Bulls, Bears and Other Beasts

by Santosh Nair

  Despite its deteriorating asset quality, the scheme had managed to stay afloat for longer than most people thought it would. As with Ponzi schemes, the steady inflow of fresh money from new investors helped pay off the exiting investors in US-64. But once inflows dried up, around March 2001, it became an uphill task for US-64 to meet redemption requests. Rumours of a crisis at UTI started doing the rounds, leading to more redemption requests from unitholders. Corporations and institutional investors started pulling out in droves from May onwards, sensing their investments were in danger. The losers were individual investors who had no inkling of the true health of US-64 and stayed invested.

  It was obvious that the unusually heavy redemption pressure in May and June had to do with inside information that UTI would announce a halt in repurchase of US-64 units at its 2 July board meeting. In what was a clear breach of confidentiality, SBI, which had a nominee on the board of trustees of UTI, redeemed Rs 355 crore in May. UTI had borrowed heavily from many banks in June to meet redemption requests. Each of these banks was an investor in US-64, and, knowing the scheme’s perilous financial health now, joined the queue for redemption.

  At its board meeting on 2 July, UTI announced that it was freezing redemptions in US-64, stunning the market and shattering the faith of millions of individual investors. The scheme was restructured, and a repayment schedule was worked out, but almost every US-64 investor had to take a knock on his original investment. Worst of all, the crash also claimed a few lives. There were newspaper reports of at least half a dozen investors committing suicide after incurring massive losses in speculative trades. Some of them owed huge sums to brokers and financiers, and feared a far worse fate if they failed to pay up.

  The quarterly earnings season brought more bad news for the IT services sector. Satyam’s numbers were good, but the management said it was ‘cautiously optimistic’ about the year ahead. Anybody reading between the lines could make out that the booster growth rates seen till a quarter ago were unlikely to be repeated for a while. The slowdown in the US following the Nasdaq crash was now beginning to pinch Indian software firms.

  The following day, Infosys too made a similar statement; its revenue guidance for the year provided for a growth of 30 per cent, which, given the company’s track record, was a modest target. Some of the second-line IT companies like Mastek announced very sorry earnings figures. And, quite suddenly, the market appeared to have got over its obsession for technology stocks.

  Looking back, I wish I had been a bit more cautious in investing my profits from the dotcom craze or bubble, whichever way you look at it. I survived the meltdown in ICE stocks, which is not to say that I did not make any losses. The market snatched away roughly 40 per cent of my peak paper wealth, but I still had a substantial amount left. I invested in a dozen-odd start-up firms that seemed to show a lot of promise. Or maybe I should say the entrepreneurs did a good job of convincing me to invest. There were all kinds of ideas on which the start-ups were founded, many of which were actually quite absurd. Some of them were ahead of their time and, launched a few years later, would perhaps have done much better.

  Of course, I was not alone. To use a pun, I was in good company. I was hoping that even if two of them did well, I would still be able to at least double my overall investment. Over the next years, the majority of them turned out to be duds. I managed to exit a couple of them at a modest profit. But on the whole my start-up portfolio was a disaster.

  Nevertheless, it was a good experience in terms of understanding some of the business models and the aspiring businessmen.

  20

  Penny Wise, Pound Foolish

  Prakash may have retained his trading profits, but most of the gains in his long-term portfolio slipped through his grasp as he could not bring himself to sell in time. There were some others who suffered sizeable losses despite having cashed a good chunk of their paper profits in time. Bina’s distant cousin Pankaj belonged in this unlucky category. He managed his family business of trading in grains and oilseeds. He had grown the business with his hard work and acumen, and now made a net profit of around Rs 50 lakh annually. About a year ago, he developed an interest in stocks. As a professional trader, Pankaj felt he could replicate his success in grain trading with stocks too.

  He began cautiously, and thanks to the bull market, made good money with his initial bets. From modest positions of a couple of hundred shares, he increased the size of his trades to a couple of thousand shares, that too in high-priced technology stocks. His wife and parents were worried, but Pankaj was certain he had mastered the game. To my irritation, he offered me a few tips on trading when I ran into him at a relative’s wedding around Diwali.

  ‘The man will be in trouble before long, and I am willing to write it on stamp paper,’ I told Bina that evening.

  When stock prices leapt to unimaginable highs in February and March, Pankaj’s paper profits on his outstanding positions amounted to Rs 50 lakh. When he boasted about it to his parents at the dinner table, they told him to cash the profit. They did not understand stocks, but were wise enough to know that the paper wealth represented one year’s income. Pankaj refused to listen to them. His wife then rang Bina and asked me to speak to him. I knew it was easier to convince a professional stock trader than an amateur who mistook luck for skill. Still, I managed to convince him to book profits. But instead of taking the money out right away, Pankaj let it lie with the broker. When the stocks went into a tailspin, Pankaj thought there was quick money to be made by buying them at lower levels and selling them at the first opportunity. A series of mistimed trades later, Pankaj not only lost every rupee of his profits, but had to pay his broker an additional Rs 15 lakh. His father paid up the money, and that was the last time Pankaj ever mentioned stocks at home.

  Another relative of mine lost a fortune, simply because he wanted to save on capital gains tax by holding on to the shares for three months.

  On Nasdaq, investors were punishing new-economy shares with a vengeance. The selling frenzy reached a crescendo on 14 April when the Composite Index was hammered 10 per cent in a single trading session. It was now down around 35 per cent from its peak barely a month ago.

  On Dalal Street, many of the late entrants among retail investors had been wiped out by the fall. But those who had got in early still had some cushion left and chose to play on.

  By the first week of April the Sensex had fallen to around 4,700. But within the next week, it rallied to over 5,500, convincing many that the bull market had resumed and that India would be able to stand apart from other global markets. Also, many of the high-flying stocks appeared cheap against their earlier peak values, something new entrants found tempting, as they felt a steep fall presented a good opportunity to buy stocks and make the kind of profits their friends, colleagues or relatives claimed they had.

  For instance, Infosys was going for around Rs 15,000, against its high of roughly Rs 28,000; Wipro was available for under Rs 5,000, attractive considering its peak of Rs 10,000 in late February; Global Tele could be bought for around Rs 1,700, against its high of Rs 3,500. The list was pretty long.

  Of course, the buyers failed to notice that the stocks were not exactly cheap, but only seemed so when compared with their peak prices. Retail investors also have this misconception that once a stock touches a new high, it will definitely cross that price in the foreseeable future because there are smart people who bought the stock at its peak.

  The rebound in the Sensex to 5,500 turned out to be short-lived. By the end of April, it again sank to 4,500, and by the last week of May, slumped below 4,000.

  Many retail clients defaulted, causing losses to the brokers who had to honour the trades with the stock exchange, whether or not their clients paid. Brokers had only themselves to blame for not collecting adequate margins and for allowing clients to take up positions without bothering to check if they could pay up when the chips were down. Any investor you spoke to in those days would invariably say these words, ‘
If only I had . . . ’ at some point during the conversation.

  ‘Indiscipline has cost even the best of traders a lot of money,’ GB told me when I visited his office one evening. ‘And I can say that because I handle their trades. But to be fair, nobody has seen a rally like this before. They became too comfortable as prices kept rising. Any professional trader will have a price target at which he must take his profit and another target at which he must cut his loss. In the past, these operators would stick to their targets on the upside and downside, no matter what.’

  But this time, they felt it would not hurt if prices fell some more because their average cost of purchase was quite low. Once overconfidence creeps in, it creates room for indiscipline, and bigger errors of judgement follow. Because of the large positions they carry, they have to time their exit well. Theoretically, it may have looked safe to hold on to their positions and even buy some more when prices began to weaken. But their experience should have told them that if prices fell further, there would be many weak sellers at lower levels, all looking to exit at the same time. That would make it difficult to unload large positions without breaking the price.’

  The Sensex showed some signs of stabilizing in June, when it ranged between 4,300 and 4,800. In the first week of July, it again topped 5,000, raising hopes that the bull market was still alive. But that turned out to be a false dawn. ICE stocks continued to melt as fund managers and retail investors tried to salvage whatever they could of their paper wealth. By now, most of them had reconciled to the bitter truth that the technology party was well and truly over. In February, you were seeing prices that nobody could have ever imagined, and just a few months later, you were again seeing prices few would have thought possible even in their worst nightmares.

  Like most of the players in the market, I too had lost money. But thankfully, it was only a loss on profits. You may find this a bit hard to believe, but I was relieved that my profits had shrunk to more realistic levels. Had I cashed every rupee of profits when my portfolio was at its peak, I would not have known what to do with the money. Many get a kick out of being known as a ‘Rs xxx crore net worth fellow’. Not I. This is partly due to fear of attracting the attention of the tax department and the underworld, and partly due to the fear that too much money may blunt my trading skills. I own a portfolio of shares, but have absolutely no delusions about being a value investor and no aspiration to be counted among the investment gurus.

  I bought the shares on the recommendations of the people whose wisdom and judgement I trusted. Over the years, my faith in their investment calls would pay off handsomely. Still, trading was what I enjoyed most, and I wanted to be in the game for at least a decade more.

  When I told GB all this, he did not take me too seriously.

  ‘Lala, you will be here for a long time, don’t worry,’ he said in his usual dismissive style.

  ‘Why do you think so?’ I asked.

  ‘First, you have managed to stay in business for ten years. That says something about your trading skills. Had you not been a competent trader, the market would have forced you out by now. Second, this profession leaves you unfit for any other trade, because nowhere else can you make or lose lakhs in a day. Perhaps it is not just the money but the excitement, which you cannot find in any other job,’ GB said.

  The man made sense.

  Despite the market crash, it had been a good year for me. I invested in land outside Mumbai, acquired a bigger flat in Ghatkopar and bought myself a red Opel Astra.

  21

  Back on the Slow Track

  Just when it seemed the market had stabilized, the 9/11 attacks on the twin towers of the US World Trade Center plunged markets worldwide into another spell of gloom.

  Over a period of less than two weeks of the attacks, the Sensex slid 15 per cent to slump to an eight-year low of 2,600. More foreign brokerages closed shop, and so did scores of small brokers. In less than twenty months, the mood in the market had swung from euphoria to one of utter despair. Many of us traders, including I, wondered how long we would be able to survive if the situation continued. In the previous bear market, people had been talking about companies closing down. Now some were talking about stock exchanges shutting down. The 9/11 attacks deepened the recession in the US, and the ripple effect was felt in economies across the world.

  In January 2002, Bharti Tele-ventures announced its IPO, the first 100 per cent book-built issue in the history of the Indian capital market. In a book-built issue, the price is discovered by gauging investor demand for the shares. This was different from a fixed-price IPO, where the company offers shares to the public at a price decided by it. Mobile phones had gained in popularity by then, but most people thought it would be a privilege of the well-off for some time to come. Consequently, the ambitious projections by the company in the run-up to the IPO were mostly ignored by prospective investors. The dotcom debacle was still fresh in everybody’s minds, and people were sceptical of IPOs in general.

  The company announced a floor price of Rs 45, which eventually became its issue price too because of the lukewarm response from investors. At Rs 834 crore, the issue was fairly big for a market still trying to find its feet after the previous year’s crash. The overall bearish mood was mainly to blame, and the raw deal that minority shareholders in Bharti Telecom got when that company was delisted in 1999, made some prospective investors wary.

  As for me, I had no such qualms. IPOs never excited me, except for the grey market in them. What put me off about IPOs in general was having to buy shares at what the promoter decided was the right price for him. I bought Bharti shares after they listed and kept adding to my positions over the months. Bharti’s IPOs were subscribed to around 2.5 times – no mean feat considering the depressed market environment. The decision paid off handsomely a few years later as the mobile phone went on to become an amenity rather than a luxury.

  ‘Many companies will be out of business soon,’ I remarked to GB one day as we were discussing the precipitous erosion in stock prices. ‘Ah, don’t worry about that,’ GB said. ‘The stock prices may have been hammered, but that does not mean the companies’ customers will stop giving them business. The market may think of many of these promoters as shady and most of them actually are. But their products and services are trusted by clients. And that trust is what it takes to stay in business, not a high stock price.’

  The market remained lacklustre through 2002 and all the way till May the following year. I was now truly on my own, having split with Monk. He was probed by SEBI because of his dealings with Ketan, and would later be penalized. Since he had routed quite a few of those deals through me, I had SEBI officials landing up at my doorstep too. They could not prove any wrongdoing on my part, but there was still a cost in terms of the time and energy I spent responding to their queries and making repeated trips to their office.

  My parting with Monk was amicable, and I returned the money he had loaned me for the BSE membership card. Not long ago, the money would have been loose change for Monk. But the market crash had set him back by a good few crores, and every rupee now mattered.

  ‘It is a small world after all, Lala, but let’s be in touch,’ Monk told me as I shook hands with him after handing him the cheque.

  Corporate earnings kept sliding, and the intermittent rallies usually ended in grief for the bulls. The market was not ready to turn around yet. Caught on the wrong side many times myself, I reduced my trading positions considerably, not wanting to burn more capital.

  And then the market changed course, without any indication. It would be a few months before players acknowledged that a bull market was under way again. The denial was only to be expected. After starting the year at around 3,400, the Sensex had sunk to 2,900 by mid-May. It then climbed to 3,500 by end-June. However, corporate earnings were still sluggish, and many, including me, were certain the rally would not endure. But the market got an unexpected sentiment booster in Maruti Udyog’s IPO. Despite the uncertain market conditi
ons, the government decided to push ahead with the public issue. To everybody’s surprise, the IPO got an enthusiastic response from all classes of investors, including retail. The floor price was set at Rs 115, and based on the demand, the final price was set at Rs 125. This was the first time that a book-built issue had been priced above the floor price. The issue fetched the government Rs 993 crore.

  For a market thought to be starved of liquidity and lacking buyers, the response to the IPO came as a pleasant surprise. More importantly, it drove home the message that there will always be takers for quality offerings if the price was fair. Many players were worried that the market would take a while to digest the Maruti IPO, as it had sucked out nearly Rs 1,000 crore at one go. But the shares did well on listing, and investors who made money in the issue started looking for other attractively valued stocks to put money in.

  That’s the beauty of public issues – they come across as liquidity guzzlers. But if the shares do well on listing, the IPO itself then becomes a source of liquidity.

  By mid-October the index was closing in on 5,000, and even the most diehard of bears now had to grudgingly admit that a bull market was truly under way. Companies were eager to raise money and merchant bankers were working overtime advising them on how to go about it.