The $3tn Ponzi scheme
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On 25th May 2021, the Indian Stock Market touched a meteoric market capitalization of $3 trillion for the first time. Amidst the bulls and the bears, lies a large industry that sells narratives and wealthy dreams to the common man. Sagas that make young salaried professionals start their first SIP. Fears make businessmen check the stock prices repeatedly. Desires that even The Dalai Lama cannot escape if he turned off the television. It’s the industry of hope, and none of us is out of its reach.
To understand this completely, let’s understand what leads to stock prices rallying up or breaking down - and if you think the answer to that is the performance of the underlying company, I am sorry to say you are wrong. Fundamentally, stock markets are massive reserves of buyers and sellers - pure economics at play - demand and supply. If demand, then up::If supply, then down. Unfortunately, the reasons for shifting demand and supply could be plenty - political, domestic or global, wars and trade wars, and of course, pandemics. While these have nothing to do with the performance of the company, stock prices still react. Given the same underlying logic, if there is no demand, stock prices would fail to rally irrespective of the company’s performance.
No matter how well you perform. If no one is looking, you don’t get the credit
For example, the stock price of Reliance Industries remained between Rs.450 and 500 for 8 straight years - from 2009 to 2017, despite the company growing its top line and bottom line year after year.
For stock prices to rally or fall, investor participation (read: attention) is required. Without an unbalanced demand or supply, the stock can remain range bound for nearly its entire lifespan. You guessed it right, narratives play an excellent role in attracting or repelling investors to/from a certain stocks and/or investment products
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Embedded Financial Sales
It’s a fine Friday morning, and Rohan, a 22-year-old young professional, turns on the television to finally watch the Indian cricket team test match against the New Zealand team. The Indian Team is playing well and the match is progressively building up as Rohan multitasks between his duties as a WFH software developer and his passion as a cricket fanatic. In between the overs, an ad by his favourite batsman catches Rohan’s eye. This is when Rohan first hears about a “SIP” - Systematic Investment Plan.
Later in the week, when Rohan’s dad asks him about his investment plans, Rohan recollects something about mutual funds and SIPs. Following the path of least resistance, Rohan quickly Googles about mutual funds and understands the various categories - yet he seems unconvinced about the risks, an aspect unaddressed by most companies while they make bold promises.
Like most of us, Rohan watched a few Youtube videos aimed at investor literacy, to gain more confidence. Most of them shared some common ideas - invest slowly to avoid excessive risk, mutual funds are all safe, compound your wealth with time, Rs.1k SIP over 40 years would become Rs.10cr. Very similar ideas in fact. Rohan checks at a few more sources - well, he wants to be a smart and informed investor - and lands on this article in his most trusted newspaper, The Economic Times. It reads -
“Risk-averse investors can look at these schemes, as there is little possibility of a loss of capital over three years. The scheme offers investors an opportunity to take a small exposure to equity while sticking to the conservative asset allocation,” says Vijay Chhabria, founder of Prudent Investment Advisors.
These hybrid funds generally mature in three or five years. The debt component comprises good quality bonds that mature just before the maturity of the scheme. In the case of a three-year scheme, approximately 80% of the money is invested in bonds, which ensure the return of capital invested at the end of the tenure. The balance is invested in equity. These schemes aim at offering double-digit returns. The one-year returns of similar schemes look good, given the recent rally in the equity markets. Three-year schemes launched in 2011, which will be maturing in 2014, are performing well.
His eyes light up! “Yes!! Finally, someone is talking about the risk! This seems like the thing for me! This talks about the major players I can trust as well as the pros and cons of these schemes! Should definitely try this “thing” - hybrid funds”
Often, millions of investors like Rohan are exposed to such embedded and concealed sales across platforms. While we love to believe that every mutual fund company competes for our funds, reality shares a different view. Mutual fund companies have over time created a common club -
the
AMFI
.
They mostly share common interests, and in a vastly populated country like India, stand to gain out of joining hands.
Through AMFI initiatives, they often create and execute colossal marketing campaigns under the disguise of investor awareness programs. More often that not, even our most trusted sources of information and awareness are adulterated with capitalistic adverts and propagandas, often misselling facts and exaggerating how these products are “most suitable for investors exactly like us”
Research and invest?
Individual investors looking to invest in stocks most frequently rely on newspapers, business news channels and research reports from leading brokerage houses to develop a view about a sector or stock. Unfortunately, the sale of narratives has its strongest footholds here. Before we deep-dive into the specifics, its important to understand the motives behind these -
Bull Signals:
A promoter group looking to raise the company’s valuation to seek new investment, debt or protect its existing valuation
Institutions (FIIs, DIIs, Wealth Management Firms, Operators) have already accumulated the stock in their portfolio and now want attention on the stock, thereby driving the price higher
Larger Players wanting to exit an illiquid stock, and thus wants to create substantial demand for the stock to give them an easy exit
Holding Companies and/or governments looking to divest stake in the future to raise funds for operations
Bear Signals:
Institutions (FIIs, DIIs, Wealth Management Firms, Hedge Funds, Operators) holding large short positions in the stock and now want negative attention on the stock, thereby driving the price lower. This could also lead to margin calls on promoter pledges, leading to massive contagion downfalls
Larger Players who want to buy more of a certain stock want negative attention to the stock to prevent it from rising
Competitors looking to create panic and/or attract capital in their own company
Other Beasts:
Governments and Central Banks looking to protect investor sentiment and project trust in the economy often hold markets up through terrorist attacks, surgical strikes, annual budgets, elections, calamities and war
Companies looking to lobby associations, governments and other entities to get certain tax breaks, government relief packages and local support
Investors/Management looking to avoid hostile takeovers would want richer valuations to make the task tougher
Others. Lots of others.
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When? Where? How?
Diverse motives require diverse channels of distribution
Larger players (Promoters, Institutions, Mutual Funds, Operators, Wealth Management Funds) require the muscle power of retail investors to help drive a broader rally or fall in the respective stocks. To address this market, consumer media companies and brokerage house channels are often used.
Business News Channels - The Everything Store
Let’s scan through a casual snap of a few leading business news channels:
A lot of individual and small scale investors and traders rely on business news channels such as CNBC, ET Now, Bloomberg Quint and ZeeBiz for their daily share of stock market coverage. Certainly, these channels do a great job at covering facts and market events daily. In addition to that, they also serve as distribution channels for various players in the market. No! I am not talking about commercial ads obviously! Ever questioned why a particular stock or sector is being discussed amidst a pool of over 4,000 companies listed on the share market?
While the Reliances and HDFC Banks surely need to be covered, what prompts these news channels to discuss specific small caps or sectors? If buy or sell signals are given, why on a particular stock?
That’s right! And I will leave it at that. The next time you watch these channels, always remember, literally every panel, space and discussion can be a narrative sale.
Research Reports - Home of Selective Information
I love reading research reports by leading brokerages over sectors and stocks! As an investor, it gives me various numerous infographics and industry insights on a platter. Surely, there is little scope for naive investors like me to realise if certain information is strategically not included in the report - further aiding such companies to use such reports to create false narratives. In fact, one of the most prominent examples of this occurred last year, in broad daylight while investors panicked amidst the covid market crash of March 2020.
Between March and April, several brokerages published reports w.r.t. a leading NBFC, Bajaj Finance - all mentioning that the company was nearly doomed, and aggressively slashed target prices on the stock. A market favourite, once trading at nearly Rs.5,000 was given a sell recommendation with targets as low as Rs.1,600. Do check out other news narratives here, here and here.
Almost around the same time, something funny was happening with the stock. The stock had lost nearly 60% of its market value due to low investor confidence in the rise of the company. However, do check the volume chart at the bottom - the stock was trading with the highest volumes in over 3 years. Individual investors like you and me aren’t capable of generating such volumes, even if we all join hands. This had to be institutional players transacting!
While individual investors were being asked to “Sell” admits a sea of pessimism, smarter hands were buying stocks sold! Once the weak hands exited, the stock rose over 70% in a matter of 40 days leaving artless investors shocked and speechless. Anyway, brokerages soon came out with corrections and new targets, while investors were punished for sins not their own.
Bajaj Finance, on the date of writing this newsletter, remains one of the top 50 stocks of the country, and a part of the Nifty 50 index of the NSE. When such narratives can be created for companies with high trading volumes and large Market capitalization, one can only estimate the state of small caps and midcaps, where information asymmetry is much larger. Investors continuously burn their hands trying to invest in false narratives and exit at the worst times.
Other Beasts - The Hidden Market Forces
Alternately, governments, participate in markets through cash-rich state-owned companies like LIC to trigger buying or selling in the markets. Central Banks similarly participate through nationalised banks to keep currency markets stable. Well, how many times have we even heard leading mutual fund and investment moguls come forward and say “India’s structural story is very much intact”
Every player has their own motive and strives to use maximum resources and muscle power to further their cause. Such is the truth of the most stock markets across the globe. Close to a Ponzi scheme, where the smarter players benefit from the stupidity and carelessness of the lowest strata of investors.
Conclusion? Exit Stock Markets? How do I save myself?
Personally, I have been a stock market participant since my college days. I have never invested in Bank Fixed Deposits, Real Estate or Gold. I have always had 100% of my wealth invested in the Indian stock market and plan to continue doing so. The idea behind this newsletter was to spread awareness regarding the wider distribution of stock market narratives and the industry behind them. Understanding this could help each one of us a better investor over the long term.
The stock market is a gold mine for those who know the tricks of the market. As the saying goes, “Markets can be irrational longer than we can remain solvent.” I believe that investing in sectors where you hold domain expertise is crucial. This allows you to conduct primary research, harness industry insights and tap human networks. Consequently, it enables you to see through gaps in reasoning in biased reports, thereby empowering you to act above and beyond the average retail investor.
You don’t need to be the best. You simply need to be a little better than average for long periods of time to make wealth in the game called investing.
DM 🚀
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