It is said that Media is the fourth pillar of democracy. Though an informal pillar, the power of this institution in our lives is felt the most when the other three pillars ie Legislature, Executive and Judiciary loses credibility in the eyes of the people. This is exactly what is happening in our country now. Indian media especially the Jain family controlled papers and channels (ToI, Times Now etc) have metamorphosed from opinion reporters to opinion makers. Till recently their economic daily Economic Times was free from this ethics flexible Jain syndrome. But looks like even ET has caught hold of the disease of manufacturing news.
Today's(19th Aug 2013) ET front page screams of a large number of Indian stocks trading below their book value ie the price of their assets and hence the ET reporter advises his readers to pick and choose these companies whose fundamentals are "strong". Though he mentions fleetingly that one of the reasons why the companies are devalued is the debt they have on books, the article conveniently forgets to mention the effect the debt have on assets and valuations of the company.
To understand more, let us explore the idea of "sitting ducks". A public listed company is classified as a sitting duck if the stock valuation of the company is lesser than the book value ie the total assets of the company. The underlying idea is that if some corporate raider can buy the shares at a lesser value, tear down the firm and then sell off its assets, he can make a killer profit. But the problem here is that a raider can pocket the profits of the sales only after he pays off the debts the company owes. Debt owners have the first right on the company assets followed by preferential share holders and then only can a common shareholders (the ones who buys from stock market) profit. Take for instance, Reliance communication which is presently at Rs 118.75 and the book value is Rs 159.47. The difference is nothing but the huge debt of Rs 35,185 crores loan they are struggling with and to reduce which Mr Anil Ambani is doing exactly what a corporate raider would have done- selling his assets piece by piece. But the fact remains that nobody wants to buy and so he is turning towards his brother for help now.
Now let us look at the issue from a different angle. As a result of this article, almost every stock (with the exception of some really badly effected ones) shot up by 2.5% to 7% today with intra-day figures touching even 10%. Analyse this spurt in the context that the sensex over all fell by 291 point today due to the continuing rupee meltdown. If a person who was privy to this information had invested 1 crore in some of these stocks yesterday, he would have made around 5 lacs in a single day today. So a few might have profited from the brilliant ET analysis. But who lost? To understand that, let us first look at a famous stock market theory.
The Greater fool theory states that stock markets are able to give a return greater than the corporate profits because everyone who trades on stocks behaves like fools. A fool buys stock only because he/she believes that there will be another fool who will be willing to pay more for the same stock. So fools keep selling to each other and the valuation goes up. But in case of an oligocracy like India (sadly we are getting there, the country is ruled by a few powerful people across politics, business, media, bureaucracy etc), we will have to modify the theory a bit. We will have to say that there are two categories of fools here: Powerful fools and really foolish fools ;). The first category runs this country and so knows when to buy and when to sell. They know when the government is going to free import duty on petroleum and when petrochemicals will be curtailed and so we cannot even call them fools. They are able to manufacture the right environment needed to breed a million fools who will buy from them. So all the fools in the second category who read the first page of ET diligently and went to buy the "assets" of PSUs at a deep discount will be the proud owners of these shares for next few months to come.
I guess that was too much of economics and stock market theories, let me close this article on a lighter note. Americans extended the greater fools theory and surmised that if you want to make money in the market, then you need to be a lesser fool. So how will you remain a lesser fool? Simple, by withdrawing from the market when you see too many fools who does not understand anything about stocks around. There were a lot of veteran fools who successfully used this tactic and made money at the expense of bigger fools. Some say even American President Herbert Hoover was one of them. So, the story goes like this. President Hoover was interested in stocks and held a big portfolio and was making good money as the markets were on a upward surge in 1920s. Once, while in a lift, the lift operator started talking to him about the right stocks to invest in. The talk by a commoner with no understanding of stocks rang an alarm bell in Hoover's head. He, being a veteran fool, understood that the market is getting crowded with fools and time has come to sell. He immediately went to his broker and asked him to sell every stock he held. The grand presidential sale hit the headlines and the news spread in no time. When the other investors saw that the US President was selling, they panicked and there was a mad rush to sell stocks. The mad rush resulted in the crash of the NYSE on that Tuesday (October 29) of 1929. The black Tuesday as we know the day today marked the beginning of the Great Depression.....
Today's(19th Aug 2013) ET front page screams of a large number of Indian stocks trading below their book value ie the price of their assets and hence the ET reporter advises his readers to pick and choose these companies whose fundamentals are "strong". Though he mentions fleetingly that one of the reasons why the companies are devalued is the debt they have on books, the article conveniently forgets to mention the effect the debt have on assets and valuations of the company.
To understand more, let us explore the idea of "sitting ducks". A public listed company is classified as a sitting duck if the stock valuation of the company is lesser than the book value ie the total assets of the company. The underlying idea is that if some corporate raider can buy the shares at a lesser value, tear down the firm and then sell off its assets, he can make a killer profit. But the problem here is that a raider can pocket the profits of the sales only after he pays off the debts the company owes. Debt owners have the first right on the company assets followed by preferential share holders and then only can a common shareholders (the ones who buys from stock market) profit. Take for instance, Reliance communication which is presently at Rs 118.75 and the book value is Rs 159.47. The difference is nothing but the huge debt of Rs 35,185 crores loan they are struggling with and to reduce which Mr Anil Ambani is doing exactly what a corporate raider would have done- selling his assets piece by piece. But the fact remains that nobody wants to buy and so he is turning towards his brother for help now.
Now let us look at the issue from a different angle. As a result of this article, almost every stock (with the exception of some really badly effected ones) shot up by 2.5% to 7% today with intra-day figures touching even 10%. Analyse this spurt in the context that the sensex over all fell by 291 point today due to the continuing rupee meltdown. If a person who was privy to this information had invested 1 crore in some of these stocks yesterday, he would have made around 5 lacs in a single day today. So a few might have profited from the brilliant ET analysis. But who lost? To understand that, let us first look at a famous stock market theory.
The Greater fool theory states that stock markets are able to give a return greater than the corporate profits because everyone who trades on stocks behaves like fools. A fool buys stock only because he/she believes that there will be another fool who will be willing to pay more for the same stock. So fools keep selling to each other and the valuation goes up. But in case of an oligocracy like India (sadly we are getting there, the country is ruled by a few powerful people across politics, business, media, bureaucracy etc), we will have to modify the theory a bit. We will have to say that there are two categories of fools here: Powerful fools and really foolish fools ;). The first category runs this country and so knows when to buy and when to sell. They know when the government is going to free import duty on petroleum and when petrochemicals will be curtailed and so we cannot even call them fools. They are able to manufacture the right environment needed to breed a million fools who will buy from them. So all the fools in the second category who read the first page of ET diligently and went to buy the "assets" of PSUs at a deep discount will be the proud owners of these shares for next few months to come.
I guess that was too much of economics and stock market theories, let me close this article on a lighter note. Americans extended the greater fools theory and surmised that if you want to make money in the market, then you need to be a lesser fool. So how will you remain a lesser fool? Simple, by withdrawing from the market when you see too many fools who does not understand anything about stocks around. There were a lot of veteran fools who successfully used this tactic and made money at the expense of bigger fools. Some say even American President Herbert Hoover was one of them. So, the story goes like this. President Hoover was interested in stocks and held a big portfolio and was making good money as the markets were on a upward surge in 1920s. Once, while in a lift, the lift operator started talking to him about the right stocks to invest in. The talk by a commoner with no understanding of stocks rang an alarm bell in Hoover's head. He, being a veteran fool, understood that the market is getting crowded with fools and time has come to sell. He immediately went to his broker and asked him to sell every stock he held. The grand presidential sale hit the headlines and the news spread in no time. When the other investors saw that the US President was selling, they panicked and there was a mad rush to sell stocks. The mad rush resulted in the crash of the NYSE on that Tuesday (October 29) of 1929. The black Tuesday as we know the day today marked the beginning of the Great Depression.....
