Mar 15, 2008

History Repeats: Investors fail to learn much from past mistakes

KOLKATA: It was Mark Twain who said it first, "A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way". "If Twain were around now, he might try winding up a derivatives business. After a few days, he would opt for cats," was what Warren Buffet told shareholders of Berkshire Hathaway almost a century later, while recounting the problems experienced in exiting major re-insurance businesses like General Re.

In India right now, investors wish they would rather have Twain's cat to carry home by the tail rather than the stupendous losses from the market for which, global meltdowns and subprimes apart, they blame the rampant open F&O (futures & options) positions in the derivatives segment.

"Just take a look at the scene and you will find any number of scrips crowding in the F&O space. Compare the futures volume with the options volume where if you keep the top 10 scrips aside, it would perhaps be heavily skewed," said S Dadheech, an investment analyst in Mumbai.

Many like Bunty Dalmia, a director of Dalmia Securities, thought that derivatives expiring on cash basis must be allowed to be converted into delivery basis to stop the rampant manipulations currently going on in the market. Ajit Day, a former president of Calcutta Stock Exchange, wondered how all caution could have been thrown to the winds when the 'B' group stocks started accelerating.

"Historically, that is one of the surest signs that the market is heading for a saturation somewhere down the road. It had happened during the time of Harshad Mehta and it had happened so many times subsequently. But nobody seemed to care," he rued.

The Indian stock market has been a study in repetition. There is also no dearth of blames or no crisis of critics either. But let's put a few things straight. Initial and follow-on public offers — known as IPOs and FPOs — have raised a record Rs 45,000 crore in 2007. This was nearly 83% higher than the Rs 23,600-crore mop-up in 2006. In 2007, there have been a total of 101 IPOs that mobilised in excess of Rs 34,000 crore.

This was followed by the Reliance Power IPO in January 2008, an issue that attracted Rs 44,000 crore from 50 lakh retail applications. Historically, secondary markets have been known to fall in times of huge primary market mobilisations, specially in a firm market where profits get booked.

Some market players believe this could just be another of those phases. According to this section, correct handling of the situation could see a recovery later this week itself.

The Indian psyche vis-a-vis stock markets is essentially bull-driven. One just loves to see the market rising. So when the Sensex touched 21,077.53 points on January 8, there was already a talk of the 25k level. "Between July 6, 2007, and January 8, 2008, the Sensex had gone up all of 6,000 points from 15k to 21k. We had gained 4,000 points from 10k to 14k between February 6 to December 5, 2006, and then a drift for seven months till July, 2007, from where in six months, the Sensex had shot up 5,000 points to 20K on December 11, 2007.

The index added another 1,000 points early this year. So what's the fuss about if instead of a customary one-third technical correction, it has retraced almost a full-way back?" asked one of the biggest bulls based in Mumbai. According to him, the correction augers well for the market if there are no more bad news from the US.

It is a pity that the stock market is now bereft of an entire community, a clan that traditionally used to come in handy at times of free falls such as these — the bears. Classical bears like Manubhai Maneklal or Debu Bhalotia don't come by the dozen and yesteryear players like Giridhari Kejriwal, who could play both bull and bear with the same elan, are also limited in number.

It's largely a one-way street these days, although one of Mumbai most talked-about bulls has recently been known to have turned short from around a level of 17-18k and may have paid the penalty for the experiment.

But while marketmen hope the fall is arrested as quickly as possible, they also think it is necessary to have some checks and balances in place to avoid the retail investors from getting mauled.