[comfortablynumb]

Originally Posted by msdivy

It is like selecting 3 best students in every class and then assessing the school quality based on the marks scored by those best students.

If those selected students are getting excellent marks, then school is excellent health

Originally Posted by Samurai

That's an excellent way of explaining it, I couldn't have said it better. That is why stock market index doesn't even indicate the future of the economy, it merely indicates the future of the companies in the list.

It's threads like this one in general and posts like these by msdivy in particular which are instrumental in clearing misconceptions from the minds of laymen like me. Thanks a lot.

Meanwhile, looks like the ivory tower residents are also admitting it, albeit grudgingly

https://www.rediff.com/business/repo...y/20200821.htm

[am1m]

Originally Posted by msdivy

It is like selecting 3 best students in every class and then assessing the school quality based on the marks scored by those best students.

I know there is a 'thanks' button and I've used it, but this is so simply brilliantly expressed, I had to log in and post to thank you! Makes so much sense to me now.

[srini1785]

Originally Posted by msdivy

The stock market index is a selection of best-performing stocks. Poor performers are dropped from the list. New good performers are added to the list.

It is like selecting 3 best students in every class and then assessing the school quality based on the marks scored by those best students.

If those selected students are getting excellent marks, then school is excellent health

They are called Bell- Weather stocks and as per learned people ( count me out), their performance is an all weather indication of whats happening in that particular sector. How this works, as per the students analogy is that, if these students fail, due to various reasons like over confidence , under preparation , pure ego etc, its not a reflection on them but a true reflection of how tough the question paper was set and its a given that the next exam is going to be lot easier.

That's capitalism in action for you.

Laggards and back benchers like me be dammed.

Never quite understood the logic and one of the reasons why i opted out.

[download2live]

There are many people who are scratching their head over the apparent disconnect between the effect of caronavirus on economy and the rally in stock market.

One word answer: US elections.
Wall St is doing what it has been told to do. Drum up the stock market in run up to US elections. Look at the Stock market rally till the end of Feburary. Then there was the blip in March. I will come to that in a moment.

Now the stock market has been pumped up again. Trump whole US election strategy has been to show that economy is going gang busters.

Now that it looks unlikely that he will win, I think same people are doing something else. The market is being driven hard. Just before the elections big players will sell and pull out of market leaving the naive inverstors holding the bag. The market will take a dive after US elections. I hope I am wrong since I also hold some stocks. :-)

Second half of Sept 2020 should be the time to take profits from the investments. Atleast sell enough to cover your intial investments.

Now coming back to March 2020. Every event is priced in Stock market. If there is one thing that upsets it, it is unexpected events. And Covid getting declared as a pandemic was one such event. We saw what happened then in March 2020. Soon various scenarios were priced in the market and it is all business as usual.

[v1p3r]

Originally Posted by download2live

One word answer: US elections.

Ummm that's not one word?

[V.Narayan]

A counter point of view to the anti-stock market views expressed in the last few pages. I am sure there will be some who will disagree. I have invested in the Indian stock markets since 1985 and held US stocks since 2008. I cannot by any stretch claim to know how it works and I do absolutely no speculation. My experience overall has been :-

-- the stock market returns roughly GDP growth + inflation as SmartCat correctly states
-- this works only if you stay the course and don't panic when the index nose dives; most can't resist the panic to sell.

The stock market investing is like a swift running river. If carefully harnessed it will give you hydro electricity; if not it will surely drown you. Most small investors who get into the stock market are like ordinary car drivers jumping into the F1 race. It is almost guaranteed there will be an accident.

Just my personal experience has been that folks lose money on the stock markets because of their own buying and selling behaviour and then justify their negative experience and feelings by saying the stock market sucks. And then the rationalization starts....it is a monopoly of big brokers, it doesn't reflect the true economy, there is no place for the innocent small guy, it is a cabal of big evil corporations etc. Unfortunately investors jump in with a desire to make a big quick buck and then burn themselves and blame the market rather than their own desires. Many small investors claim they are long term players but a quick buck is always very close to the surface.

Never understood why the stock market should reflect someone's view of the economy or the RBI's view. It is after all a collection of traded corporations i.e. a slice of the economy and not the whole economy. It reflects corporate sentiment, hope, fears. It is also driven by availability of liquid capital and its movement across borders. The brokers and investors never claim it reflects the economy. That claim is foisted on it by journalists and intellectuals.

For the small investor who wants a taste of the stock market benefits you have mutual funds. That has been my advice to all my relatives who are constantly pounding me for 'tips' not understanding that if you invest in stocks silence is golden - don't talk, don't boast just put your head down and do what you need to do. Any way to each his own.

Just putting these contrarian views lest some beginner reading the last several pages thinks the stock markets are bad and dirty. It is a route to invest thoughtfully, hold for long and reap the profits. I am very grateful to the stock markets in India and USA. On at least two occasions when the chips were really very down for me in my business I relied on many years of sensible stock investments to bale me out. People blame the river if they don't know how to swim. I am not questioning the opposite views held by many just stating that stocks can do you a lot of good.

[vrprabhu]

Originally Posted by V.Narayan

Never understood why the stock market should reflect someone's view of the economy .... availability of liquid capital .... brokers and investors never claim it reflects the economy. That claim is foisted on it by journalists and intellectuals

Very true. My understanding is that the stock market originated so as to enable entrepreneurs raise capital from public, and provide liquidity to the investors in case they want to exit (by trading the shares in the stock market). With the passage of time, stock markets have become one more avenue for making money.

(BTW, insurance companies invest a part of their funds in stock market - the premium you pay winds up in to equities, even though insurance policy is strictly not an investment product for an individual; Annuity - Pension, including NPS, fund managers also do so).

In fact there are plenty of listed entities which are sound (have a good book value) but their shares are traded below this level. So the current value of share doesn't really indicate whether the company is in fact doing well or not. While the top 3 analogy is great, it needs to be understood that the index is built on a base comprising of 50 / 100 stocks - and not all of them may do well simultaneously. There will be top 3 or 5 who have contributed to the increase in the index, but there will also be bottom 3 or 4 who have pulled it down equally.

Going back to my earlier point, I am not sure how many will remember the IPO boom in the late '90s and early 2000s. Share application forms were not freely available in respect of some companies touted to be 'performers' - there used to be a mad scramble to apply for the issues touted to fetch handsome returns on listing. Unfortunately, many companies who encashed the hype have gone bust (the losers in this case were indeed the investors). But some have really done well - and there have been stellar performers. Still remember the mad scramble for IPO of State Bank of India - Infosys was relatively unheard of in their nascent days.

And to end with my usual gripe, coming back to the economy, inflation seems to be crossing 6%. Interest paid on term deposits by many banks are below this (savings bank interest rate seems like a joke - it may not be equal to the plethora of charges levied). Practically you are losing value by keeping money in a Bank. A ten year Govt. of India bond (borrowing) yields upwards of 6% (~6.2% presently). And, if the call for further rate cuts are heeded, where will the interest rate bottom out? No wonder, people are attracted to stock markets where the returns appear to the higher.

Completely agree with the views expressed by Mr. Narayan - it is your money and you should do the homework if you want to invest it anywhere!

[Samurai]

Originally Posted by V.Narayan

-- the stock market returns roughly GDP growth + inflation as SmartCat correctly states

And GDP indicates what? I recently made a GDP comment without thinking and was instantly corrected by an informed BHPian.

Originally Posted by Samurai

Agreed, I said GDP by habit.

I felt like an idiot for a while because I missed something obvious to me otherwise.

In statistics, whatever the 1% does is considered outlier. Unfortunately, in the finance world, whatever 1% does is considered the majority view. Why is that?

Let's take a room with 99 software engineers, who are generally well off. Let's say their combined net worth is ₹200 crores. That means the average net worth of people in that room is ₹2.02C, which is real enough. Then Mukesh Ambani walks into that room, whose net worth is 600000 crore. The new average net worth of that room is ₹6002 crores. Now that room is considered a very rich room. This is the business economics point of view, because money defines everything from that vantage point.

Originally Posted by V.Narayan

The stock market investing is like a swift running river. If carefully harnessed it will give you hydro electricity; if not it will surely drown you. Most small investors who get into the stock market are like ordinary car drivers jumping into the F1 race. It is almost guaranteed there will be an accident.

So the world belongs to F1 drivers alone? Only they should benefit? Who designed the financial system so that only F1 drivers can thrive?

There was time when only people with royal or noble blood could thrive. I am sure Royals/Nobles thought there was absolutely nothing with that system. We have an entire thread discussing fancy cars owned by maharajas when 99% of the country was struggling for food. I am glad commoner like me don't have to kowtow when a royal passes by. Now the F1 drivers (investment experts) are the new royals. Rest are serfs.

Originally Posted by V.Narayan

Just my personal experience has been that folks lose money on the stock markets because of their own buying and selling behaviour and then justify their negative experience and feelings by saying the stock market sucks.

Have you noticed what I said in this post? I am not against investing in stock market. Also, I never lost money in stock market. Even when I invested in stocks and mutual funds, I at least doubled it. So, I am not talking from any personal bad experience. I started forming thoughts on this after the carnage of 2008 scam, when investment bankers bankrupted the whole world without paying any price. It affected me indirectly when many of our customers were nearly bankrupted, and stopped many contracts.

Call me crazy, but I have this habit of looking at what is good for the world, even if it comes at an expense to me. I do that because I feel that if people around me thrive, I will thrive too. My view is similar when it comes to broader economics too. As a businessman I should focus only on business-economics, but I always think from socio-economics POV. If I thrive, when the folks around me are struggling, I feel it is ultimately not good for me. Which is why, even as an employer I always look to benefit the employees first.

Originally Posted by V.Narayan

And then the rationalization starts....it is a monopoly of big brokers, it doesn't reflect the true economy, there is no place for the innocent small guy, it is a cabal of big evil corporations etc.

You are basically calling socio-economics as rationalization.

Originally Posted by V.Narayan

Never understood why the stock market should reflect someone's view of the economy or the RBI's view. It is after all a collection of traded corporations i.e. a slice of the economy and not the whole economy. It reflects corporate sentiment, hope, fears. It is also driven by availability of liquid capital and its movement across borders. The brokers and investors never claim it reflects the economy. That claim is foisted on it by journalists and intellectuals.

Completely agree. Stock market is a corporate finance medium, where companies solicit money and investors make their bets by investing in companies. Everything was fine with it until the 80s when Glass-Steagall Act kept investment banking separate from commercial banking. Starting with Reagan, it was weakened and finally repealed in Clinton time. This led to massive financialization of the economy, where everyone started getting affected by stock market, whether they wanted it or not. My dad was a commercial banker all his life, and he was an avid investor in stock market after retirement, until his death (1992-2015). Stock market Trading was his primary hobby during 23 years of retirement. He made quite a bit of money, after crossing 80 he regularly pulled money out and put many FDs in his grandchildren's names. So even my dad didn't lose any money. But he took a dim view of investment banking, especially after I explained him how the 2008 scam worked. He often wondered how borrowers could be responsible spenders with such easy access to money and no consequences. He was from the time when branch managers like him had to do risk analysis for every loan, match it with collateral, assess the ability of borrower to pay interest, etc. They would lose their job or even go to prison if they screwed up.

Yes, this may all sound very contrarian to you. But it is a valid opposing view. Having started a bootstrapped company this very year, finance is something I constantly think about.

Business-economics people dismiss socio-economics because they can't put a number on it. Socio-economics is subjective, not objective. But economics has to consider both. When business-economics becomes too dominant, the socio-economics becomes a ticking bomb waiting to explode. That is what led to American revolution, French Revolution, Cuban revolution, Iranian Revolution, etc.

[srini1785]

Case study on why stock market is a vacuum pit:

After 8,818% rally in 103 days, Ruchi Soya faces red flag; analysts want a Sebi probe

https://economictimes.indiatimes.com...w/76683745.cms

For those who want a quick recap :

1. Ruchi Soya filed for bankruptcy after it failed to repay loans to banks. It went into bank administration.
2. Baba Ramdev led patanjali takes over.
3. Shares of Ruchi soya which hit Lower circuit continuously in May 2020 have seen a 8900% increase since Ruchi Soya posted a profit of 32 crs this quarter,

If this is called value investing i would rather put my money on the horses.

[SmartCat]

Originally Posted by Samurai

Call me crazy, but I have this habit of looking at what is good for the world, even if it comes at an expense to me. I do that because I feel that if people around me thrive, I will thrive too. My view is similar when it comes to broader economics too.

Doesn't the Indian real estate market (and everything that goes with it, including speculation) bother you?

- Land in major cities are pricier than in developed countries
- All the ill-gotten wealth of politicans, criminals and businessmen mostly hides in real estate. We can even conclude that we have corruption (which primarily affects the poor) in India because of Indian real estate market. It offers an avenue for corrupt individuals to store their ill-gotten wealth.
- Lots of crimes/murders have a real-estate angle.
- Because of pricey real estate, majority of Indians don't own homes.
- A big chunk of monthly income of lowest sections of the society goes into paying rents. In Bangalore, my maid pays Rs. 4,000 per month for a small 2 room home.

[vrprabhu]

Originally Posted by Samurai

When business-economics becomes too dominant, the socio-economics becomes a ticking bomb waiting to explode. That is what led to American revolution, French Revolution, Cuban revolution, Iranian Revolution, etc.

Went through your post and empathise. I am sure I would also feel the way you do, if I were in your shoes. In fact, at times, I wonder how I can take my comfortable air-conditioned office as a matter of right, when I don't contribute anything to the people who keep it functional.

I also completely agree with your father's sentiment - when it comes to so called financial whiz's who aren't bothered at what cost they make money (so long as it not theirs). Events - actually disasters - like Lehman collapse or Barclays rogue trading or LIBOR fixing or Satyam scandal etc. - will continue to recur, as long as people are driven with the motive to make money at any cost.....

But, let us hope that things don't come to such a pass as stated by you, and better sense prevails. As such, there are other burdens on the bottom of the pyramid and there will be a cost to be paid for any revolution - usually by those at the bottom.

Originally Posted by SmartCat

Doesn't the Indian real estate market (and everything that goes with it, including speculation) bother you?

Quite true.


But, aren't large corporates and Governments are also culprits? In the name of development they destroy nature, fragile ecosystem and cause irreversible damage - all in the name of development and uplifting the economy, when the benefits seem to be disproportionately reaped by those at the top.

Similarly, it also bothers me that those who govern and administer appear to be far more well off than the (ordinary) tax payer, whose money they are dependent on - and are treated akin to 'Royalty/Nobility', when their avowed intention is to serve the masses....

[DigitalOne]

Originally Posted by V.Narayan

The brokers and investors never claim it reflects the economy. That claim is foisted on it by journalists and intellectuals.

That claim is also foisted by politicians who are facing elections in 2.5 months . Politicians world over have a vested interest in keeping stock market prices high; a lick of paint over a crumbling edifice.

If one recognizes this fact, and if one can identify the right time and the paint companies used, you can make money.

[Samurai]

Originally Posted by SmartCat

Doesn't the Indian real estate market (and everything that goes with it, including speculation) bother you?

It does, when did I say it doesn't bother me? I bought a flat in Bangalore last year to reside, it didn't feel good shelling out so much money emptying out all the savings.

Housing should not be an investment asset, even though it is one of the prominent investment instrument in most capitalist countries, including India. If this statement shocks many of you, and want to dive into this concept, read this book by Economist Dambisa Moyo. Housing mortgage stocks basically caused the 2008 crash.

Everyone needs to live in a house. When you live in the house, it doesn't generate income. So house should be a dead investment by definition. A dead investment should not be expensive, yet it is usually the most expensive asset any family would buy. See the contradiction here? Since everyone aspires to own a home eventually, also thinking of it as an investment, it is not easy to understand why this is a contradiction. But, let's try.

Let's say you buy a flat purely as business investment, and then rent it. That means the rent should be higher than total cost of purchase and debt servicing, what does that mean?

Say the house costs you ₹1 crore to acquire. You put ₹50L and the bank loan is ₹50L. At least ₹7L of that go towards stamp duty, cess, surcharge, registration, lawyer fee, bribes (duh!), which you can't get back or count towards asset value. So that house is really worth ₹93L on day one.

The finance cost of your 50L at 7% FD interest = 30K/month
The the EMI of 50L loan at 9% and 15 years tenure = 50K/month. (HDFC EMI calculator)
The cost of maintenance and property taxes = 5K/month

So the house has to generate ₹85K/month on average to remain cash positive. Renters may leave once in a while and house may remain empty for some times. Plus you need to generate income, at least 25% profit on such a high investment. That means you need to rent it around ₹125K/month to make any business sense.

However, what is the typical rent of such a house in Bangalore, just 30-35K/month. In other words, it is a bad business investment. Yet, 1000s of ordinary non-business people are buying a house thinking of it as an investment. Some times, more than 1-2 homes. They do this because of the appreciation of the houses or land prices, which has been consistently beating the inflation and covering finance costs.

Why are the home prices going up if it is a bad investment for the buyer? They are buying because the price will go up? The prices are going up because the people are buying it? A circular logic is at work here.

And who is funding the easy cash to purchase these homes at high prices? Not everyone has black money. The banks are lending home loans rather easily, because house is a good collateral since the prices keep appreciating. Home loan lenders are raking in, so their shares do well in the stock market, which means they can dole out even more loans, even bigger loans. Wait, we are back to stock market...

Families all over the world are pledging their future income (for 15-20 years) towards housing market thinking it will keep going up. Stock market investors in housing stocks can get out instantly if they see a bubble bursting, but the home owners are stuck with the homes they overpaid without a way out. This results in a massive wealth transfer from home owners to stock market investors. The vacuum cleaner effect I mentioned in an earlier post. You don't have to invest in the stock market to be a victim of the stock market.

[vrprabhu]

Originally Posted by Samurai

... Yet, 1000s of ordinary non-business people are buying a house thinking of it as an investment. Some times, more than 1-2 homes. They do this because of the appreciation of the houses or land prices, which has been consistently beating the inflation and covering finance costs

Yes. Absolutely. It started in Metros and is now moving into Tier II and III cities also.

You also need to add the wonderful tax incentives for the loan repayments in respect of the second home loan - people see this as a means to save the income tax outgo, without actually factoring the huge amount of interest payouts which won't add to the capital value of the asset.

But, hey, economic has to grow, right.

Housing boom= more consumption of steel, cement etc. + more labour requirement etc.

Nobody cares about the degradation of land, exploitation of rivers (by sand dredging - now that sand and brick have some scarce and expensive, the alternatives are in the form of M-sand and P-sand - by blasting of hills and converting the rock into sand).

As long as wheels of the economy keep turning and churning wealth, who are we to complain, right

[ashokrajagopal]

Warning: Economics garnished, long post ahead

Let me chip in with some stones from my glass house.
Suggestion to take a Martian point of view for the whole of this post if you can. Try to be as neutral and 3rd party as you can.



US Fed balance sheet at the beginning of the year : About 4 Trillion
US Fed balance sheet now: About 7 Trillion

a) Its not all printed from thin air, but most of it is. I can account all of these, but then that gets too technical.
b) What Fed calls assets is what it has loaned out, ie, what other people call loans in a broad sense.

To put this in perspective, if I am not wrong, the Great Recession in 08-09 made Fed increase its balance sheet by 1.4 trillions in those two years.
In 2020, year to date, the rough number is about 2.9 trillion.

There has been purchases of about 600 billion dollars worth of mortgage backed securities if I am not wrong.
To put it in perspective, the original MBS for 08-09 crash was worth about the same thing.

There has been purchase of fixed income ETFs, for about a hundred billion dollars. The person advising Fed about which ETFs to buy was none other than Larry Fink, CEO of Blackrock.
To put this into perspective, imagine the Indian money market crashing, and RBI inviting HDFC MF's CEO to advise on selecting securities to buy.
Blackrock CEO is also the consultant for corporate bond purchases which Fed announced as well.

For ETFs and Corporate bonds together, it has set aside 750 billions.
No, it did not need to buy as much; just the announcement was enough.
About 1.25 trillions worth of new corporate debt has been issued this year AFAIK.

To put this into perspective, picture this.

• Everybody knows Airlines is the one industry which is in doldrums now and for the foreseeable future.
• If the climate crisis was not enough, along came Covid.
• So, Boeing, which was already dogged by the last "new plane" fiasco was down in the dumps.
• In comes Fed's announcement of a possibility of buying corporate bonds.
• And then come's US Govt's intentions of a possible bailout.
• And somebody asks Trump if Govt will ask for ownership in return to a bailout. Of course, yes, says the Prez.
• You may call Boeing many things, but socialist they are not, and they refuse the bailout.
• Boeing issues bonds, and rake in a cool 25 billion dollars.

Now, can you connect that "Free market" dotted picture ? And see how the Fed+Govt put a glass floor below a falling asset ?

This is just one of the "Puts" that the Fed issued this year, guaranteeing a future bailout if all hell breaks loose.


This is very complicated stuff, and all details about these past months will only come out in 2-3 years after the dust settles.
So, all the pundits who explain in TV and websites about how the "market" is forward looking are at best bullshitting, and at worst clueless.
Call it what you want, there is no market anymore. The central banks are not just making the market, they are actively maintaining it.

So, what started it ?
Yes, Covid, but what was the trigger point ?
The sovereign bonds started misbehaving in March. Not just the yield curve inversion in Feb, which Fed backstopped, there was a moment in March 22-23 times when the UK Gilts and US treasuries started jumping up and down in terms of volatility -- its all very very low yields, about 0.2 or 0.1, but they started going up and about 6-7 times ( ie. 0.7, 0.9 etc) in a matter of hours. Hedge funds, wealth funds and all such big liquidity providers started scrambling for cash and would dump even US Treasuries for the spread ( diff in interest rates).
There was all kinds of funny activity happening in search of liquidity during those days until Central banks stepped in with the printer and more importantly words like "we will do whatever it takes".


In about 3 years from now, once the dust settles, we can see a lot of arguments for Austerity and "Free Market" and "rugged individualism" and "liberty" if history is anything to go by. Until then, lets just let the simulacra run its course.