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TMT or TNT? - Views on News from Equitymaster
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  • Jan 7, 1999

    TMT or TNT?

    True to form and their desire to create a new focal point for nonsensical valuations, the equity analysts of the western breed crafted this new buzz-word, TMT - technology, media, and telecom. TMT was this magic phrase to depict the everlasting sunshine that would cover all investors smart enough to invest in tomorrow's future today. Well, with TMT stocks now battered and some having lost anywhere between 90% and 50% of their value in the past 2 months, TMT sounds more like TNT - the dynamite that blew up in most investor's portfolios.

    There are lessons to be learnt in every greed market, and this last one offers plenty of reminders of what those lessons are. Your greed - and what it can do to your returns - is one of the lessons. But in addition to the greed of you the investor, there is the greed of another market participant that needs to be considered: the greed of the financial intermediaries. The strong desire of many market intermediaries (such as broking firms) to profit from your greed helps cause these sharp boom and bust cycles as just seen by the TMT debacle. The broking firm, seeing huge profits from market madness, is potentially no longer looking after the interest of you, the greedy investor, but after their own self-interest.

    Equity analysts, introduced into the Indian environment less than 10 years ago but very active in the western world for decades, enjoy their power of prediction. Having forecasted the rise of a stock from say, Rs 100 to Rs 300, they are treated like gods and, keeping their desire to retain their god-like status, are happy to prod the share onwards and upwards and revise their price target to, say, Rs 450. And when the Rs. 450 price target is achieved they get nervous because their last updated prediction, they know, was more of a wild card. That surge in share price, not predicted by the equity analyst, was caused by you the investor who, caught in your greed, and having missed the buy signal at Rs 100 entered the stock at Rs 350. It was your buy orders that caused the stock to rise to Rs 450. The sales-person in the broking outfit, who may be the person who takes your order, now tells the equity analyst that since investors (you who missed the stock at Rs 100) are buying, the price is going to go up further. The sales person suggests that the equity analyst cannot now change his mind and put a "sell" recommendation on the stock as you the greedy investor would never believe him anyway. Also, bear markets are not much fun for the profit levels of broking companies whereas bull markets are good news. The equity analyst, the sales person repeats, will be wrong because everyone is queuing up to buy more shares even at Rs 450. People on the street are talking about the stock price rising to Rs 1,000. And think of all the broking commissions the company will get and the bonus for all concerned if it is another good year.

    This is where there is a potential divergence between what is good for you the investor and what is good for the broking firm. You the investor need to be reminded of the risks and the rewards of your decisions. The broking firm is more interested in its own current profit stream. The broking firm does not act out of the good of society and issue a warning that stock markets have become irrational. Instead, they probably churn out more research reports on marginal companies that are now branded as the greatest investment opportunity known to mankind. This is where Adam Smith's law of self-interest breaks down. The invisible hand is not out to help you but is actually an accomplice in the bust cycle.

    That is not to say that SEBI needs to ban brokers or haul them up for not buying space in the Times of India to warn you about the dangers of an overheated market. No, the job of being responsible lies with you the investor. It is for you to strike a balance between your desire for returns and the frenzy of a market madness. It is for you to work out who to listen to and what advice to accept and ignore. No one can banish greed. But, for those who care to learn a lesson and be reminded about the cost of greed, history has many examples. The global TMT valuation hype is just the latest. Next time pinch yourself a bit and ask yourself: what price am I willing to pay for this story? You will be surprised how a simple question can save you from the effects of a powerful explosion.



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