Benjamin Graham is the father of security analysis. He transformed the practice of financial analysis from trade to science. He wrote two master pieces namely Security Analysis and the Intelligent Investor. He has given some extremely good concepts on investing. Let us discover some of them.
1. Mr Market.
Mr. Market has a fictitious character created by Ben graham to explain market behaviour. The stock market should be viewed as an emotionally disturbed business partner. Graham advised investors to look at market fluctuations from the Mr. Market’ perspective. He stated that the investors needed to imagine that they were in a partnership with a highly accommodating fellow named Mr. Market. Mr Market had the peculiar nature of being over optimistic or being over pessimistic on any given day. On a day when he was over optimistic he would ask for any price to get your share and when he was over pessimistic he was most likely to dump his shares on you at any price that you demand. Another characteristic of Mr. Market was that he doesn’t mind being ignored. If you don’t accept his offer today, he will come again tomorrow with a new quote. Graham advised investors to take advantage of Mr. Market but also warned not to be influenced or take guidance from him.
Mr. Market shows up his face each day offering a price at which he will buy your share of the business or sell your share. No matter how wild his offer is or how often your reject it, Mr Market returns with a new offer the next day and each day thereafter. It’s up to you to consider or reject. Buffet says the moral of the story: Mr. Market is your servant not your guide.
2. Margin of Safety
Benjamin Graham gets the entire credit for introducing the concept of margin of safety. In all his investment he searched for the margin of safety that made an investment acceptable to him. He once remarked, “Confirmed with a challenge to distil the secret of sound investment into three words we venture with the motto “Margin of safety”.
3. Stocks are businesses.
Stock is not just a piece of paper for Graham. It is a part ownership of the business. Graham went to great lengths to educate investors about informed investing. He emphasized investors to look at investing as buying piece of business rather than merely holding a stock. He wrote “evidently stockholders have forgotten more than to look at balance sheets. They have forgotten also that they are owners of the business and not merely owns of quotation on the stock ticker. What stock holders need today is not to became balance sheet conscious alone, but more than that to become ownership conscious”. Value investors regard securities not as just speculative instruments but as fractional ownership in the underlying business.
4. Importance of dividend
Graham was fond of cash rich and debt free companies to invest. He was incensed by cash-rich corporations that did nothing but stash excess cash in their accounts. He believed that if corporations could justifiably utilise retained earnings then it was acceptable but if they were merely holding excess and unutilised cash in the bank, then it amounted to a loss of opportunities for stock holders. He stated that cash-rich corporations need to distribute their cash to shareholders, who then had the option of re-investing the dividends in the company or use it in any other way they feel better.
Tuesday, December 29, 2009
Wednesday, July 29, 2009
WHERE IS BRAND INDIA ?
Last week I happened to be in the Tommy Hilfiger show room and saw tommy Hilfiger T-Shirt for Rs 2600. Quality is good but very expensive . I think this premium is because of its brand name, positioning and marketing strategy.
Tommy Hilfiger is a US brand targeting high end brand conscious customers. For academic curiosity I started examining Tommy Hilfiger as a case study . I went to shopper stop and visited other Indian brand counters and compared these products with Tommy Hilfiger . Quality wise, both products are more or less same .But Tommy Hilfiger T –Shirt looks a bit good due to its colour combination. There is a startling difference in price. Tommy Hilfiger costs you Rs 2600 whereas Indian branded T-shirt costs you around Rs 800. The difference is Rs 1800. A case of brand premium.
I decided to go a bit deeper and visited Tirupur, Tamil Nadu where Tommy Hilfiger T-shirts are manufactured . The Tirupur textile manufacturing company that makes T-shirt for Tommy Hilfiger is getting Rs 250 to Rs 350 per T-Shirt.
The modus operandi of Tommy Hilfiger is; create a world class brand with modern design and then source low cost materials from counties like India, China, Bangla and sold the products across the globe with slight finishing touch up. The case in point here is ,MRP is Rs 2600 and cost price is Rs 300 and additional expenses may be Rs 700 including finishing touch up, logistics etc. Profit is 2600-1000= Rs 1600.
What a wonderful business ! Almost all multinational companies are doing more or less the same kind of business.
But the sad part is we, Indians, cannot boast a single such kind of international brand. We are not leaders ; we are just followers . Let us look at some interesting international consumer brands. Coca cola, Pepsi, Colgate , HP, Apple, Nokia, McDonold , KFC , Tommy Hilfiger , Intel, Sony, Toyota , Benz, Nike , Google etc. huge international consumer brands.
Just think about Indian brands ....none comes to my mind. To some extent we can be proud of Nano and IPL.
Let us consider Infosys, of course it is a wonderful and most valueable company. But so far Infosys could not create a product with international brand- its only branded product is FINACLE a banking and financial service software product. Just compare Infosys with Microsoft . More or less both these companies started their operations at the same time . After 20 years in the business Microsoft created a wonderful brand product called windows, a cash cow of Microsoft . Microsoft made $60 billion revenue with $ 22 billion profit in 2008 whereas Infosys made only $ 4 billion revenue and $ 1 billion profit. Microsoft achieved this by creating a software product windows. Infosys focused on services and lagging behind Microsoft . If USA entirely stops outsourcing, Infosys will have to shut the shop whereas Microsoft has a competitive durability.
Let us look at the cost analysis of apple’s 30 GB Ipod with a price of $ 224. It is manufactured in China and consists of 424 tiny parts. Out of these 424 parts, 300 parts cost one cent or less . the most expensive component is the display module, costs $ 20 . China assembles and tests all parts for just $ 3.70. Apple gets the largest share of $ 80 per Ipod . A company can make abnormal profits by creating international consumer brand.
This is the premium for the brand Apple. I am searching for an Apple in Indian business landscape, if you find please convey.
It is high time for us to think and form a national brand strategy. A joint effort between the government and the private sector is required to create Indian brands.
Tommy Hilfiger is a US brand targeting high end brand conscious customers. For academic curiosity I started examining Tommy Hilfiger as a case study . I went to shopper stop and visited other Indian brand counters and compared these products with Tommy Hilfiger . Quality wise, both products are more or less same .But Tommy Hilfiger T –Shirt looks a bit good due to its colour combination. There is a startling difference in price. Tommy Hilfiger costs you Rs 2600 whereas Indian branded T-shirt costs you around Rs 800. The difference is Rs 1800. A case of brand premium.
I decided to go a bit deeper and visited Tirupur, Tamil Nadu where Tommy Hilfiger T-shirts are manufactured . The Tirupur textile manufacturing company that makes T-shirt for Tommy Hilfiger is getting Rs 250 to Rs 350 per T-Shirt.
The modus operandi of Tommy Hilfiger is; create a world class brand with modern design and then source low cost materials from counties like India, China, Bangla and sold the products across the globe with slight finishing touch up. The case in point here is ,MRP is Rs 2600 and cost price is Rs 300 and additional expenses may be Rs 700 including finishing touch up, logistics etc. Profit is 2600-1000= Rs 1600.
What a wonderful business ! Almost all multinational companies are doing more or less the same kind of business.
But the sad part is we, Indians, cannot boast a single such kind of international brand. We are not leaders ; we are just followers . Let us look at some interesting international consumer brands. Coca cola, Pepsi, Colgate , HP, Apple, Nokia, McDonold , KFC , Tommy Hilfiger , Intel, Sony, Toyota , Benz, Nike , Google etc. huge international consumer brands.
Just think about Indian brands ....none comes to my mind. To some extent we can be proud of Nano and IPL.
Let us consider Infosys, of course it is a wonderful and most valueable company. But so far Infosys could not create a product with international brand- its only branded product is FINACLE a banking and financial service software product. Just compare Infosys with Microsoft . More or less both these companies started their operations at the same time . After 20 years in the business Microsoft created a wonderful brand product called windows, a cash cow of Microsoft . Microsoft made $60 billion revenue with $ 22 billion profit in 2008 whereas Infosys made only $ 4 billion revenue and $ 1 billion profit. Microsoft achieved this by creating a software product windows. Infosys focused on services and lagging behind Microsoft . If USA entirely stops outsourcing, Infosys will have to shut the shop whereas Microsoft has a competitive durability.
Let us look at the cost analysis of apple’s 30 GB Ipod with a price of $ 224. It is manufactured in China and consists of 424 tiny parts. Out of these 424 parts, 300 parts cost one cent or less . the most expensive component is the display module, costs $ 20 . China assembles and tests all parts for just $ 3.70. Apple gets the largest share of $ 80 per Ipod . A company can make abnormal profits by creating international consumer brand.
This is the premium for the brand Apple. I am searching for an Apple in Indian business landscape, if you find please convey.
It is high time for us to think and form a national brand strategy. A joint effort between the government and the private sector is required to create Indian brands.
Friday, June 12, 2009
SMALL IS BEAUTIFUL
Small Cap stocks ( having Mcap less than Rs 100 Cr ) are very exciting investments, because they can produce bigger gains in shorter timeframes than you would see with conventional stocks.Before you get all charged up on reading that we’re about to talk about the 10 stocks that are the best in India, wait.
How can we be talking of the ‘best’ stocks when we have seen the ‘worst’ all around us, for so many months now? You know for a fact that the BSE-Sensex is still down 27% since hitting its all time high in January 2008. But do you know that the index is still 259% up since its levels 10 years back? So just by staying invested in the markets, you would have multiplied your money 3.5 times over. And this is just about the broader index, which is made up of large cap stocks that anyways do not rise in multiples. After all, it’s difficult for companies with market capitalization of US$ 10 bn to double fast.
But what about a company that has a market capitalization of just around US$ 0.1 m , or at an exchange rate of 45 to the dollar, just about Rs 37 lac? It doesn’t take much to double or triple, right? Yes, it doesn’t. Or what would justify the fact that while the Sensex has returned 259% in the last 10 years, there are numerous stocks that have churned out returns of more than 10,000% over this period. Here are some of them.
10 best performing stocks over the past 10 years.
Company Name Stock price(June 1999) Stock price (June 2009) Gain %
Unitech Ltd. Rs. 0.3 Rs. 93 30900%
Kotak Bank Ltd. Rs. 3.1 Rs. 660 21200%
Matrix Lab Rs. 0.9 Rs. 209 23128%
Gujarat NRE Coke Rs. 0.2 Rs. 54 26975%
Mercator Lines Ltd. Rs. 0.4 Rs. 73 20206%
Praj Industries Ltd. Rs. 0.6 Rs.115 18225%
Anant Raj Inds. Ltd. Rs. 0.8 Rs.133 17009%
Aban Offshore Ltd. Rs. 6.0 Rs. 956 15833%
K S Oils Ltd. Rs. 0.5 Rs. 62 12220%
Era Infra Engg. Ltd. Rs. 1.01 Rs. 119 11682%
Seeing this table, you will know pretty rapidly that the best way to make money in the market is to invest for the long term. What this table doesn’t show is that all these stocks have been volatile like any other stock in the market, and you need to recognise that volatility is part of the ride. Now, when you commit to the long term, you quickly discover that the stocks that offer the best returns today were not really the well-known, widely owned names of those times. How many of you had heard of Matrix Labs or Praj then? Or for that matter how many really took Unitech seriously?
So, the trait that sets these stocks apart is that they were small companies with very small market capitalization. And although companies such as Unitech, Matrix Labs and Praj are much bigger in terms of size and market-cap today, tracked and owned by big institutional investors, there are quite a few small cap stocks waiting in the wings, doing all they can to become the next multi baggers.
So you now know for the fact that finding small stocks like the ones mentioned is a clear cut way to make tremendous wealth from the stock markets over the long term. You just need to invest in small companies that enjoy rising demand for their products, have great business models, firm financial foundations, and straightforward and visionary management teams.
So take this lesson from the market’s 10 best stocks, and put it to work in your portfolio by buying small cap stocks. Of course, you need to adhere to your risk profile (small caps are high risk stocks if your investment horizon is not long) before taking any such action.
K. Tushar Kanti Dayal
MPower Capital
Wednesday, May 13, 2009
JOHN BOGLE ON INVESTING
John C. Bogle …has the mind of an economist and the personality of a preacher.
Washington Post
One of the revolutionary investors in American financial history, John C. Bogle is an extra-ordinary human being. Founder and former chairman of The Vanguard Group is a savvy investor who helps millions of people to realize their financial dreams. I just completed his book “JOHN BOGLE ON INVESTING”. It’s really very interesting and insightful for investors who are serious about investments.
Fortune magazine clearly stated that, “Bogle is rattling the status quo among the mutual fund titans”. Yes, we should be thankful to him for he shows the world that mutual funds are not the all important in creating wealth instead they are wealth destroyers in the long run. Due to their short term pressures they wanted to show instant results and because of that they used to take short term investment dicisions which are clearly not in favour of investors. I am going to discuss some of the useful insights which will be helpful not only investors but also to become better human beings.
At Vanguard, the three main objectives of the business are:
1. Treating investors as part owners.
2. To operate on the lowest possible operating cost structure.
3. To create wealth in the long run.
It is surprising that in our present days where financial frauds and cheating are the order of the day, Bogle run his financial firm on honesty and succeeded like anything.
His personality is such that you cannot pass on unimpressed if you come across. His character is like a magnet which instantly attracts anybody nearing him.
William T. Allen while writing introduction to this book said that, “Virtue is a word that tends to embarrass us today. John Bogle’s life reflects such a deep commitment to the concept of duty, honor, candor, diligence, and service to others that the most complete summarization of the man is to say that he is a man of high virtue”. He further said that, “the value of life is measured by how one affects the lives of others, not by either celebrity or by balance sheet”. He further observed that, “the world is noticeably better place because of his efforts. The public was the principal beneficiary of his vision”. Absolutely stunning observation on a greatest role model of our times.
His investment philosophy is that the most effective means of building wealth is simply to emulate the annual returns provided by the financial markets, and reap the benefit of long-term compounding and minimizing the cost of investing.
His ideal investment program includes four elements:
1. Simplicity: Matching, not beating the markets; asset allocation that is strategic, not tactical.
2. Focus: Maximizing the productive economics of investing; minimizing the counterproductive emotions of investing.
3. Efficiency: Economical operations: minimization of frictional costs of fees and commissions and taxes.
4. Stewardship: Placing the interest of the clients first: unyielding emphasis on human beings and eternal values-integrity, honesty and candor.
He called the above program as “The majesty of simplicity in an empire of parsimony”. He said that ‘low costs, simply put, are better than high costs.’ He made investing simple and said that, ‘the one great secret of investing is that there is no secret.’ He further stated that, ‘reward is the first and most important dimension of investing. But don’t ignore risk, the second dimension of investing. But time moderates risk. The third dimension is cost. Time magnifies the impact of cost.’ He emphasized capital allocation in these words.
Own Stocks, the Course to Stay;
Hold Bonds, for They Will Pay;
Keep Cash Reserves for a Rainy Day.
He said that ‘there is a critical difference between designing a product that sells, and creating an investment that serves.’
The element of cost plays vital role in investment success. Bogle is highly cost conscious. He gives the reasons;
1. that companies having the smallest expense will have the ultimate advantage.
2. that companies having this advantage are the most desirous of correcting present abuses.
3. that companies which cannot long survive the present condition of affairs are determined to nullify every effort for reform.
It is clear from his observation that we must reduce expenses to thrive in the business. Simple investment ideas and basic human values are the foundation of his philosophy.
Washington Post
One of the revolutionary investors in American financial history, John C. Bogle is an extra-ordinary human being. Founder and former chairman of The Vanguard Group is a savvy investor who helps millions of people to realize their financial dreams. I just completed his book “JOHN BOGLE ON INVESTING”. It’s really very interesting and insightful for investors who are serious about investments.
Fortune magazine clearly stated that, “Bogle is rattling the status quo among the mutual fund titans”. Yes, we should be thankful to him for he shows the world that mutual funds are not the all important in creating wealth instead they are wealth destroyers in the long run. Due to their short term pressures they wanted to show instant results and because of that they used to take short term investment dicisions which are clearly not in favour of investors. I am going to discuss some of the useful insights which will be helpful not only investors but also to become better human beings.
At Vanguard, the three main objectives of the business are:
1. Treating investors as part owners.
2. To operate on the lowest possible operating cost structure.
3. To create wealth in the long run.
It is surprising that in our present days where financial frauds and cheating are the order of the day, Bogle run his financial firm on honesty and succeeded like anything.
His personality is such that you cannot pass on unimpressed if you come across. His character is like a magnet which instantly attracts anybody nearing him.
William T. Allen while writing introduction to this book said that, “Virtue is a word that tends to embarrass us today. John Bogle’s life reflects such a deep commitment to the concept of duty, honor, candor, diligence, and service to others that the most complete summarization of the man is to say that he is a man of high virtue”. He further said that, “the value of life is measured by how one affects the lives of others, not by either celebrity or by balance sheet”. He further observed that, “the world is noticeably better place because of his efforts. The public was the principal beneficiary of his vision”. Absolutely stunning observation on a greatest role model of our times.
His investment philosophy is that the most effective means of building wealth is simply to emulate the annual returns provided by the financial markets, and reap the benefit of long-term compounding and minimizing the cost of investing.
His ideal investment program includes four elements:
1. Simplicity: Matching, not beating the markets; asset allocation that is strategic, not tactical.
2. Focus: Maximizing the productive economics of investing; minimizing the counterproductive emotions of investing.
3. Efficiency: Economical operations: minimization of frictional costs of fees and commissions and taxes.
4. Stewardship: Placing the interest of the clients first: unyielding emphasis on human beings and eternal values-integrity, honesty and candor.
He called the above program as “The majesty of simplicity in an empire of parsimony”. He said that ‘low costs, simply put, are better than high costs.’ He made investing simple and said that, ‘the one great secret of investing is that there is no secret.’ He further stated that, ‘reward is the first and most important dimension of investing. But don’t ignore risk, the second dimension of investing. But time moderates risk. The third dimension is cost. Time magnifies the impact of cost.’ He emphasized capital allocation in these words.
Own Stocks, the Course to Stay;
Hold Bonds, for They Will Pay;
Keep Cash Reserves for a Rainy Day.
He said that ‘there is a critical difference between designing a product that sells, and creating an investment that serves.’
The element of cost plays vital role in investment success. Bogle is highly cost conscious. He gives the reasons;
1. that companies having the smallest expense will have the ultimate advantage.
2. that companies having this advantage are the most desirous of correcting present abuses.
3. that companies which cannot long survive the present condition of affairs are determined to nullify every effort for reform.
It is clear from his observation that we must reduce expenses to thrive in the business. Simple investment ideas and basic human values are the foundation of his philosophy.
Friday, April 24, 2009
THE FINANCIAL BUBBLES
There are no new forms of financial frauds; in the last hundred years there have only been small variations of a few classic designs.
John Kenneth Galbraith.
All people are most credulous when they are most happy.
Walter Bagehot.
“History repeats itself” is a well known saying and there are plenty of historical evidences to prove this. It’s exactly true in the stock markets throughout the world.‘Bubbles on water are not true’, a saying in Kannada language. It’s a universal truth and applies exactly to the stock market. We cannot say when they will burst. Just now, we have seen the Water Bubbles, the very next moment they will be no where. It’s a sheer illusion. It’s a fact that they are not permanent. The surprising thing is after some time again Bubbles will be formed and waiting to burst.These kinds of Bubbles often pictured in financial world. A financial bubble is caused by widespread mania and speculations followed by a brutal collapse in asset values. The difference is water bubbles are harmless but financial bubbles are very very dangerous. You will be wiped out from these financial bubbles. Without any discrimination, they will spoil related and unrelated persons.History repeats itself’ has lots of historical evidences. This applies exactly to the stock market. History always repeats itself in the financial world. Stock market fluctuations are like waves. They always fluctuate. It is because stock market is directly connected to the behaviour of investors. Investors are irrational human beings. Due to their irrational behaviour, the stock market also behaves irrationally.Why we should study these financial bubbles? What is the relevance of these manias? As an investor, you must study these financial bubbles and what were the reasons for such a foolish behaviour from the part of investors. It is pertinent to remind that “Those who cannot remember the past are condemned to repeat it”. We can learn some lessons from studying these bubbles so that we cannot make such kinds of mistakes in our investment process. Now let us discuss major financial bubbles of the world.
1. TULIP MANIA
The first and officially identified financial bubble in the world is Tulip Mania. It is quite interesting story of human folly. In 1559, Courad Guestner brought the first Tulip bulb flower from Turkey to Holland and Germany. Tulip bulb was a kind of beautiful flower. People of Holland and Germany instantly fell in love with the Tulip bulb flower. Soon Tulip bulbs became a status symbol for the wealthy. The reasons behind this are these flowers are beautiful and hard to get.Later everybody irrespective of their financial status started buying tulips with craze. And at this point of time, speculators enter into the stage and created trading activities to earn easy money. Small businessmen, professionals, housewives and formers everybody entered into trading tulips. Finally tulips were placed in the local stock exchange like stocks of the companies. Due to all these things prices of tulips sky rocketed to the dizzy heights. There was a severe competition among traders. Trading volume increased enormously thanks to speculative activities. By 1634, even middle class people craving for owning tulips. By 1635, this mania reached boom stage and prices moves to ridiculous heights.At the height of tulip mania in 1635, a single tulip bulb was sold for the following items;
1. four tons of wheat. 2. eight tons of rice. 3. one bed. 4. four oxen. 5. eight. 6. 12 sheep. 7. one suit of cloth. 8. two casks of wine. 9. four tons of beer. 10. two tons of butter. 11. 1000 pounds of cheese. 12. one silver drinking cup.
Is this surprising you! Yes this kind of mania surprises everybody. But this is the way crowd behaves. There were plenty of evidences in the human history to this kind of illusions. We read crowd’s behaviour in Shaksepeare’s dramas. That is exactly the reflection of reality. In today’s terms people of Holland bought single tulip bulb for $ 76000. What you can call it, madness of people !. People from all walks of life sold their homes and real estate at incredibly low prices in order to speculate in tulip bulbs. Everybody wants to make a quick fortune. The majority of buyers had no intention of even planting these bulbs.Rationally speaking, tulips had no practical value as such. In the dizzy height of this tulip mania all common sense and logic was thrown to the wind.Suddenly the journey of tulip took a ‘U’ turn. Some smart investors smell the over valuation and sold their position at peak prices. These are the informed speculators and made huge profit by selling their holding at the boom. Prices of tulip bulbs began to fall swiftly. Suddenly, the market began with a widespread panic when every body started realizing that tulips were not worth the prices they paid for. In a matter of 4 weeks, tulip prices crashed by over 90%. Fortune were lost like a water vapor. Wealthy people became paupers. Bankruptcies were everywhere.Investors who bought tulips at the peak were not in a position to honour their own contract with sellers because of market crash. Dutch Government nullified all the contracts purchased at the height of the mania. The Supreme Judges of Amsterdam declared all tulips speculations to be gambling, and refused to honour these contracts. As a result of this, payments were not enforced by any of Holland’s courts. This further fueled the market crash.This financial bubble spoiled the Dutch commerce for decades. The price of tulips at the height of the mania was $ 76000 (in today’s terms), 4 weeks later they were valued at less than one dollar. Just imagine magnitude of the crash, what was the fate of the investors bought tulips at the peak.Lessons; As an investor, you should not part of the crowd. You should think independently. At any cost, you should not buy stocks in times of boom. Contrarian approach to the investing is always better.
2. SOUTH SEA BUBBLE
The story of South Sea Bubble is also quite interesting and has some lessons for us. South Sea Bubble started in 1711 in England. After a war which left Britain in debt by 10 million pounds. Britain proposed a deal to a financial institution, the South Sea Company, where debt would be financed in return for 6% interest. The Government offered exclusive trading rights in the South Seas, The company smelt a good deal and instantly agreed because of proximity to wealthy South American colonies. Over the years, the company developed monopoly in the slave trade and trade the commodities such as gold and wool with British.The South Sea Company issued stocks to the public to finance its operations. Investors quickly noticed the monopoly position of the company and snatched shares up from the start. The company, seeing the success of the first issue of shares. Quickly issued even more. The stocks were accumulated by the investors with great appetite. Truly speaking, the management of t he company was inexperienced. All they knew was issuing additional shares and create hype in the market place. The company established lavish corporate office and the foolish investors were impressed by these gestures. This planted an image of success and wealth in the eyes of shareholders. It became extremely fashionable to own south sea company shares.The management team itself manipulated stock prices to create interest among investors. Speculation became rampant as the share price kept sky rocketing. There was a belief in the market that this company “could never fall”. Further the management developed sum ours that the South Sea Company had been granted full use of Latin American Ports, by Spain. But the truth was that Spain only allowed three ships per year. Investors expectations were too high.Directors of the company were involved in widespread corruption. In this boom, other companies made huge profits by issuing their IPO’s These new companies proclaimed everything from building floating mansions to distilling sunshine from vegetables. The new shares of these companies were snapped up by the speculative investors. Everybody became stock market experts.In 1718 Britain and Spain went to war again, stopping all chances for trade. Investors from other European countries started frantically scrambling for South Sea shares. Truly speaking the South Sea Company was not generating any profit from its operations. More emphasis was placed on making money from issuing more shares to investors than from actual commerce. It was at this point of time that management realized that the shares were incredibly over valued relative to the fundamentals of the company. They decided to sell their holdings while other investors were still unaware that the company was profitless.The news broke out that the management has sold its shares completely. There was a panic selling in the market in the next moment, but it was too late. Everybody was selling but no buyers. Not a single investor was ready to buy. South Sea Shares become worthless piece of papers. Fortune mere lost overnight stocks belongs to other companies were also fell to the ground across the market. Scientist Isaac Newton lost over 20,000 pounds of lies fortune and made a famous statement that, “I can calculate the motions of heavenly bodies, but not the madness of people”. Jonathan Swift also inspired to write “Gulliver’s Travel”. The British government some avoided a banking crisis as it was the financial powerhouse of the world. The government reformed financial sector and issuing of shares was barred until 1825. In spite of these efforts, the economy didn’t fully recover until next century.
3. THE MISSISSIPPI BUBBLE.
The Mississippi Bubble is similar to The South Sea Bubble. In 1720, at the same time as England’s South Sea Bubble, France experienced the financial crisis known as The Mississippi Bubble. This has a striking similarity to the South Sea Bubble.In 1715, France was bankrupt from war. Due to the war France defaulted on its debt as well as interest on the debt. The economy was also in a bad shape. At this circumference the king Louis XV turned to his trusty adbisor, the Duke of Orleans for advice. In turn, the Duke of Orleans turned to his friend John Law, a Scottish financier.John Law was born in 1671 to a gold smith who was also a money lender. John Law was well versed on the principles of banking. Unfortunately, Law involved in a duel, killing his opponent and convicted of murder. Law eventually managed to escape prison and Quickly left England. Law earned much of his income from speculation activities. John frequented destinations such as Amsterdam, Venice and Genoa. It was these financial centers that John Law renewed his fascination for high finance. In 1705, John Law advocated a monetary theory that argued against the eye of metallic money and favoured paper money would stimulate economic activities.When the Duke of Orleans sought his help, Law devised a strategy to stabilize the French economy. In 1716 John Law established the Bank general. This Bank general took deposits of gold and Sliver and issued paper money in return. Bank general gained equity through the conventional selling of shares as well as converting government debt. To John Law’s credit, the economy had begun to stabilize and this helped to increase his rapport and influence within the French government.In 1717, John Law acquired the ailing Mississippi company and merged it with Bank General. France had granted the Mississippi Company a trading monopoly with the French colonies known as “French Louisiana”. The trading monopoly carried a high value as speculation arose over the prospect of the beaver skin t rade and of finding precious metals, with Indian slaves to mine.The Mississippi company raised huge capital by selling shares to investors. The company expanded to monopolize as French Trade outside Europe. In 1719, the company got the right to mind new coinage. The company also got the right to collect all French indirect taxes and subsequently it got the right to collect direct taxes.The Company’s stock prices were sky rocketing. Shares started trading at 500 livres (French currency of the time) in January 1719. The public investors gained an insatiable desire for Mississippi company shares and price hit 10000 livres by December 1719. People belongs to all social classes became investors and many became millionaires just from t heir holidays of company shares. Interestingly, the French word millionaire originated as a result of the Mississippi bubble.The Mississippi company gained 80,500,000 livres in revenue from interest paid by the king on loans and profit from tobacco, the mint and trading further enhance investors’ confidence.The amount of back notes in calculation had increased 186% in one year, due to the rampant issuance of notes to fund share purchase. As a result hyperinflation ensued with the prices of goods doubling between July 1719 and December 1720. The majority of Bank General notes were not backed by precious metals and became worthless.A scandal struck in May 1720 when John Law decided that company stock prices were exorbitantly high and he started devaluing the shares. Additionally, Bank General notes were devalued by 50%. Intense protest resulted in compromise in which the bank notes’ value was restored but payment in precious metals was stopped. It was because bank notes’ were not backed by precious metals while issuing. Then the public was outraged against the company and the near worthless paper money.Under intense selling pressure and Law’s devaluation, shares had collapsed from 10,000 livres to 1000 livres by December 1720. At the same time John Law’s enemies confiscated two thirds of shares and took over the company. Share prices further deflated to 500 livres in 1721. Investors were financially devastated and many millionaires lost their entire fortunes.The collapse of the Mississippi company plunged France and Europe into a severe economic depression, laying the ground work for the upcoming French Revolution. John Law was considered as scam artist and was exiled from France. Law returned to his gambling roots and died in poverty. A fall from the grace.If we looked into purely, it in purely economic sense, it was a failure of monetary policy which caused excessive growth in money supply and inflation.
4. THE GREAT CRASH OF 1929.
The great crash of 1929 is an excellent lesson in economics. Wall Street crash subsequently spread widely throughout the world. And it clearly shows that capitalism is not a perfect system and it has its own drawbacks.First we should understand the back ground of this crash. It’s also a fact that every boom has the element of crash in its own womb and every crash has the element of boom in its own womb.1920’s were a time of great prosperity. After world war I, the “Roaring Twenties” was fueled by increased industrialization and new technologies such as ratio and automobile. Air flight was also becoming widespread. There was rapid economic progress in all sectors of the American economy.From 1921 to 1929 American stock exchange ‘Wall street’ rose towards sky. Wall street index ‘Dow Jones’ moved from 60 [pomts tp 400 points investors were greedily invests in the wall street. Some of them sold their homes and other valuables and invest the proceedings into stocks. They all believed there is no end for this boom. Investors snapped up every stocks with great appetite. Millionaires were created instantly. Soon Wall street became America’s favourite pastime spot as investors jockeyed to make quick bucks. Some retired persons invested their life time savings into stocks. Totally stock market was boiling.Then suddenly can tsunami into stock market in the form of fed rate. By 1929, the fed raised interest rates several times to cool the overheated stock market. On 24th of October 1929, stock market crashed due to panic selling by all investors. By November of 1929, the Dow Jones average sank from 400 to 145 points. In three days, the New York stock exchange crazed over $ 5 billion worth of share value. By the end of 1929, 16 billion dollars had been shaved market capitalization.BLACK MONDAYOctober 28, 1929 was recorded as black Monday in the financial history. This black Monday was the second terrible day in the history of wall street. (58 years later another market crash happened on 19th October 1987. It was also referred as black Monday). Black Monday was a terrible day in the market. Market crashed over 13% on this day. Investors were bankrupt. Around 16.4 million stocks were exchanged in the hands of confused investors and the ticker tape fell seriously behind two hours forcing people to sell their holdings blindlyTo make matter worse, banks had invested their deposits in the stock market at the time of boom. With the crash of stock market, banks’ investment in stocks was wiped out. The banks lost their depositors money. Depositors rushed to banks to withdrawn their deposits. But banks were not in a position to give money. Banks and brokerage houses became insolvent. The financial system was in stumbles. Many investors and speculators became bankrupt and commit suicide by jumping out of buildings. More or less 140 billion dollars of depositors money disappeared and 10000 banks were bankrupt.The market downfall continued from 1929 to 1932 and wall street index fell from peak 400 points in 1929 to 41.32 points in 1932. A terrible fall of 91%. The situation was really aggravated by serious policy mistakes of the Federal Reserve Board i.e., rise in Fed rate which led to a fall in money supply and depressed the economy. Again Dow Jones reached 400 points in 1955, after 26 years.The great depression of 1929-33 was the most severe economic crises of modern times. Millions of people lost their jobs and many of them bankrupted and unemployment increased everywhere. Due to this depression, America’s manufacturing output had fallen to 54% of its 1929 level, and unemployment had risen to between 30% of the work force. Roger Bobson wrote that “Factories will shut down…. Men will be thrown out of work ….. the vicious circle will get in full swing and the result will be a serious business depression”.The great depression began in the United States but quickly spread worldwide. Only communist countries escaped from this financial debacle.Lesson: As investors, we can learn some important and basic lessons from this 1929 market crash. Of course, trees grow bur never grown to sky. They have their own limitation. If they try to grow beyond their limitation, definitely t hey will be break down. Similarly stock market cannot grow to the sky. Rise and fall are the natural things in stock market. There need not be over optimism about boom and at the same time there need not be over pessimism about depression. And don’t invest your hard earned money at the time of boom.
5. THE STOCK MARKET CRASH OF 1987.
The stock market crash of 1987 in America was the largest one day stock market crash in the history finance. It also has some lessons. The wall street index Dow Jones lost 22.6% of its value or $ 500 billion dollars on October 19th 1987. That day was called as black Monday. It was a terrible day in the financial history of the world.We need to study causes to understand the crash. Prior to this crash the stock market had an extremely powerful bull market that started in 1982. This bull market had been fueled by hostile takeovers, leveraged buyouts and merger mania. The philosophy of the time was that companies would grow exponentially simply by constantly purchasing other companies. To fund these kinds of frenzy acquisitions, companies raised capital by selling junk bonds to the public. Every other companies started issuing IPO’s. Microcomputers’ were also a top growth industry. People started to view the personal computer as a revolutionary machines that will change the way of life and creates wonderful profit for companies. Everybody become investors. Investors aggressively buying every shares available in the market. This euphoria made people believe that the market would always go up.In early 1987, SEC (Security Exchange Commission – American Regulator) conducted numerous investigations of illegal insider trading inflationary pressures also built up in the economy. The Fed rapidly raised short term interest rates to control inflation. Unfortunately this step had a negative impact on stock prices. The panic stricken investors trying to sell their shares. Due to this mad rush, the stock prices across the market crashed like a aeroplane. Common investors rushed to market to sell their stocks simultaneously. The market couldn’t handle so many orders at once and most people couldn’t sell because there were not any buyers.In a single day Dow crashed by 22.6% and $ 500 dollars of investors money evaporated in the madness of the crowd. Investors couldn’t contact their brokers as brokers were engaged by thousands of other panic stricken investors. Many people lost their fortune instantly. Some unstable investors, who had lost fortune, went to their broker’s office and started shooting. Several brokers were killed despise they had nothing to do with the market crash. The majority of the investors simply selling their shares because others are selling. There was no reason and logic for selling. This irrational mentality caused the extreme market crash.Suddenly, the fed intervened by lowering short term interest rate to increase money supply. Fed’s intention was to prevent further depression and a banking crisis. Remarkably, the market recovered quickly from the worst one day stock market crash. Unlike the 1929’s market crash, the market quickly started on a bull run companies started buying back their own undervalued stocks. This crash helped market to reform further by introducing circuit breakers system which electronically stops stocks from trading if they plummet too quickly.Once again market witnessed the remarkable similarity between all of the market crashes.
6. THE NICKKEI BUBBLE.
Study of Japan and its economic progress is quite interesting. Japan’s history is the best example of human creativity. The Nikkei Bubble has some lessons for investors.After second world war, Japan was devastated. It’s major cities were destroyed by bombing and its economy was virtually non existent. Due to much effort and hard work, the Japanese economy slowly began to recover. In this process of recovery, American helped Japan in many ways. U.S. Provides capital and military assistance.Devastated factories were quickly built and excess labour force moved from agriculture sector to industry. Japanese were, basically, hard workers and very loyal to their employers. Savings rate was very high and it leads to massive investment in the industrial segment .Many companies merged together to become large industrial and banking conglomerates called zaibatsu. The zaibatsu gained their competitive edge by copying and improving western products and selling them for cheaper prices. These qualitative and cheaper products won western customers and started to compete U.S. companies. American market helped these Zaibatsu to had tremendous economic growth and turned into even larger business alliances called Keiretsu. These Keiretsu are based on the philosophy of mutual cooperation where all facts of business and government worked hand in hand. Due to these developments, Japanese stock market Nikkei wored like anything . as the market wored there Keiretsu purchased each other’s share.Due to 1970’s oil crisis and inflation, American car industry was suffering. Most of the American cars had V8 engines which consumed lot of petrol. Japanese car makers, such as Honda, quickly smelt American needs and produced small fuel efficient cars. Moreover these cars cost a fraction of the price of American cars. Even in the 1960’s, Japanese cars were being assembled with robots, making human error almost non existent. American automobile industry declined and Japan gained the market share. This boom helped Nickkei to further soaring.By the 1980’s, Japan started manufacturing electronic goods. Japanese Keiretsu corporations such as Hitachi and Sony, copied and produced quality electronics hardware needed by the growing computer industry. Japan trounced American companies thanks to its ability to compete on prices, aided by robots and cheep labour. Except microprocessors, Japan dominated the market for all chips, circuit boards and other components. In the 1980’s, it was widely believed that Sony and Hitachi would eventually acquire Intel and IBM.Japan entered into developed economy status. Throughout the world, every country viewed Japan as a model society. Japanese had highest of life and longest life expectancy. In addition, Japan was the world’s largest creditor and had the highest GDP per capital. As the economy booming and the stock market soaring, Japanese corporations built many sky scrapers in Tokyo and Osaka. This caused real estate prices climbed to the sky. Between 1986 and 1982, the price of commercial land in greater Tokyo doubled. Peal estate. Prices soared so much that Tokyo alone was worth more than the United States. Between 1955 and 1990, land prices in Japan appreciated by 70 times and stock increased 100 times over. An average home near Tokyo, cost above $ 2 million in 1989. Investors worldwide frenzily buying Japanese shares.All these factors together influenced Nickkei to move towards sky. The Nickkei moved from 7000 in 1965 to 40000 in 1990.Eventually all things, good or bad, come to an end. Unfortunately, the longest bull phase of Nickkei came to a sad end by March 1990. To cool the inflated and boiling economy, the Japanese Government raised rates. The next month the Nickkei crashed by over 30000 points. Nickkei crashed from 40000 to 10000 points. Japanese housing prices plummeted 14 straight years. The Nickkei further sank until its low of 8000 in 2003. Even today the Japanese economy is in doldrums
John Kenneth Galbraith.
All people are most credulous when they are most happy.
Walter Bagehot.
“History repeats itself” is a well known saying and there are plenty of historical evidences to prove this. It’s exactly true in the stock markets throughout the world.‘Bubbles on water are not true’, a saying in Kannada language. It’s a universal truth and applies exactly to the stock market. We cannot say when they will burst. Just now, we have seen the Water Bubbles, the very next moment they will be no where. It’s a sheer illusion. It’s a fact that they are not permanent. The surprising thing is after some time again Bubbles will be formed and waiting to burst.These kinds of Bubbles often pictured in financial world. A financial bubble is caused by widespread mania and speculations followed by a brutal collapse in asset values. The difference is water bubbles are harmless but financial bubbles are very very dangerous. You will be wiped out from these financial bubbles. Without any discrimination, they will spoil related and unrelated persons.History repeats itself’ has lots of historical evidences. This applies exactly to the stock market. History always repeats itself in the financial world. Stock market fluctuations are like waves. They always fluctuate. It is because stock market is directly connected to the behaviour of investors. Investors are irrational human beings. Due to their irrational behaviour, the stock market also behaves irrationally.Why we should study these financial bubbles? What is the relevance of these manias? As an investor, you must study these financial bubbles and what were the reasons for such a foolish behaviour from the part of investors. It is pertinent to remind that “Those who cannot remember the past are condemned to repeat it”. We can learn some lessons from studying these bubbles so that we cannot make such kinds of mistakes in our investment process. Now let us discuss major financial bubbles of the world.
1. TULIP MANIA
The first and officially identified financial bubble in the world is Tulip Mania. It is quite interesting story of human folly. In 1559, Courad Guestner brought the first Tulip bulb flower from Turkey to Holland and Germany. Tulip bulb was a kind of beautiful flower. People of Holland and Germany instantly fell in love with the Tulip bulb flower. Soon Tulip bulbs became a status symbol for the wealthy. The reasons behind this are these flowers are beautiful and hard to get.Later everybody irrespective of their financial status started buying tulips with craze. And at this point of time, speculators enter into the stage and created trading activities to earn easy money. Small businessmen, professionals, housewives and formers everybody entered into trading tulips. Finally tulips were placed in the local stock exchange like stocks of the companies. Due to all these things prices of tulips sky rocketed to the dizzy heights. There was a severe competition among traders. Trading volume increased enormously thanks to speculative activities. By 1634, even middle class people craving for owning tulips. By 1635, this mania reached boom stage and prices moves to ridiculous heights.At the height of tulip mania in 1635, a single tulip bulb was sold for the following items;
1. four tons of wheat. 2. eight tons of rice. 3. one bed. 4. four oxen. 5. eight. 6. 12 sheep. 7. one suit of cloth. 8. two casks of wine. 9. four tons of beer. 10. two tons of butter. 11. 1000 pounds of cheese. 12. one silver drinking cup.
Is this surprising you! Yes this kind of mania surprises everybody. But this is the way crowd behaves. There were plenty of evidences in the human history to this kind of illusions. We read crowd’s behaviour in Shaksepeare’s dramas. That is exactly the reflection of reality. In today’s terms people of Holland bought single tulip bulb for $ 76000. What you can call it, madness of people !. People from all walks of life sold their homes and real estate at incredibly low prices in order to speculate in tulip bulbs. Everybody wants to make a quick fortune. The majority of buyers had no intention of even planting these bulbs.Rationally speaking, tulips had no practical value as such. In the dizzy height of this tulip mania all common sense and logic was thrown to the wind.Suddenly the journey of tulip took a ‘U’ turn. Some smart investors smell the over valuation and sold their position at peak prices. These are the informed speculators and made huge profit by selling their holding at the boom. Prices of tulip bulbs began to fall swiftly. Suddenly, the market began with a widespread panic when every body started realizing that tulips were not worth the prices they paid for. In a matter of 4 weeks, tulip prices crashed by over 90%. Fortune were lost like a water vapor. Wealthy people became paupers. Bankruptcies were everywhere.Investors who bought tulips at the peak were not in a position to honour their own contract with sellers because of market crash. Dutch Government nullified all the contracts purchased at the height of the mania. The Supreme Judges of Amsterdam declared all tulips speculations to be gambling, and refused to honour these contracts. As a result of this, payments were not enforced by any of Holland’s courts. This further fueled the market crash.This financial bubble spoiled the Dutch commerce for decades. The price of tulips at the height of the mania was $ 76000 (in today’s terms), 4 weeks later they were valued at less than one dollar. Just imagine magnitude of the crash, what was the fate of the investors bought tulips at the peak.Lessons; As an investor, you should not part of the crowd. You should think independently. At any cost, you should not buy stocks in times of boom. Contrarian approach to the investing is always better.
2. SOUTH SEA BUBBLE
The story of South Sea Bubble is also quite interesting and has some lessons for us. South Sea Bubble started in 1711 in England. After a war which left Britain in debt by 10 million pounds. Britain proposed a deal to a financial institution, the South Sea Company, where debt would be financed in return for 6% interest. The Government offered exclusive trading rights in the South Seas, The company smelt a good deal and instantly agreed because of proximity to wealthy South American colonies. Over the years, the company developed monopoly in the slave trade and trade the commodities such as gold and wool with British.The South Sea Company issued stocks to the public to finance its operations. Investors quickly noticed the monopoly position of the company and snatched shares up from the start. The company, seeing the success of the first issue of shares. Quickly issued even more. The stocks were accumulated by the investors with great appetite. Truly speaking, the management of t he company was inexperienced. All they knew was issuing additional shares and create hype in the market place. The company established lavish corporate office and the foolish investors were impressed by these gestures. This planted an image of success and wealth in the eyes of shareholders. It became extremely fashionable to own south sea company shares.The management team itself manipulated stock prices to create interest among investors. Speculation became rampant as the share price kept sky rocketing. There was a belief in the market that this company “could never fall”. Further the management developed sum ours that the South Sea Company had been granted full use of Latin American Ports, by Spain. But the truth was that Spain only allowed three ships per year. Investors expectations were too high.Directors of the company were involved in widespread corruption. In this boom, other companies made huge profits by issuing their IPO’s These new companies proclaimed everything from building floating mansions to distilling sunshine from vegetables. The new shares of these companies were snapped up by the speculative investors. Everybody became stock market experts.In 1718 Britain and Spain went to war again, stopping all chances for trade. Investors from other European countries started frantically scrambling for South Sea shares. Truly speaking the South Sea Company was not generating any profit from its operations. More emphasis was placed on making money from issuing more shares to investors than from actual commerce. It was at this point of time that management realized that the shares were incredibly over valued relative to the fundamentals of the company. They decided to sell their holdings while other investors were still unaware that the company was profitless.The news broke out that the management has sold its shares completely. There was a panic selling in the market in the next moment, but it was too late. Everybody was selling but no buyers. Not a single investor was ready to buy. South Sea Shares become worthless piece of papers. Fortune mere lost overnight stocks belongs to other companies were also fell to the ground across the market. Scientist Isaac Newton lost over 20,000 pounds of lies fortune and made a famous statement that, “I can calculate the motions of heavenly bodies, but not the madness of people”. Jonathan Swift also inspired to write “Gulliver’s Travel”. The British government some avoided a banking crisis as it was the financial powerhouse of the world. The government reformed financial sector and issuing of shares was barred until 1825. In spite of these efforts, the economy didn’t fully recover until next century.
3. THE MISSISSIPPI BUBBLE.
The Mississippi Bubble is similar to The South Sea Bubble. In 1720, at the same time as England’s South Sea Bubble, France experienced the financial crisis known as The Mississippi Bubble. This has a striking similarity to the South Sea Bubble.In 1715, France was bankrupt from war. Due to the war France defaulted on its debt as well as interest on the debt. The economy was also in a bad shape. At this circumference the king Louis XV turned to his trusty adbisor, the Duke of Orleans for advice. In turn, the Duke of Orleans turned to his friend John Law, a Scottish financier.John Law was born in 1671 to a gold smith who was also a money lender. John Law was well versed on the principles of banking. Unfortunately, Law involved in a duel, killing his opponent and convicted of murder. Law eventually managed to escape prison and Quickly left England. Law earned much of his income from speculation activities. John frequented destinations such as Amsterdam, Venice and Genoa. It was these financial centers that John Law renewed his fascination for high finance. In 1705, John Law advocated a monetary theory that argued against the eye of metallic money and favoured paper money would stimulate economic activities.When the Duke of Orleans sought his help, Law devised a strategy to stabilize the French economy. In 1716 John Law established the Bank general. This Bank general took deposits of gold and Sliver and issued paper money in return. Bank general gained equity through the conventional selling of shares as well as converting government debt. To John Law’s credit, the economy had begun to stabilize and this helped to increase his rapport and influence within the French government.In 1717, John Law acquired the ailing Mississippi company and merged it with Bank General. France had granted the Mississippi Company a trading monopoly with the French colonies known as “French Louisiana”. The trading monopoly carried a high value as speculation arose over the prospect of the beaver skin t rade and of finding precious metals, with Indian slaves to mine.The Mississippi company raised huge capital by selling shares to investors. The company expanded to monopolize as French Trade outside Europe. In 1719, the company got the right to mind new coinage. The company also got the right to collect all French indirect taxes and subsequently it got the right to collect direct taxes.The Company’s stock prices were sky rocketing. Shares started trading at 500 livres (French currency of the time) in January 1719. The public investors gained an insatiable desire for Mississippi company shares and price hit 10000 livres by December 1719. People belongs to all social classes became investors and many became millionaires just from t heir holidays of company shares. Interestingly, the French word millionaire originated as a result of the Mississippi bubble.The Mississippi company gained 80,500,000 livres in revenue from interest paid by the king on loans and profit from tobacco, the mint and trading further enhance investors’ confidence.The amount of back notes in calculation had increased 186% in one year, due to the rampant issuance of notes to fund share purchase. As a result hyperinflation ensued with the prices of goods doubling between July 1719 and December 1720. The majority of Bank General notes were not backed by precious metals and became worthless.A scandal struck in May 1720 when John Law decided that company stock prices were exorbitantly high and he started devaluing the shares. Additionally, Bank General notes were devalued by 50%. Intense protest resulted in compromise in which the bank notes’ value was restored but payment in precious metals was stopped. It was because bank notes’ were not backed by precious metals while issuing. Then the public was outraged against the company and the near worthless paper money.Under intense selling pressure and Law’s devaluation, shares had collapsed from 10,000 livres to 1000 livres by December 1720. At the same time John Law’s enemies confiscated two thirds of shares and took over the company. Share prices further deflated to 500 livres in 1721. Investors were financially devastated and many millionaires lost their entire fortunes.The collapse of the Mississippi company plunged France and Europe into a severe economic depression, laying the ground work for the upcoming French Revolution. John Law was considered as scam artist and was exiled from France. Law returned to his gambling roots and died in poverty. A fall from the grace.If we looked into purely, it in purely economic sense, it was a failure of monetary policy which caused excessive growth in money supply and inflation.
4. THE GREAT CRASH OF 1929.
The great crash of 1929 is an excellent lesson in economics. Wall Street crash subsequently spread widely throughout the world. And it clearly shows that capitalism is not a perfect system and it has its own drawbacks.First we should understand the back ground of this crash. It’s also a fact that every boom has the element of crash in its own womb and every crash has the element of boom in its own womb.1920’s were a time of great prosperity. After world war I, the “Roaring Twenties” was fueled by increased industrialization and new technologies such as ratio and automobile. Air flight was also becoming widespread. There was rapid economic progress in all sectors of the American economy.From 1921 to 1929 American stock exchange ‘Wall street’ rose towards sky. Wall street index ‘Dow Jones’ moved from 60 [pomts tp 400 points investors were greedily invests in the wall street. Some of them sold their homes and other valuables and invest the proceedings into stocks. They all believed there is no end for this boom. Investors snapped up every stocks with great appetite. Millionaires were created instantly. Soon Wall street became America’s favourite pastime spot as investors jockeyed to make quick bucks. Some retired persons invested their life time savings into stocks. Totally stock market was boiling.Then suddenly can tsunami into stock market in the form of fed rate. By 1929, the fed raised interest rates several times to cool the overheated stock market. On 24th of October 1929, stock market crashed due to panic selling by all investors. By November of 1929, the Dow Jones average sank from 400 to 145 points. In three days, the New York stock exchange crazed over $ 5 billion worth of share value. By the end of 1929, 16 billion dollars had been shaved market capitalization.BLACK MONDAYOctober 28, 1929 was recorded as black Monday in the financial history. This black Monday was the second terrible day in the history of wall street. (58 years later another market crash happened on 19th October 1987. It was also referred as black Monday). Black Monday was a terrible day in the market. Market crashed over 13% on this day. Investors were bankrupt. Around 16.4 million stocks were exchanged in the hands of confused investors and the ticker tape fell seriously behind two hours forcing people to sell their holdings blindlyTo make matter worse, banks had invested their deposits in the stock market at the time of boom. With the crash of stock market, banks’ investment in stocks was wiped out. The banks lost their depositors money. Depositors rushed to banks to withdrawn their deposits. But banks were not in a position to give money. Banks and brokerage houses became insolvent. The financial system was in stumbles. Many investors and speculators became bankrupt and commit suicide by jumping out of buildings. More or less 140 billion dollars of depositors money disappeared and 10000 banks were bankrupt.The market downfall continued from 1929 to 1932 and wall street index fell from peak 400 points in 1929 to 41.32 points in 1932. A terrible fall of 91%. The situation was really aggravated by serious policy mistakes of the Federal Reserve Board i.e., rise in Fed rate which led to a fall in money supply and depressed the economy. Again Dow Jones reached 400 points in 1955, after 26 years.The great depression of 1929-33 was the most severe economic crises of modern times. Millions of people lost their jobs and many of them bankrupted and unemployment increased everywhere. Due to this depression, America’s manufacturing output had fallen to 54% of its 1929 level, and unemployment had risen to between 30% of the work force. Roger Bobson wrote that “Factories will shut down…. Men will be thrown out of work ….. the vicious circle will get in full swing and the result will be a serious business depression”.The great depression began in the United States but quickly spread worldwide. Only communist countries escaped from this financial debacle.Lesson: As investors, we can learn some important and basic lessons from this 1929 market crash. Of course, trees grow bur never grown to sky. They have their own limitation. If they try to grow beyond their limitation, definitely t hey will be break down. Similarly stock market cannot grow to the sky. Rise and fall are the natural things in stock market. There need not be over optimism about boom and at the same time there need not be over pessimism about depression. And don’t invest your hard earned money at the time of boom.
5. THE STOCK MARKET CRASH OF 1987.
The stock market crash of 1987 in America was the largest one day stock market crash in the history finance. It also has some lessons. The wall street index Dow Jones lost 22.6% of its value or $ 500 billion dollars on October 19th 1987. That day was called as black Monday. It was a terrible day in the financial history of the world.We need to study causes to understand the crash. Prior to this crash the stock market had an extremely powerful bull market that started in 1982. This bull market had been fueled by hostile takeovers, leveraged buyouts and merger mania. The philosophy of the time was that companies would grow exponentially simply by constantly purchasing other companies. To fund these kinds of frenzy acquisitions, companies raised capital by selling junk bonds to the public. Every other companies started issuing IPO’s. Microcomputers’ were also a top growth industry. People started to view the personal computer as a revolutionary machines that will change the way of life and creates wonderful profit for companies. Everybody become investors. Investors aggressively buying every shares available in the market. This euphoria made people believe that the market would always go up.In early 1987, SEC (Security Exchange Commission – American Regulator) conducted numerous investigations of illegal insider trading inflationary pressures also built up in the economy. The Fed rapidly raised short term interest rates to control inflation. Unfortunately this step had a negative impact on stock prices. The panic stricken investors trying to sell their shares. Due to this mad rush, the stock prices across the market crashed like a aeroplane. Common investors rushed to market to sell their stocks simultaneously. The market couldn’t handle so many orders at once and most people couldn’t sell because there were not any buyers.In a single day Dow crashed by 22.6% and $ 500 dollars of investors money evaporated in the madness of the crowd. Investors couldn’t contact their brokers as brokers were engaged by thousands of other panic stricken investors. Many people lost their fortune instantly. Some unstable investors, who had lost fortune, went to their broker’s office and started shooting. Several brokers were killed despise they had nothing to do with the market crash. The majority of the investors simply selling their shares because others are selling. There was no reason and logic for selling. This irrational mentality caused the extreme market crash.Suddenly, the fed intervened by lowering short term interest rate to increase money supply. Fed’s intention was to prevent further depression and a banking crisis. Remarkably, the market recovered quickly from the worst one day stock market crash. Unlike the 1929’s market crash, the market quickly started on a bull run companies started buying back their own undervalued stocks. This crash helped market to reform further by introducing circuit breakers system which electronically stops stocks from trading if they plummet too quickly.Once again market witnessed the remarkable similarity between all of the market crashes.
6. THE NICKKEI BUBBLE.
Study of Japan and its economic progress is quite interesting. Japan’s history is the best example of human creativity. The Nikkei Bubble has some lessons for investors.After second world war, Japan was devastated. It’s major cities were destroyed by bombing and its economy was virtually non existent. Due to much effort and hard work, the Japanese economy slowly began to recover. In this process of recovery, American helped Japan in many ways. U.S. Provides capital and military assistance.Devastated factories were quickly built and excess labour force moved from agriculture sector to industry. Japanese were, basically, hard workers and very loyal to their employers. Savings rate was very high and it leads to massive investment in the industrial segment .Many companies merged together to become large industrial and banking conglomerates called zaibatsu. The zaibatsu gained their competitive edge by copying and improving western products and selling them for cheaper prices. These qualitative and cheaper products won western customers and started to compete U.S. companies. American market helped these Zaibatsu to had tremendous economic growth and turned into even larger business alliances called Keiretsu. These Keiretsu are based on the philosophy of mutual cooperation where all facts of business and government worked hand in hand. Due to these developments, Japanese stock market Nikkei wored like anything . as the market wored there Keiretsu purchased each other’s share.Due to 1970’s oil crisis and inflation, American car industry was suffering. Most of the American cars had V8 engines which consumed lot of petrol. Japanese car makers, such as Honda, quickly smelt American needs and produced small fuel efficient cars. Moreover these cars cost a fraction of the price of American cars. Even in the 1960’s, Japanese cars were being assembled with robots, making human error almost non existent. American automobile industry declined and Japan gained the market share. This boom helped Nickkei to further soaring.By the 1980’s, Japan started manufacturing electronic goods. Japanese Keiretsu corporations such as Hitachi and Sony, copied and produced quality electronics hardware needed by the growing computer industry. Japan trounced American companies thanks to its ability to compete on prices, aided by robots and cheep labour. Except microprocessors, Japan dominated the market for all chips, circuit boards and other components. In the 1980’s, it was widely believed that Sony and Hitachi would eventually acquire Intel and IBM.Japan entered into developed economy status. Throughout the world, every country viewed Japan as a model society. Japanese had highest of life and longest life expectancy. In addition, Japan was the world’s largest creditor and had the highest GDP per capital. As the economy booming and the stock market soaring, Japanese corporations built many sky scrapers in Tokyo and Osaka. This caused real estate prices climbed to the sky. Between 1986 and 1982, the price of commercial land in greater Tokyo doubled. Peal estate. Prices soared so much that Tokyo alone was worth more than the United States. Between 1955 and 1990, land prices in Japan appreciated by 70 times and stock increased 100 times over. An average home near Tokyo, cost above $ 2 million in 1989. Investors worldwide frenzily buying Japanese shares.All these factors together influenced Nickkei to move towards sky. The Nickkei moved from 7000 in 1965 to 40000 in 1990.Eventually all things, good or bad, come to an end. Unfortunately, the longest bull phase of Nickkei came to a sad end by March 1990. To cool the inflated and boiling economy, the Japanese Government raised rates. The next month the Nickkei crashed by over 30000 points. Nickkei crashed from 40000 to 10000 points. Japanese housing prices plummeted 14 straight years. The Nickkei further sank until its low of 8000 in 2003. Even today the Japanese economy is in doldrums
Thursday, March 19, 2009
All MNC'S IN OUR STOCK MARKET
I have a dream; All multinational companies should list in our stock market. Indian investors should have an opportunity to invest in these companies and let them get a share of the hefty profits they are making in our country.
The other day, I was looking at warren Buffett’s portfolio consisting of Coco Cola, American Express, Johnson and Johnson etc. Truly great businesses to invest. Warren Buffett created huge wealth for himself and for his investors by investing in these companies . It is really tempting me to invest in those companies because of their superior economics.
But we Indians are most unfortunate citizens. Number of good opportunities are snatched away from us and we are always a second rate citizens in the world. We don’t get what we want even though we have the power to have it. Even in 90’s we could not allow to buy certain electronic goods directly from other countries . In the same way even now we cannot invest in these MNC’s because they are not listed in our stock market.
Similarly, the government is not allowing the great business schools in the world such as Harward, Wharton, London Business School to start their operations directly in India. Due to this, we cannot study in those world best institutions. This is really strange. The governament is not willing to allow its own people to get the best available education in the world. A sort of regressive thinking.
Just imagine, if the great companies like Micro Soft, Coca Cola, McDonald, KFC, Pepsi, Johnson and Johnson, Cadbury,Nike, Fedex, Intel and Apple are all listed in our stock market, Indians also could have been invest in these companies and Participated in their wonderful growth saga.
These companies by virtue of their superior quality of products and services, superior technology, superior management practices and with their huge intellectual properties created enormous wealth on behalf of shareholders . The investors of these companies made huge money abroad.
Why can’t we, Indians? From time immemorial opportunities have been robbed from Indians in many ways.
These MNC’s have been using our resources like land, water , human resources etc and making huge profits and taking the profit to their home land . India offers the largest untapped markets in the world to these MNC’s. We can term these MNC’s as modern day East India Companies as they are taking away the profits . If they are listed here we can also participate in their growth and share the wealth.
Let us look into the income distribution aspect of this . If allowed, we can be a shareholders of these great companies. Investors get money in the form of dividends and capital appreciation . They will spend this money here only . This will augur consumption which will drive the economy further.
How can we make these MNC’s list here?. Simple.Government should make it mandatory of listing for MNC’s if they continue to do business in this land or government should encourage MNC’s to list in Indian market by giving incentives such as tax concessions, or creating some sort of a favorable business environment. Differential taxation to listed and unlisted companies is the best way to encourage them to list in the market. Chandrkant Sampat, a veteran value investor, once remarked that, “De-bureaucratize the whole process of Foreign Direct Investments[FDIs] with only one condition,the Multinationals must seek entry into this country must get themselves listed on the Indian bourses. Imagine Microsoft India Ltd, Coca ColaIndia Ltd.,Intel India Ltd. Being traded here! Not only will this bring in US$ 80 billion of FDI annually, but the stakeholder wealth that ensues will actuate new ideas,new ideas create new wealth…”
It is high time for the government to think and act positively and proactively. It is time to act upon this issue and should not make its people to wait happlessly. Let them divest at least 26% initially in favour of Indian investors. We just want a slice of the wealth created by these companies.
The other day, I was looking at warren Buffett’s portfolio consisting of Coco Cola, American Express, Johnson and Johnson etc. Truly great businesses to invest. Warren Buffett created huge wealth for himself and for his investors by investing in these companies . It is really tempting me to invest in those companies because of their superior economics.
But we Indians are most unfortunate citizens. Number of good opportunities are snatched away from us and we are always a second rate citizens in the world. We don’t get what we want even though we have the power to have it. Even in 90’s we could not allow to buy certain electronic goods directly from other countries . In the same way even now we cannot invest in these MNC’s because they are not listed in our stock market.
Similarly, the government is not allowing the great business schools in the world such as Harward, Wharton, London Business School to start their operations directly in India. Due to this, we cannot study in those world best institutions. This is really strange. The governament is not willing to allow its own people to get the best available education in the world. A sort of regressive thinking.
Just imagine, if the great companies like Micro Soft, Coca Cola, McDonald, KFC, Pepsi, Johnson and Johnson, Cadbury,Nike, Fedex, Intel and Apple are all listed in our stock market, Indians also could have been invest in these companies and Participated in their wonderful growth saga.
These companies by virtue of their superior quality of products and services, superior technology, superior management practices and with their huge intellectual properties created enormous wealth on behalf of shareholders . The investors of these companies made huge money abroad.
Why can’t we, Indians? From time immemorial opportunities have been robbed from Indians in many ways.
These MNC’s have been using our resources like land, water , human resources etc and making huge profits and taking the profit to their home land . India offers the largest untapped markets in the world to these MNC’s. We can term these MNC’s as modern day East India Companies as they are taking away the profits . If they are listed here we can also participate in their growth and share the wealth.
Let us look into the income distribution aspect of this . If allowed, we can be a shareholders of these great companies. Investors get money in the form of dividends and capital appreciation . They will spend this money here only . This will augur consumption which will drive the economy further.
How can we make these MNC’s list here?. Simple.Government should make it mandatory of listing for MNC’s if they continue to do business in this land or government should encourage MNC’s to list in Indian market by giving incentives such as tax concessions, or creating some sort of a favorable business environment. Differential taxation to listed and unlisted companies is the best way to encourage them to list in the market. Chandrkant Sampat, a veteran value investor, once remarked that, “De-bureaucratize the whole process of Foreign Direct Investments[FDIs] with only one condition,the Multinationals must seek entry into this country must get themselves listed on the Indian bourses. Imagine Microsoft India Ltd, Coca ColaIndia Ltd.,Intel India Ltd. Being traded here! Not only will this bring in US$ 80 billion of FDI annually, but the stakeholder wealth that ensues will actuate new ideas,new ideas create new wealth…”
It is high time for the government to think and act positively and proactively. It is time to act upon this issue and should not make its people to wait happlessly. Let them divest at least 26% initially in favour of Indian investors. We just want a slice of the wealth created by these companies.
Saturday, March 14, 2009
Wealth Creation and India - Why we Lag behind?
Wealth is the product of man’s capacity to think. Ayn Rand
Money is the only non-living thing which grows like anything. It cannot grow by itself. It is the human creative thinking which helps money to grow by leaps and bounds. In fact wealth is the product of human imagination. If you see the world’s richest men’s history, you come to know that it is their sheer imagination which creates enormous wealth for them. From time immemorial it is known that man can create huge wealth by his thinking capacity.
There are ample examples for wealth creation in western countries. By their thinking they create wealth and enjoy part of it and finally donate it back to the society. The best examples of our time are Bill Gates of Micro Soft, Warren Buffet of Berkshire Hathaway and George Soros of Quantum Fund. Warren buffet created huge wealth through stock market investment and became a 2nd richest man in the world. He was rich just because his value investment style.
But in India the situation is not so conducive for wealth creation. Here we cannot respect money and the society has no respect for wealth creators. Historically speaking, we cannot see our society worship the wealth creators.
Broadly speaking, Indians are good savers but poor investors. We have a wrong concept that both savings and investments are synonymous. But in practice they are different. Savings cannot grow rapidly whereas a fundamentally strong investment grows by leaps and bounds. In our Country only 2% of our household savings is invested in stock market. With a savings rate as high as 23%, India is a nation of savers, household savings largely going into Bank Deposits (43%), Provident Fund (18%), Life Insurance (11%), Small savings instruments (26%) and only 2% may go to equity investments.
NCAER-SEBI “ Survey of Indian Investor” of June 2000 reported that only 7.4% of Indian households invested in equity, either directly or through mutual funds. The comparable number for U.K. was 23% Canada 46%, Germany 18%, France 48%, Australia 50% and the U.S. 48%.
Indian economy was a caged Tiger due to various biased economic policies. Of late, our economy and stock market are booming. By careful study of macro as well as micro indicators influencing the economic growth in India, one can come to the conclusion that certainly India’s growth story will unfold in the coming years. And hence for a long-term investor who wanted to build wealth, it is time to look into stock market as a vehicle for wealth creation. At this juncture, one should invest in stock market to get higher returns compare to fixed income investments.
Money is a compelling force in our life and also most neglected segment of our life. It can be of vehicle for personal and social transformation. Money is seen as the means to various ends; it is not an end itself; of course, but you can’t do anything without money in real life.
The most unfortunate thing about Indians is that we want money but we are averse to talk about it in public. We have developed a kind of prejudice towards money. In a survey conducted summed up its observation that, “India’s biggest problem is complacency-and its willingness to settle for small gains. There is a distinct lack of enterprise”. It is a fact that we can’t live a day without money. If we go back to Indian history, there is no sign of respect towards wealth and wealth creators. Our society considered wealth creators as sinners for its own historical and cultural reasons. It may be because to discourage unethical way of hoarding. But anyway this kind of discouragement to wealth creation has done a lot of damage and thanks to this, wealth creation process suffered in India unlike western countries. In western countries they respect and worship wealth creators and due to that enormous wealth has been created in those countries. This kind of encouragement towards wealth and its creators wiped out their economic miseries and lead them to economic prosperity and economic freedom. We accept poverty as our karma, a way of life and pride to declare that in India, people living happily with poverty. How can poverty and happiness live together? It is just nonsense. It is worthwhile to take note of Manmohan Singh’s comment, “A society that respects those who create wealth is an achieving society”. Creation of wealth means not unethical hoarding, but that should be within the legal framework and with justifiable ways.
Thanks to economic reforms, Indian economy moved into growth trajectory and several new possibilities have been opening up to the new investors. And financial sector reforms in general and stock market reforms in particular opened up a plethora of opportunities to the Indian investors to participate in the journey of wealth creation. We should not miss this chance.
As a keen student of economics I think wealth is purely a product of man’s creativity. But in India much wealth has not created by human creativity; but for other purely non-economic reasons which is irrelevant to discuss here. It is need of the hour that we should learn to respect money, wealth and wealth creators which is very vital in transforming India into a developed nation. That is why Manmohan Singh rightly said that “A Society that respects those who create wealth is an achieving society”.
In western countries there is lot of literature about money, wealth and investment. Thousands together books were published on this subject. And everyone in those societies has training to manage money in their early part of life. But in India we don’t have any kind of wealth management education. You can rarely find a book on the subject barring some publications. We are living with scarcity mentality which leads us to pessimism. Number of western thinkers thought about wealth. But we used to get lot of thinking on philosophy and religion. It is obvious from this that Indians never bothered much about wealth. That may be the prime reason for our low standard of living
The simple definition of economics: study of day-to-day economic activities of common man. Everybody has their own economic life whether he is a billionaire or a beggar. A beggar has to calculate his income and expenditure to fulfill his unlimited needs with limited resources. Economics has tremendous implications on everybody’s life. But unfortunately we don’t understand about our economics. And we have a poor knowledge of economics and finance. As an economist by qualification I believe that it is my duty to take economics where it belongs, to the common people and see they should be benefited from economic knowledge. In fact I take this as a mission to spread knowledge of economics among my countrymen who are suffering from ignorance and poverty. Ignorance towards economics costs lot in one’s life. we have seen number of living examples of persons loosing their hard earned money in the name of chit funds and doubling. The only solution for this is we have to empower our people with economic knowledge and financial awareness.
There are no easy opportunities for an ordinary citizen in India to put their saving into equity market. To put it in statistics,98% of our people don’t know about stock market investing. They think equity investment is the toughest subject. They think stock market investing is like gambling. But in reality stock market investing is not a gambling; it is partly an art and partly a science. There is a cause and effect relationship between stock price and its real value backed by the assts of the company.
There is always scope for uplift our living standard. To uplift the living standard of middle class in India, the reasonable way, in my view, is to canalize their hard earned money and savings to stock market or any other prudent investment. So that they can earn much more than other available avenues.
We Indians lack the knowledge of economics, wealth and investment which is crucial as far as our standard of living and financial prudence are concerned. The ignorance of our countrymen’s financial knowledge leads directly to financial vulnerability. John Kenneth Golbraith once said. “Money is the measure of capitalist achievement”. To achieve this, one should have sound financial knowledge. To educate my countrymen through financial literature and create financial awareness is my mission and the prime motto.
There are ample examples for wealth creation in western countries. By their thinking they create wealth and enjoy part of it and finally donate it back to the society. The best examples of our time are Bill Gates of Micro Soft, Warren Buffet of Berkshire Hathaway and George Soros of Quantum Fund. Warren buffet created huge wealth through stock market investment and became a 2nd richest man in the world. He was rich just because his value investment style.
But in India the situation is not so conducive for wealth creation. Here we cannot respect money and the society has no respect for wealth creators. Historically speaking, we cannot see our society worship the wealth creators.
Broadly speaking, Indians are good savers but poor investors. We have a wrong concept that both savings and investments are synonymous. But in practice they are different. Savings cannot grow rapidly whereas a fundamentally strong investment grows by leaps and bounds. In our Country only 2% of our household savings is invested in stock market. With a savings rate as high as 23%, India is a nation of savers, household savings largely going into Bank Deposits (43%), Provident Fund (18%), Life Insurance (11%), Small savings instruments (26%) and only 2% may go to equity investments.
NCAER-SEBI “ Survey of Indian Investor” of June 2000 reported that only 7.4% of Indian households invested in equity, either directly or through mutual funds. The comparable number for U.K. was 23% Canada 46%, Germany 18%, France 48%, Australia 50% and the U.S. 48%.
Indian economy was a caged Tiger due to various biased economic policies. Of late, our economy and stock market are booming. By careful study of macro as well as micro indicators influencing the economic growth in India, one can come to the conclusion that certainly India’s growth story will unfold in the coming years. And hence for a long-term investor who wanted to build wealth, it is time to look into stock market as a vehicle for wealth creation. At this juncture, one should invest in stock market to get higher returns compare to fixed income investments.
Money is a compelling force in our life and also most neglected segment of our life. It can be of vehicle for personal and social transformation. Money is seen as the means to various ends; it is not an end itself; of course, but you can’t do anything without money in real life.
The most unfortunate thing about Indians is that we want money but we are averse to talk about it in public. We have developed a kind of prejudice towards money. In a survey conducted summed up its observation that, “India’s biggest problem is complacency-and its willingness to settle for small gains. There is a distinct lack of enterprise”. It is a fact that we can’t live a day without money. If we go back to Indian history, there is no sign of respect towards wealth and wealth creators. Our society considered wealth creators as sinners for its own historical and cultural reasons. It may be because to discourage unethical way of hoarding. But anyway this kind of discouragement to wealth creation has done a lot of damage and thanks to this, wealth creation process suffered in India unlike western countries. In western countries they respect and worship wealth creators and due to that enormous wealth has been created in those countries. This kind of encouragement towards wealth and its creators wiped out their economic miseries and lead them to economic prosperity and economic freedom. We accept poverty as our karma, a way of life and pride to declare that in India, people living happily with poverty. How can poverty and happiness live together? It is just nonsense. It is worthwhile to take note of Manmohan Singh’s comment, “A society that respects those who create wealth is an achieving society”. Creation of wealth means not unethical hoarding, but that should be within the legal framework and with justifiable ways.
Thanks to economic reforms, Indian economy moved into growth trajectory and several new possibilities have been opening up to the new investors. And financial sector reforms in general and stock market reforms in particular opened up a plethora of opportunities to the Indian investors to participate in the journey of wealth creation. We should not miss this chance.
As a keen student of economics I think wealth is purely a product of man’s creativity. But in India much wealth has not created by human creativity; but for other purely non-economic reasons which is irrelevant to discuss here. It is need of the hour that we should learn to respect money, wealth and wealth creators which is very vital in transforming India into a developed nation. That is why Manmohan Singh rightly said that “A Society that respects those who create wealth is an achieving society”.
In western countries there is lot of literature about money, wealth and investment. Thousands together books were published on this subject. And everyone in those societies has training to manage money in their early part of life. But in India we don’t have any kind of wealth management education. You can rarely find a book on the subject barring some publications. We are living with scarcity mentality which leads us to pessimism. Number of western thinkers thought about wealth. But we used to get lot of thinking on philosophy and religion. It is obvious from this that Indians never bothered much about wealth. That may be the prime reason for our low standard of living
The simple definition of economics: study of day-to-day economic activities of common man. Everybody has their own economic life whether he is a billionaire or a beggar. A beggar has to calculate his income and expenditure to fulfill his unlimited needs with limited resources. Economics has tremendous implications on everybody’s life. But unfortunately we don’t understand about our economics. And we have a poor knowledge of economics and finance. As an economist by qualification I believe that it is my duty to take economics where it belongs, to the common people and see they should be benefited from economic knowledge. In fact I take this as a mission to spread knowledge of economics among my countrymen who are suffering from ignorance and poverty. Ignorance towards economics costs lot in one’s life. we have seen number of living examples of persons loosing their hard earned money in the name of chit funds and doubling. The only solution for this is we have to empower our people with economic knowledge and financial awareness.
There are no easy opportunities for an ordinary citizen in India to put their saving into equity market. To put it in statistics,98% of our people don’t know about stock market investing. They think equity investment is the toughest subject. They think stock market investing is like gambling. But in reality stock market investing is not a gambling; it is partly an art and partly a science. There is a cause and effect relationship between stock price and its real value backed by the assts of the company.
There is always scope for uplift our living standard. To uplift the living standard of middle class in India, the reasonable way, in my view, is to canalize their hard earned money and savings to stock market or any other prudent investment. So that they can earn much more than other available avenues.
We Indians lack the knowledge of economics, wealth and investment which is crucial as far as our standard of living and financial prudence are concerned. The ignorance of our countrymen’s financial knowledge leads directly to financial vulnerability. John Kenneth Golbraith once said. “Money is the measure of capitalist achievement”. To achieve this, one should have sound financial knowledge. To educate my countrymen through financial literature and create financial awareness is my mission and the prime motto.
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