Saturday, February 6, 2010

IPO - Incredibly Pathetic Offerings and Financial Wars

Recently we had a real estate player coming out with an IPO and it wasn’t surprising that the retail subscription was not fully subscribed. Similarly we have had several other IPOs and FPOs where the retail investor has not invested.

But surprisingly all these IPOs/FPOs have somehow managed to get
subscribed/oversubscribed by institutional investors. This could probably mean that retail investors are not as smart as some of the institutional investors and probably don’t know what they are missing out. Or it could mean that retail investors are getting more intelligent and understand actual valuations. It could also mean that promoters coming out with the IPO might have treated some Mutual Fund Manager handling public funds to a nice hearty meal with some delicious dessert. In return they get them to invest in their IPOs. How accountable is a Mutual Fund to investors at the end of the day? ULIPs are still worse than Mutual Funds – they are probably one of the best ways to commit financial suicide.

If institutional investors had not backed some of the IPOs, they would have simply collapsed. Even in the case of quality FPOs, I will rather pick it up in the market at a lower price than compete with others in an FPO. When markets correct 500 points in a day, I don’t have to compete with anybody to buy. Most people who play in Future and Options are selling stocks as if they are on fire.

These are the types of opportunities any smart investor waits for. We are once again to start seeing this. This is just the beginning and if you have Rs. 100, you can start by putting 3-4 rupees now gradually just for taste. Why would anyone in their right senses want to block their money in an Incredibly Pathetic Offering, when in the coming days we are going to get some incredible investment opportunities?

The global economic situation is becoming worse. America’s financial problems are getting bigger and bigger. Pockets in China, Japan, UK, Middle East(Dubai) and Europe are all in financial trouble. Unemployment is rising and demographics are no longer favorable. Financial wars are being fought which the masses do not know anything about.

This was the scene that I and investors like the Chameleon were waiting to unravel. Now is just the beginning. Today there is a huge risk if you keep your money in USD, Pounds o Euro as the economies behind these currencies are all unstable. Investments in any of these economies is also a big risk. Within a matter of moments things can turn around.

See what happened with Toyota within a matter of days and how it crashed from its glory. See what happened with Lehman Brothers, Merrily Lynch, AIG, GM, Ford, Dubai, Greece, Portugal, Spain, etc. I will once again stick my head out and say this is just the beginning. In India had real estate guys not been temporarily bailed out by the RBI, they too would have collapsed. No bail-out can last forever – we saw the real estate collapse in America, Dubai, Japan and now China.

Now if you analyze these happenings, you will realize that anyone who is not informed will lose immense money. As always in the midst of this, there are some incredible opportunities turning up. In India keeping your investable money in an FD or blocking it in real estate will be foolish and you need to keep cash ready to pounce on the right opportunities. In the midst of all the global chaos and financial wars being fought, somehow thanks to our past Karmas India will turn out to be an oasis of wealth and opportunity.

Today the Indian Rupee actually has the scope to become an international currency, as it backed by a strong domestic economy and the English language. Believe it or not, there are more Indians who speak English than the British themselves. Do not trust rating agencies which give India less of a credit rating than America. These are the same rating agencies who told investors to invest in Lehman Brothers and caused pensions funds in Europe to bankrupt.

I will use the coming opportunity as a chance to once again invest in India and not let some rating agencies stop me. I am reminded of what Lord Krishna told Arjuna on the battle field, when he was having doubts about going to war. Our daily lives whether at work, business or investing also is like a war where we may have doubts. But we need to do what is right and what we believe in.

"O Partha! Lucky are those Kshatriyas(warriors) who get such an opportunity, which opens for them the doors of the heaven. If you don’t wage this righteous war, then for neglecting your duties, you will incur sin and lose your reputation.

All people will always talk of your infamy which surely is worse and painful than death for a respectable man. The great generals who have highly esteemed your name and fame will think that you have left the battlefield out of fear only, and thus they will consider you insignificant. Your enemies will speak many spiteful and insulting words causing harm to your reputation discrediting your power. What could be more painful than that? So Arjuna! get up and fight.

Fight for the sake of fighting, treating victory and defeat, pleasure and distress, loss or gain alike. By so doing you will not incur any sin."

Yogesh Chabria


manish said...

Dear Sir,

I always admire you courage to post frank and from the heart messages. Yes, some of these IPOs don't make sense. Also NTPC is much better to just pick up in the market.


Dr. Gupta said...

I'm an NRI and wanted to know what alternative do you suggest. Because USD and GPB is a risk, also in India NRE FDs in Rupees barely give us 2% interest. Property too doesn't make sense. So for someone like me, who doesn't really track the markets. Please some advice would be appreciated.

Anonymous said...

how do these real estate companies pose profits these days? i was surprised to see companies like sobha developers pose increse in profits.They haave aa mountain of debt & as far aas i can see unable to sell much


Viral Rajnikant Dholakia said...

Speaking more about Indian Real-Estate...

We curse real-estate developers for charging unusually high prices since at least a decade now & consequently raking in a big moolah.

But, coming back to bourses, we are seeing Real estate stocks bleeding & under-performing by wide margin.

Have a look at numero uno DLF... its Life-highs being Rs.1300 odd & currently quoting at a meagre Rs.300 even after witnesing a scorching bull run from Sensex 8k to 16k. Same is the story for other real-estate stocks too.

Where is the lack of uniformity coming from?? Developers are deemed to be making money, but markets/stocks suggests that the sector is bleeding or witnessing lack of adequate Sales.

Where is the imbalance coming from? Probably this imbalance will lead to burst of bubble sooner or later.

Probably, at the same time, I am also tempted to say that Real-estate as a story in India is still in a nascent stage & has a long way to go. And, looking at that, the real estate stock are reasonably valued at this point in time. Atleast they are not exhorbitantly valued as before. Perhaps, I mean to say, even during a real estate burst the downside in real etsate stocks could be slightly capped. Who knows??

The Happionaire™ Blog said...

I had to comment after reading yous analysis Dholakia ji. Excellent analysis about the analysis of the real estate sector.

Vigensh ji, sales can be easily manipulated. Create a new paper company and transfer your sales to that company. People will think sales are rising. If you study the nature of sales, you will understand a large part of it is fictitious.

-Yogesh Chabria

Viral Rajnikant Dholakia said...

Thanks Yogesh ji for ur appreciative reply.

I also feel that during any intermediate correction & during subsequent panic, long-term investors should look to Accumulate selective stocks from sectors like Real-estate & Education.

Both the above mentioned sectors still remain largely UNORGANIZED sectors. This gives scope to both the sectors to grow bigger with time & with policy evaluation and correction.

Naresh Pisharody said...

Dear Yogesh ji,
Thanks for the post, educating and cautioning, guiding us. The news is all about the risks in European markets these days. Some thing we have known for long. Chances of them defaulting on loans, and chances of UK and US being unable to maintain their Triple A ratings. I recently listened to a very well known capitalist in the US who runs a large software organization, call the US recession L shaped. That which goes down never to come up in near times. That was shocking as I know how accurately earlier, he had foreseen business environments & economies evolve.

On the real estate front, I guess the profits shown by real-estate companies may mean nothing if we look at the kind of bad loans that have been re structured and the true debt scenarios that emerge. I had the opportunity to meet the CMD of a PSU Bank who was lamenting on the scenario, that while all things are so bad, since the loans have been restructured, even the Banks profitability has been projected to be better than what it is. If we Indians learn to spend lesser than what we earn, we would never ever get into these problems. Unfortunately the youth of today need to go back to our old ways. Save more.

Anonymous said...

Hello everyone...
Thanks Yogesh for the post.... it makes sense.... but quite didnt understand INR becoming the world exchange currency. Gold could be looked as the same... if we look at the Portugal, Italy, Greece and Spain(PIGS), they have relatively high reserve of gold around more than 60%. so when they have to minimize debt.. they might have to sell it.. which will bring the price of gold down.... giving an opportunity to buy old for us (GOLD can be used to fight inflation) and can be made part of our holdings.
I have a difference of opinion about with what Naresh sir told... I dont think that one can save and become rich....(Only that point I have difference of opinion.. to save more) rather should take informed decisions to grow money. I agree that lots of youth is living on the future expected income.. which is risk. Getting into bad debt by purchasing very costly real estate which is not generating enough return is a foolish idea. everyone does this seeing that the value of real estate goes high every month.. but forgets the fact that how much population can afford it (% of population). So when one finds out that he/she should be able to take much more sensible decision... as some one said.. common sense is not that common. so where ever you invest... check the supply and demand.. how much that product worth it..... like a tooth paste priced at 2000 Rs does not make sense to me... so is the case in real estate. If I have 1 Cr.. that does not mean that I will buy the tooth paste for 2000 rs. so that is what we should educate the youth. Easy money is not that easy always.... (It might have worked couple of times.. but not always). In any situation one person could make many people fools once.. but not always....

karuppiah said...

Naresh, Can you tell who is the US capitalist you are mentioning about?

Dreamer said...

Analysis by Mr. Dholakia was really nice.

Alot of development and new industries are blossoming in tier II and tier III cities. They certainly have a chance to reach the highs that Mumbai has enjoyed over the years. I think real estate groups are providing Mumbai like products to consumers in these cities. Certainly, these cities would reach the highs of real estate that Mumbai has enjoyed.

So, real estate investment in tier I, II or III cities is very relative.

Ravi P said...

I have to post a story here by looking at what you're doing Yogesh ji. Truly admire your words. I hope everyone will like it. If not then please ignore.

A holy man was having a conversation with the Lord one day and said, 'Lord, I would like to know what Heaven and Hell are like.'

The Lord led the holy man to two doors. He opened one of the doors and the holy man looked in. In the middle of the room was a large round table. In the middle of the table was a large pot of stew, which smelled delicious and made the holy man's mouth water.

The people sitting around the table were thin and sickly. They appeared to be famished. They were holding spoons with very long handles that were strapped to their arms and each found it possible to reach into the pot of stew and take a spoonful. But because the handle was longer than their arms, they could not get the spoons back into their mouths. The holy man shuddered at the sight of their misery and suffering.

The Lord said, 'You have seen Hell.'
They went to the next room and opened the door. It was exactly the same as the first one.

There was the large round table with the large pot of stew which made the holy man's mouth water. The people were equipped with the same long-handled spoons, but here the people were well nourished and plump, laughing and talking.

The holy man said, 'I don't understand.'

'It is simple,' said the Lord. 'It requires but one skill. You see they have learned to feed each other, while the greedy think only of themselves.'

Viral Rajnikant Dholakia said...

I agree with what Mr.Paresh says... regarding High Growth potential in transforming Tier 2 and 3 arenas into upcoming hubs.

Not just that, for true long term investors, what may be in store is not just Tier 2 and 3 arenas, but it could as well be the 'unknown' Tier 3 and 4 or even 5 over a period of time, as the real-estate sector penetrates deeper into the Rural India.

Karl said...

Hi Yogesh,

In your article, you alluded to financial wars being fought which the masses are not aware of. Are you referring to the efforts of the U.S. to destabilize the euro by using the rating agencies and the mainstream media to spread rumours about the fiscal health of certain European countries?

Its pretty amusing to watch the CNBC anchors talk about the 'flight to quality' in the $ and U.S. Treasuries considering the far worse financial situation in U.S.

Maybe you could elaborate more in your forthcoming posts and the implications of all this on India.


Viral Rajnikant Dholakia said...

Dear Yogesh ji,

In one of your previous article you have said that you don't invest money in Mutual Funds (MF) for specific reasons mentioned as over there.

With respect to that, I would like to share few thoughts. I hope to discuss it over here with some well-known myths among public & whether it is really risky to invest in some specific category of MF after-all? Which category of MF am I referring to? Read on...

Most of the investors who go for Equity investments in MF, usually do so through Diversified Equity funds (or Balanced funds if the investor is conservative). That is a well-known fact.

However, during the optimistic times of Sensex rally to 21k, a little more than couple of years back, we saw emergence of Infrastructure funds (Thematic funds), based to the potential of this indsutry to do well in a developing country like India. And than many other Thematic funds came from various sectors. Meaning to say, a riskier part of MF is Thematic fund which comes with corresponding returns.


But, where I would like to point your attention is that, a large part of the Savings of Indian Public is still too conservative to have been deployed in Equity markets. Though the ratio is gradually improving.

The myth amongst layman public is that Equity is still a Risky asset-class. But, the fact remains that it isn't so risky if this (Equity) route is approached with long-term perspective, wherein volatility gets negotiated with assurance of Time period.

So, in a place, where investing in equity itself is considered risky, there is no question of debating about MF investment. But, people miss a point that over longer-term nothing serves thier 'IDLE' money (savings) better than equity returns.

But, going deeper... for those who dont prefer to put money directly into Equity, or for that matter who lack adequate time/knowledge to invest directly in Equity markets, can definitely do so through MF.

Now, Coming directly to your point... there are also types of investor like you (with full due respect to your view), who dont trust those Fund managers or Fund Houses.

We do have Index funds for such people, where the scope of manipulation from the side of Fund or its manager is very small in nature, where the goal of the fund is to replicate the index movement & its returns as closely as possible or even in a better way.

Since Equity in itself is considered quite a risky asset-class, investing in Index MF is by 'NO' means a Conservative investment space. So, the purpose is served more fruitfully & faithfully in such funds which aims at mirroring the over-all Indian Corporate Performance (i.e, the Equity Index of Indian markets).

A point to note over here is that... even Diversified Equity funds do not out-perform index returns by a very substantial margin, even with the mandate of more flexibility in deciding their holding and selection of stocks. They are out-performers by hardly few percentage points. In that, if there is some negative yielding year in between, diversified funds tend to rather under-perform the index returns most of the times. So, the +ve aspect of investing in Diversified MF gets evenly balaced over Medium-term horizon.

But, with investment in Index fund the same journey is travelled with lesser tension (along with more assurance) that when market will rise, 100% my index investments will also go up to that extent. Where as, for stock specific diversified funds, 5 years may be good and than remaining 5 years may be under-performance by big margin, depending upon market trends.

I simply mean to conclude over here that, it is better to generalize as such: All the Funds in the market may not serve your purpose of investment, but some selective category of funds (say, for example, Index funds) could well be serving one's purpose more appropriately.

Sorry for a bit too long explanation & taking your precious time.

amjad said...

It is always a pleasure not just to read the post by Chabria ji but also read enlightening discussions by members of the community here. I agree with Naresh ji that today's generation need to spend less and invest more.

The Happionaire™ Blog said...

Naresh ji - NPAs that the banks have with the real estate sector are unimaginably large. Saving and investing is the mantra lot more people are adopting today.

Anonymous - That is correct. Irrespective of how much money we have, it doesn't make sense to buy something that is overpriced or if I get the same things somewhere else cheaper. If I have Rs. 25 crore and a packet of bread costs Rs. 20, but someone asks me for Rs. 40 - I will not pay for it.

Ravi ji - As always very beautiful story and we get to learn a lot.

KK ji- I don't think that the US would be doing such a thing. The Euro already has got inherent problems. The populations of the EU is aging, cost of production is high and demand is rapidly falling. The problems faced by Euro as well as other currencies is very real.

Viral ji - I do understand that there will be pockets of value in real estate, but given a choice I will still invest in equities because the returns would be easier to get and is much more transparent. Maybe it is just because I am more comfortable with equities.

Your analysis on MFs was interesting. An index fund will always be preferred. But you know it is much easier to select a good stock - rather than a good MF. It is harder to judge individuals than a business.

Amjad ji - Thanks.

Yogesh Chabria

Ravi P said...

Strange no one pointing it, but I think Yogesh its been quite long now since you've posted. I feel it is time for another informative post to ensure happionaires are collaborating and sharing their ideas. It seems like a sudden silence. Is this an indication of a big storm marching ahead?

Who knows - But I am sure mystery will resolve soon. You all take care!!

Jagan said...

I agree with Ravi ji...we've been waiting to read another dose of knowledge and thoughts from Yogeshji!

Anonymous said...

Very good work and excellent article! Cheers.