ECONOMY
Dizzy rise
S. RAMACHANDER
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The Sensex may keep soaring; what does it mean for the common man?
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PHOTO: SHASHI ASHIWAL
Going up: This marker outside the Bombay Stock Exchange says it all.
MARKET zooms past 9000. FII interest keeps bears at bay. Institutions holding long positions could divest and exit. Phrases like these are the common currency of TV chat shows and newspaper articles about the stock market. The market, as this goes to print, is seeing an extraordinary upswing.
To the average educated person without degrees in commerce, management, or accounting, much of this sounds like gobbledegook — and unnerving to boot. Last year in particular has been one of those dizzy, euphoric ones for the punters in the stock market.
Unfortunately, there's a catch. Meteoric increases in wealth don't come easy. The stock market offers a ready opportunity, but it is not for the merely adventurous. Some patience and knowledge of basics are required. At the other end of the scale, anyone beyond 45 has been accustomed to 15 per cent per annum on corporate fixed deposits as the normal rate of return all their working lives. To them, the change in the financial markets seems disastrous. Huge falls in interest rates on savings bank account accompanied by a disappearance of the high fixed income from the FD market have put them in an unfamiliar Alice in Wonderland world. Those who had been depending on a few select stocks and the well chosen, government supported avenues for savings have now perforce to play on a trickier wicket. A succession of scams, bank collapses, and mind-boggling numbers running to hundreds of crores of bad debts (nicely camouflaged by the term non-performing assets) add to the general air of unease. Thus, sifting fact from hype is the most challenging task facing the typical reader of these columns.
Uneasy attitude
The reasons for their uneasy attitude are many. First of all, making millions on the market by merely guessing which stock will move up and which will go down, sounds like something vaguely irregular, and not quite kosher. Secondly it also seems too complicated, requiring specialist knowledge and therefore not to be attempted by the uninitiated. And thirdly, it sounds too dangerous and risky, because it all seems too good to be true.
You just log onto a web-trading site, click on a stock code and quantity, and you can buy 100 Infosys shares at a cost of nearly Rs. 3,00,000, which the net-banking facility automatically debits to your bank account. No mess, no signatures, no paperwork! Just five years ago, this kind of paperless trading would have seemed enviably advanced technology, but today it is available to any one who can get the money to open an account. As with any such story, there are a lot of wrinkles in the small print, caveats that the common investor and householder must be aware of.
Mollycoddled by a protected economy, two generations have been brought up to completely ignore the basic economic theory that the higher the return, the higher is the risk.
The reality of the stock market is in fact starkly simple. Much of its movements are based on expectation and not just the proven facts. Once we accept that the risk-return balance is essential, then it is easy to deal with the occasional irrationality and exuberance of the market numbers. Whether the stock price of a company will move up or not depends first, on how well it is doing in its business, its products being well accepted, its managers being honest and diligent as well as innovative, and the general approach to risk. This much is fairly obvious, which the pundits refer to as the "fundamentals".
A strong company, with good brands, a long record of having weathered storms and come out well (and therefore with good management, one could reasonably argue) would be expected to do fairly all right in the future as well, even if competition or other unforeseen elements rock the boat occasionally. These are the blue chip companies, which exist in every market, in every country. Those who wish to set something aside for a rainy day, and want a better return than the public provident fund or government/public sector bonds, would usually invest a good part of their savings in such companies.
Reason for movements
A second reason for stock price movements is not so obvious. It depends on how other bidders in the market place evaluate their chances, so to speak, and what other options they have to invest in. If, for example, the Japanese or the European markets become more attractive, American pension funds may pull out their funds from India for a time, bringing about a sharp drop in stock market indices. Investing for the short run return or profit from price increases is basically a bet in anticipation of a trend. You bet based on how you think other punters would behave. So, if everyone believes that the telecommunications industry is the future, there is a greater demand than short-term availability, which, as with any commodity, pushes up its price.
The reverse is equally true. When an announcement regarding the future of international oil or banks is made anywhere in the world, it has its ripples everywhere. Thus one could think of the movement of markets as larger, long-term trends, riding alongside short-term trends, sometimes in consonance and sometimes not. This explains why there are sometimes differences within the industry. Anyone who invests in shares must therefore be clear as to why he is doing so — is it for short run entry and exit or for long-term dividend yields and value appreciation?
A general finding all over the world about equity (or shares) is that it is a good source of long-term benefit. Over the years, at least in the 20th Century history, the same amount invested in gold or real estate has not returned the kind of yields that the equity market in general has. The important word here is "in general". So if you are going to run out and buy stocks for a substantial part of your savings and investment portfolio, beware! The way to ensure that you get the average high return expected (say 12 to 15 per cent over a few years) is to invest in a basket of shares of companies in more than one industry. The mutual fund industry is trying to do precisely this, what the experts call diversifying the risk. That is to say, not all companies or industries would go up and down together so you can expect the swings and roundabouts to even out. The catch is of course that the investment in a balanced fund across several companies and industries still has to pay for the expenses and the profit motive of the middleman, the mutual fund. It is up to each one of us to decide whether we are prepared to take that cost, in return for a better judgement being applied to the purchase and sales decisions by the professionals.
One last word of caution: do not ever expect to make money consistently on all stocks you buy; be happy if the pluses are bigger than the minuses, as they very likely will be in the long run.
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