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Everywhere I look, I see the word "bubble" - quickly followed by the word "burst" or "deflate".
So what exactly is a "bubble"?
And the price of oil and coal and electricity is also "bubbling" - that makes the hot tub bath an even more expensive experience.
And in everyday life, "bubbles" may still be the pet name that many north Indians prefer to an alternative like "tinkoo" or "pinkoo".
But, in financial jargon, "bubble" means something that is inflated and - like your bath soap bubble - eventually goes "phut".
Investing - avoiding the bubbles.
Yahoo! was quite the junglee of the technology bubble (circa 1998 to 2000).
For all its "bubbliness" Yahoo has grown sales by a very respectable 45% each year since the year 2001 and the stock is up some 5x in 6 years. Of course, if you were the unlucky enough to buy it in March 2000 at about USD 100 per share, well you are still sitting on a 75% loss, eight years later.
In India we had our share of TMT bubbles. For those old enough to remember (and young enough to recall) there was Himachal Futuristic - the darling of the stock market and a media favourite. Well, they ran into a rough patch. An investment in HFCL in March 2000 would still leave an investor deep in the red today.
The interesting thing about HFCL is that it is not a one-time bubbler, but has a pretty good track record of bubbling and then "phut-in".
The first bubble-burst event was in 1993/1994, with a repeat in 1999/2000, and then smaller little pops recently.
Perception may also cause a "bubble".
So even Zee was not a bubble, though, from the graph it sure looks like one. Investors got greedy, they overpaid - there was a real business. It just did not deserve the valuation it got. (We do own Zee now for some clients.)
But bubbles are not linked only to technology, telecom, and media. The recent boom in the housing market in USA and in the financial sector in general, resulted in an unnatural - or bubbly and frothy - environment in which forecasts were always rosy.
Take the case of Countrywide Financial - a company that gave loans to buy homes in USA. The loans were - as it turns out - given too aggressively and without much correct assessment of whether the borrower could service the debt taken to buy the home. The "bubble" in the US housing market helped the share price of Countrywide. But when that deflated, that familiar "phut" sound was heard all over again.
India will have its fair share of financial stocks that will emanate that "phut-ing" sound. Check out the graphs of a few and you will know what I mean.
Moving on, we all know that clean energy is a hot topic today and a hotter investment theme. Since getting hot water for the bubble bath is expensive and stirring the water for one week to create some heat energy for the bath is not a practical solution, more "practical" solutions for clean energy are being discovered. And more stocks are appearing from the woodwork. Take a look at NEPC (used to be NEPC Micon, and I did - unfortunately - have some client money in the company in the 1990’s).
From a peak of INR 180 in 1993 to Rs 1 in the year 2001. The NEPC stock is up some 15x since then, but….
And real estate. A hard asset with a rapid rise that has started a hard fall. But land generally cannot have a zero value unless one has borrowed and cannot afford to repay. Then the value could be zero.
We missed this upward jump for sure in all real estate stocks. Although we liked the asset class in general but could never get our hands around the lack of transparency in buying real estate, the zoning process, and the "bubbly" assumption that whatever is produced will be sold.
Well, we don’t quite know what bubbles really are.