Bull markets bequeath investors with arrogance; the inheritance of bear markets is humility. In order to derive learnings from the collapse we must all, Governments, corporate managements and investors, make bonfires of our vanities. Which are these vanities?
The vanity of largesse: Governments feel, incorrectly as it turns out, that displaying dollops of largesse using other people's money (opm), will get them votes. It does not. Only good performance, economic growth and jobs win them the goodwill of the people. Yet, come election time, Government largesse (a.k.a. bribes) in the form of free electricity, free sarees, free write offs will be the norm. Its wonderful to party with opm. But the cost is borne by the people, who suffer through new and illogical taxes such as fringe benefit tax or tax on withdrawal of one's own money. (Ironic, the Government taxes me for withdrawing my own post tax money because it has squandered the tax it had collected from me)
The vanity of grandeur: Governments make grand gestures, e.g. by exhorting industry to cut prices. Had they used the enormous tax resources prudently, to improve infrastructure, both physical and social, the resultant productive efficiencies would obviate the need for such exhortation. The global stock of financial assets is a multiple, perhaps 7 times, the global GDP. This severely limits the ability of Governments to stanch it unless they act in a coordinated manner with strict supervision. That's why, the G20 decided that raising import tariffs to protect domestic industries was not a workable idea; it had been tried by Smoot Hawley in 1930, which raised tariffs on some 20,000 items imported to the US. This only prolonged the depression, since other countries followed. Immediately on his return from G20, our PM raised import levy by 5% on iron and steel and 20% on soya oil.
The vanity of cleverness: In a raging bull market such as the one we had till January, even a mediocre dart player could become a successful investor. Almost anything he threw a dart at made him money. No longer. Even fund managers have had a poor performance record. No less than 60% of S&P 500 stocks have a P/E of less than 10, the first time in over 50 years this has happened. The investment success in the raging bull market was probably more to do with luck than with genius.
The vanity of size: Corporate management chased growth for a number of reasons. Management theorists propounded that unless the company was amongst the top three in size, they didn't count. Top management was also tempted to grow, often through expensive acquisitions, as is retrospectively clear about the Jaguar – Land Rover purchase by Tata Motors. Ford has, last week, had to sell its stake in Mazda to obtain funds for a failing business, and Mazda, which bought them, got a much better deal. By that token, Infosys has been patiently sensible in its acquisitions. Individual investors, too, who chased size of portfolio and of profits, through leveraging them, are worse hit. Homeowners lusted after larger houses, the EMIs on which are now killing them.
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The vanity of speed: In the raging bull markets everyone wants faster things. Faster cars. Faster computers. Faster....err, never mind. But think of it; why should one want a car that goes from 0 to 100 in 5 seconds, and pay more for that privilege? It presupposes that you are first at the traffic signal and can get your money's worth from the pleasure of zooming away first. It also presupposes that there would be no further traffic signals to socially level car owners. Would getting that extra zing in the laptop speed your thought processes or your typing speed?
The current crisis has hit all countries. At the G20 meet, the leading 11 countries, including India, are in decline in economic growth although India looks well placed, alongwith China. Strangely, it is the BRIC countries that have had the highest stockmarket decline in % terms. The situation in India is worsened by the impending general elections; this creates uncertainty. Infrastructure spending, which would have eased the crisis, would slow down instead of speed up, because no body would be willing to do what is necessary given the elections.
Argentina's Government, hit by higher oil prices and sharply falling commodity prices, and faced with a prospect of repayment of foreign debt, has impounded the $24b. of assets lying in pension accounts They had, in a previous crisis, allowed individuals to opt out of a Government pension scheme and invest through private managers, and over two thirds had. However, after this global crisis hit, many of the individuals shifted back to the publicly managed pension funds, as, indeed, several depositors are finding comfort in public sector banks in India.
It is shameful that the Government only provides insurance for Rs 1 lac in deposits and not more! Putting hard earned savings in a bank is not an act of greed, such as investing in equity with the knowledge it could fall, and hence cannot be equated to equity on the principle of paying the price for it. In contrast, the US has set up a Federal Deposit Insurance Corporation (FDIC) which is willing to insure deposits upto $ 1.4 trillion. Since about 70% of the banking industry is in Government control it is incumbent upon an honest Government to take measures to insure bank deposits of a far higher amount than the laughable Rs 1 lac.
Last week the BSE-Sensex fell 470 points to 8915 and the NSE-Nifty fell 116 to 2693. Global markets have fallen very sharply, including India which has fallen, top to bottom, 64% off its peak. There could be a bounce next week especially since US markets closed sharply up on Friday. The economic slowdown will continue, however, and, given the impending general elections, the Indian market cannot be expected to bottom out for the next few months. Time to study good stocks and buy them at a bargain price without chasing after them.
And yes, time to burn those vanities.