Bubble babble - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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5 JUNE 2008

Everywhere I look, I see the word "bubble" - quickly followed by the word "burst" or "deflate".

So what exactly is a "bubble"?
Well, it used to be the sort of thing that one had in a hot tub bath when there was a lot of soap.
But now water is not always available 24 hours a day and it is sort of wasteful to have a "bath tub" bath. A quick shower will do.

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.
Here are some stocks that were very popular and were owned by many portfolio managers and mutual funds and then, in true bubble-like fashion, went "phut".

Yahoo! was quite the junglee of the technology bubble (circa 1998 to 2000).
The company still has a product that is widely used so while the bubble did deflate, the company has still managed to grow.


Source: Bloomberg

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.


Source: Bloomberg

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.

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Perception may also cause a "bubble".
Sometimes companies tend to do their business and the market gets all excited - and then depressed - over the perception of what the business is doing. Infosys is one such "bubble" which, as of now, is not likely to be one that will burst (it better not, my clients own it!). But it does go through these massive emotional bursts of fear and greed - not necessarily the typical characteristics of a bubble. In a bubble, there is only greed - and little reality to back it. The fear does not lead to the sell-off of the stock. The realisation that there was only "hava" causes the meltdown. The business is not a bad one - what investors were willing to pay for it was silly.


Source: Bloomberg

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.)


Source: Bloomberg

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.


Source: Bloomberg

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).


Source: Bloomberg

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.


Source: Bloomberg

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.
We cannot seem to define it but, suffice it to say, that if it looks like a bubble it probably is one - and if it smells like a bubble it definitely is one.

Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold Fund Quantum Liquid Fund
Why you should own it: An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 15% 5%

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Note: Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.


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1 Responses to "Bubble babble"

bhadra

Feb 1, 2010

I agree with Parekh--housing prices have reached its zenith--not within the reach of middle class who are the major consumers-high paid or stable jobs becoming scarce so also bank loans?except cinema actors and politicians who has money to buy a house in metros or towns?Even retired govt.servants can not aspire for a decent house.Raising the prices further will sound the death knell for the housing industry and also many banks whose NPAs will rise beyond recovery

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