Like the synthetic materials that artificially shape a human body to perfection.
It is fake because there is nothing real about it.

Investing in India – the unreal thing.
Every morning the anchors on television channels chimed in unison that they were looking for “global cues”. They scanned the horizon for a sign of that ship – even for a shadow – to tell you where the global cues were going to lead the Indian stock markets on any given day.

For all our chest-beating, the sail winds of India Shining, India Resurgent, and Incredible India were being blown by the butterflies flapping their artificial wings in some remote financial capital.

There is nothing wrong about foreign money coming into India. But there is everything wrong about not knowing why that foreign money is coming in; how long it intends to stay; and who owns it.

But neither the BJP-led NDA coalition nor the Congress-led UPA coalition paid much heed to the warnings of the Reserve Bank of India. Bankers – the traditional ones that we thankfully have at the RBI – are, by nature, cautious. They ask questions: “Good morning. I believe you wish to invest in the Indian stock markets”, they would ask a typical foreign investor, “that is so very nice of you. But, I beg to know, who are you and what do you want from this investment in India?”

Hey, this is the 21st century and the world is fat with money sloshing around. Who has time for questions and filling in all those badly drafted FII registration forms? Just take it as it comes, baby. Turn on the P-Note tap. Flood me with your synthetics.

And so the bull market began. The synthetics came bouncing around and jiggling all over. The surging Index had the media and the government officials into a salivating fit. Every trading day for the past 5 years (approximately 1,320 trading days) the foreign investors bought a net of Rs 3 crore of stocks in every hour of trading.
About Rs 5 lakhs every minute.
Looking good, baby! Jiggle away!
And the share prices went into a dance and then into a wild dance in September 2007 when the pace quickened by 8x to Rs 24 crore every hour.
That is Rs 40 lakhs every minute.

But every dance comes to an end.
Every sailor heads back home.
The butterflies stop flapping their wings.
The mighty sail of the Indian stock market flutters in search of direction and then folds.
Marooned in a sea of red, everyone wonders what happened. The markets are down. There is no global cue on the horizon. You see the plastic on the floor – that is a residual of the synthetics. The central bankers shake their head in a “we told you so” motion. And they, like true bankers, help to clean up the mess.

The Indian slow dance.
Meanwhile, the poor Indian investor kept on giving their two-bits to the mutual funds and the Indian stock markets. No minister came to meet them in Jalandar, Patiala, or Secundrabad. No one sent them any invitations to attend any conferences in London and New York and Hong Kong about what a wonderful investment destination India is. The local investors took out 2% from their annual savings of USD 300 billion and plonked their Rs 3 lakh per minute investment into the Indian stock market. Most of this found its way into the Indian stock markets via a mutual fund or a unit linked insurance policy (a bad choice of vehicles, most likely, but that is a topic for another Honest Truth!).

This kathak-like pace is no match for the synthetic foreign investors who are now running for the exit.
Running as if they are in a disco that has caught fire. As the foreign investors dump their shares, the buying power to match that selling is just not there in India.
In simple economics, when supply exceeds demand – when sellers of shares are more than the buyers of shares – the share prices have only one way to go: down. Sharply down. Like the panic sales you have seen recently.

Shift the beat to a disco bhangra.
But this gentle pace of the Indian kathak, can turn into a sustained disco bhangra.
A bhangra that will match the selling by the foreign investors.

Another law of equilibrium in economics: when demand matches supply, prices will be stable.
So far this year foreign investors have sold USD 5 billion worth of shares. That is Rs 53 lakhs every minute of trading.
The Indians are buying at the rate of Rs 3 lakhs per minute.
“Houston, we have a problem.”
Supply (Rs 53 lakhs of selling by the foreign investors) is more than demand (Rs 3 lakhs of buying by the Indians). Ouch!
When supply is more than demand, prices have only one way to go: freefall!

There is a way to make the Indian supply zoom really quickly. This is to allow the pension funds to start buying into the Indian stock market. However, given the fact that this proposal has been sitting with the government for a few years, the reality of coalition politics will ensure that nothing will happen.

But there is another way: extend the benefits of Section 80 C.
Currently, any individual can use up to Rs. 1 lakh to buy shares (locked in for 3 years in an ELSS), repay a home loan, and contribute to a PPF. This entire Rs 1 lakh is freed from any income tax obligations.

I visited the musical town of Salzburg, Austria in 1988. That was 20 years ago. The memory I have of Salzburg is one of music. I recall seeing a lot of young people walking around with musical instruments in black cases.

Salzburg is where the famous Wolfgang Amadeus Mozart was born in 1756. This quaint city is also the home of the Universitat Mozarteum Salzburg set up in 1841 which trains musicians, amongst other things.

But, 20 years later, I walked the cobble-stone streets and – there are no musicians. Maybe they are on holiday. Maybe, over the 20 year period, they all became bankers with CFAs and MBAs. Maybe some of them set up hedge funds. Maybe they all started buying Indian stocks and became rich and bought villas on the lakes in Austria.

Investing in India: ending on a bad note

But wait a minute that cannot be possible. If all the musicians in Salzburg had become investment managers with investments in India, I don’t see them on the streets of Bombay either!

And, more importantly, I don’t see their money sloshing around the Indian stock markets anymore. Alas, what is true of the musicians turned investment managers from Salzburg is true of many of the foreign investors.

Since CY 2003 (see Table 1), they have been buying approximately USD 10 billion worth of shares in the Indian stock markets. And their buying drove the markets wild. And more wild.

Then in a mad frenzy between mid-September 2007 and mid-October 2007, the foreign investors pumped in USD 6 billion. Pause and review that number.

From an average of USD 0.8 billion of buying every month (a 5 year average), they bought USD 6 billion in one month. That is 8x the normal monthly inflow.

But the music stopped – it must have been the cold winter and the desire to stay home huddled up in blankets. Heating oil is expensive these days.

In January 2008, the foreigners sold USD 3 billion. They bought small amounts since then.

But now in May they are out of the door again – the foreign investors probably sold USD 800 million worth of stock. And the Indian markets are not in the best of health.

Investing in India: tired of waiting

So I asked a few foreign investors: don’t you like India any more? “How can we like it”, exclaimed one investor, “the Indian market has done nothing.” “It is the worst performing country in my portfolio”, yelled another, “I am tired of waiting.” And we are not even in a bear market.

It seems like it has been many years since foreign investors could not get enough of India. But – as Table 1 indicates – it was only a few months ago when the foreign buying of Indian stocks was 5x the buying by local mutual funds.

For every one rupee the local Indian put in the market via the mutual funds, the foreign investor pumped in five rupees. The poor Indian investor is still putting his money in but the foreign investor is tired of waiting and is heading home with the cash.

The price of a share is determined by many factors, some of which are:

1. The business prospect of the company – how profitable is it likely to be?
2. Does a company borrow from banks or issues more shares to fund its growth?
3. Will the managements of these companies share the wealth they create fairly with the non-family members (what we call “minorities” – the people like you and me who don’t run the companies but are shareholders)?
4. Are there many IPO’s about to hit the market – will the supply of shares increase?
5. Is there anyone willing to buy the shares – is there a demand for shares?

Well, by the sounds of the noises made by some foreign investors I spoke to, the demand for Indian shares seems to have dried up.

That is not to say that India is bad; or that the Indian businesses will do badly; or that Indian managements are not worthy of investing in (some definitely are to be avoided – but that is a global phenomena!).

All that it means is that the foreign investor is not buying because he or she is not buying. Like the spouse who says: “abhi mood nahin hai”. That is also – by the way – a global phenomenon.

Investing in India: keep at it

No one has a clue when the foreign investors will come in. Or what will make them jump back into India.

Just like no one has any idea why they pumped in USD 6 billion into the Indian stock markets in September/October 2007. Or sold USD 3 billion in January 2008.

And no one has any idea when India will no longer be the worst performing market in someone’s global stock portfolio. You should not worry about it. Don’t brood on it.

Keep on buying into shares you like or mutual funds you like (have you made an investment in Quantum Long Term Equity Fund? You should consider it!).

Don’t borrow money to invest. Don’t try to hit “sixers” – or you will be bowled out. Just go for the steady batting. A regular rhythm of strokes, taking every ball as it comes. Seek professional help to confirm what you are investing in matches with what you should be investing in. India is on sale. And it may be for some more time, who knows.

Investing in the Indian stock markets – while on holiday.

But while the brain is lulled by vacations and the body needs to be repaired, life goes on around us. A new war is born in one corner of the world, a new natural disaster needs to be dealt with in another part of the world. Life moves on around us and markets jump around in random motion.

One day there is news that the world is running out of oil, another day we hear about the political instability in countries where much of the oil is produced. So oil spikes above USD 125.

Then we get news that the world is running out of rice, so rice jumps 50% in a few weeks.

We may be running out of oil, I guess, you cannot “grow” oil. But running out of rice? Well, farmers will grow more over time. And maybe prices will collapse in a few months. Like the price of wheat. There was a drought in Australia last year, the price wheat surged, the next crop is now being harvested and wheat is down some 40% from its peak in December 2007. It is still a 100% more than where it was in May 2007.

And May 2007 was vacation time. Just like May 2008 is vacation time. And the world has changed between these 2 vacation periods. And where will the world be by the time of the next vacation? We don’t know.

But we know that husbands will still love their wives and the wives will still love their husbands – for the most part, that is. And parents will always love their children and always wish them to have the love and care that they need. And we know that the “24×7″ media will still try to predict every sway of the market; every little jiggle that the market makes will be amplified.

So here we are, then, planning the vacation. And thinking about our investments. We have worked hard to earn a fair living and need to make sure that we don’t let our investments drift into oblivion.

No Wall Street firm is knocking on my door to pay me a USD 10 million sign-on bonus to blow them up again. No press pundits are boosting my ego and the perceived market value of my skill sets. So we need to plan our investments.

Investing in Indian stock markets – the Quantum funds.

Over the last year, an investment in the Quantum Long Term Equity Fund would have given an investor a return of +15%. Gold was up +32% over that same time period. (For those looking for a comparison, the BSE 30 Index gained +20% over the same time period – but the Reliance group companies accounted for nearly 50% of that increase; the Quantum Long Term Equity Fund does not own Reliance shares.)

The body and the mind may be in a “holiday mood” – well deserved, I am sure. But it is a good time to make decisions. And review the ones made last year.

We have not changed our view of the world: there is still a lot of irrational behaviour and the worst is not behind us in a global sense. But we believe we can identify a few investments that will make us a decent return on our investments.

Meanwhile, there is one “guarantee” that I can give you by the time your May 2009 vacation comes along. Nope, I cannot promise you that the NAV of the Quantum Long Term Equity Fund will do well. Nor can I promise you that gold will cross USD 2,000. But I can tell you this: India will have a new government by May 2009. It may be this government or a “new” government, but the election will be over.

And the rains will bring much relief from the heat and the dust.

Source: No Vacation from Decisions

“And”, she continued, “it is the same with clothes. They have fashion seasons and every fashion season is shorter so they encourage you to add to your wardrobe more often. All this marketing – for what?”

My wife is not a shopper, so this was not a hint to buy clothes, for sure. I thought about what she was saying and realised that she was onto something. Something to do with the world we live in.

Investing in Indian stock markets: a fashion?

Let’s take the field of investments: investing in the Indian stock markets. Why is it that we cannot sit patiently with a few stocks and watch them evolve over a ten or twenty year time horizon? Maybe make some changes to some of the stocks we own in our portfolios every 5 years or so. Sure, if a really new idea comes along, and you like the stock of the company involved in that business, go ahead and add it to your portfolio. But, generally, if you did your homework well before you invested in a stock owning the stock for a long time could work well.

But the system won’t let you. The system – the financial system geared up to service the investor – is not built on a “let the client buy only once” strategy. The financial system is geared to help you make profitable investments in the Indian stock markets by investing in a list of Indian stocks or Indian mutual funds.

And then help you change your mind the next day about what you should really do to make profitable investments by giving you a new list of Indian stocks and Indian mutual funds. And then help you change your mind again before the week is over.

For each time the system helps you change your mind, that creates an action: the selling of one stock and the buying of another. Or the selling of one mutual fund and the buying of another mutual fund. They are making you buy what is “fashionable”.

Your investment portfolio for the Indian stock market is your fashion statement. Just like owning the CD of the newest song. Or owning the latest style of shoes or clothing.

So, when you go to a party to meet the parents of your daughter’s school friends, you can discuss the latest fashion statement in investing.

Investing in Indian stock markets: or in your broker’s wealth.

You are not really investing in the Indian stock market anymore. You are investing in the wealth creation for the people in the system. Every time you trade, you generate a revenue stream for your broker. You may have a loss or a profit on your latest, fashionable trade. That is your problem. They have a guaranteed profit.

Come to think of it, there are two rules to be happy and successful:
Rule # 1: say “yes, dear” to your wife and nod your head in agreement.
Rule # 2: say, “no, thank you” to your broker and do not nod your head in agreement.

Most people seem to treat their broker as their wife – and nod in agreement to everything they say. And they seem to treat their wife as if she were a broker – and do not listen to their views.  A recipe for disaster: emotionally and financially.