nation are very comfortable in blaming Gandhi Ji for the past events. I think if something happens for good no body praises it but if it doesn’t pays off we all start the criticism. It’s like if Sehwag swings hit mighty bat to hit a six and gets caught on the boundary line no body sympathizes with him. They will surely criticize him for the reckless batting.

In this era of terror and violence I think the principles of Mahatma can do wonders to improve the condition of the society. I may not be a pure ‘Gandhi Waadi’ but I still believe that Gandhigiri is a very effective way of fighting without tears and bloodshed.