The Bubble and the Pin

Re: # 15 zeemax {``...both the real-estate and the equity markets are `imperfect` markets which can be manipulated...``}

This is so very true, not just in India or Pakistan, but also in the US... particularly the equities market (if not also the US real estate market)... I could`nt agree with you more. There are no REALLY perfect markets today, anywhere. As for the global currency market being free of manipulation, I`ll agree that it is as close as one can come to a so-called perfect market in this day and age.

...SR

#14 by rajesh_shankara

Yes Rajesh, but both the real-estate and the equity markets are `imperfect` markets which can be manipulated. The only `perfect` market is the currency market which is way too large for any single person or group to manipulate ...

Re: # 13
Mine too Zeemax. Ofcourse the old adage puts it clearer - A fool and his money are soon parted. But markets are way too complex and muddled to a point where there are no clear pointers to who is the fool and who is the wise man. I have myself fallen into the trap. I waited three years for flat prices to fall in Bangalore (shorting the market) before giving in and booking my flat 70% higher than what I could have got it for. (1100 psf vs. 2000 psf).

Markets can remain irrational longer than you can remain solvent - John Maynard Keynes

This one is my personal favourite. That is why dealers keep averaging down while holding a position against the market, confident that it just HAS to turn around ... till they run out of margins.

SR
Thanks a million. My ignorance in this is typified by the fact that the abbrieviation PE means Professional Engineer to me rather than a Price/Earnings ration ( I looked this up on google). But it looks interesting enough and I shall start to read. I having a feeling that the books that you and Rajesh have suggested will keep me beyond Christmas.
From an engineering perspective we used to look at all the companies that were pretty much vapour-ware in the late 1990`s and wonder what investors ever saw in some of them. The sad thing is that many little companies with good, not flashy products, were acquired for modest sums by large companies and then those products ditched when larger flashier companies were acquired.
My own former company made mistake after mistake in acquiring smaller ones, ditching the good products and going after unproven technology.

Rajesh: How very true, the herds often stampede towards the abyss unaware of the perils that lie ahead... like sheep to the slaughter. The one constant in the stock market is the long term cycle from high valuation to low valuation and then back up. These cycles are usually a decade or two long on each leg. The most recent up-cycle started (on Wall Street) in 1982 and peaked in 1999-2000... At the bottom of the typical valuation cycle the average divedend yields are in the 6% (+/-) range and the PEs hover around 10, yet no one is interested in the stock market and these basement bargains go unnoticed. On the other hand when the mass hysteria is at it peak, as was the case in the Mother of all Madnesses in 1999, when yields are miniature 1% (+/-) and the PEs are 20-30 the lemmings all flock to the edge of the cliff. This is madness, a la Dutch Tulips.

In 2001 when gold was at a ridiculous $250 (+/-) an ounce a similar situation prevailed and no one noticed. (Well they still don`t notice much.) But when every Tom, Dick and Harry will be setting up bogus gold prospecting companies with PEs over a 1,000 (as was the case in the dot-com mania) the public will be falling all over each other to buy those junk shares because gold will have exceeded $2,500 and ounce and magazine headlines will be predicting gold at $20,000 ounce (remember: ``Dow 36,000``...???). Yes, that madness WILL come one day... That will NOT be the time to buy gold, but that is when people will be cashing in their life insurance to buy the yellow stuff.

swarrier:

If I may suggest a couple of basic books that are a good ground-level starting point. In no particular order:

Reminiscences of a Stock Operator by Edwin Lefevre (written 1930s)
Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay (written in 1800s)

These two books, particularly the second, are not exactly going to teach the basics but are essential reads nonetheless. They describe the human element in ``all this stuff``.

After that there are a ton of books you could read, but I`ll name just a few, almost at random, amongst the good ones that ought to be read:

The Investor`s Quotient by Jake Bernstein (no relation to the great Peter Bernstein)
A Fool and His Money by John Rothchild
Winner Take All by William Gallacher
Trading For a Living by Alexander Elder

This should keep you busy until Christmass.

Cheers,

...SR

Rajesh and SR
Well at some point I shall have to start looking at it. It is so much better to understand what people are talking about. Maybe start with Buffet`s biography. It will take me some time to figure out what is happening.
Rajesh, additionally I thought Centurion Bank was doing rather well now and has acquired Bank of Punjab. Did I lose something in the midst?

Re: # 6
Well said, SR, especially the Odysseus analogy. Everytime the markets peak, people swarm to the markets. Let the markets die down for two years and no one seems to even be aware that there is a market on.

SWarrier, if at all you want to start, do so by reading biographies of the best of the lot - Buffett or Benjamin Graham. These read like stories so are more interesting and also give you sense of the discipline. During the read, you will be exposed to some of the technical aspects which will definitely appeal to your engineer brain. My personal investment hero is a Marine engineer from DMET.

Re: # 7 swarrier {``...I ... take the view of every writer ... that I read. ...no opinions of my own. This means that I do not analyse... So there is a wish to start looking at stuff with a view to understanding things...``}

Perfect. The Buddha says: Follow no one, not even ME. Each one must seek his own salvation through diligence.

...SR

Re: # 6
SR
Well it`s like this. The problem is sustaining some interest in the whole thing. I`ve always got more of a kick from doing the frequency analysis of a high bandwidth amplifier than from understanding economics. Though there are times when I would really like to understand what is happening. I used to subscribe to the Economist some time ago, but I found that I read only the bits that interested me, dealing in geography etc. However I tended to take the view of every writer of every article that I read. I had no opinions of my own.
That is irritating as in my field I always have an opinion (right or wrong). This means that I do not analyse. Not a very sound method.
So there is a wish to start looking at stuff with a view to understanding things.

re: # 5 swarrier:

First of all, no one who qualifies as an engineer can possibly be stupid (the same cannot, I my humble view, be said about economists, theologians, lawyers, doctors and investment bankers). Learning about ``this stuff`` is like anything else. It takes interest, commitment, time and diligence. Anyone can watch the gibberish on CNBC, read a few magazine articles and a book or two and become sufficiently familiar with some technical lingo to pretend to ``know`` about all of ``this stuff`` but that is really just the beginning. All the theory and econometric modeling in the world cannot substitute actual hands-on participation in market activity over a stretch of time.

Rajesh alludes to several things with just one or two words that might be meaningless to someone who is not familiar with them. For instance, he used the term ``Greeks`` which might mean something entirely different to a person who has not acquainted himself with the characteristics of options. Like any trade or profession the first barrier to entry is the specialized shop-lingo. But like I said, that`s just the beginning. There is more ``smoke and mirrors``, dramma, double-speak and outright deciet in this industry than perhaps even in the sex-industry. At every step one meets all kinds of creatures: snakes, worms, vultures and slime-balls. One has to steer clear of pitfalls everywhere. Everyone is out to get their own ounce of flesh. One has to be extremely disciplined, tough minded and yet flexible to adapt to the ever changing conditions of the market. Like Odysseus, one has to tie one`s self to his ship`s mast so as not to be lured by the sirens of Wall Street, i.e, the fast-talking brokers, newsletter salesmen, WSJ columnists and CNBC bull-shitters.

...SR

Re: # 4
SR
So I`d like to get to know more about this stuff. However I`ve never (being a stupid engineer) spent too much time on it. What would be the best way to understand this stuff in a small way?

{``...what cozy deals are struck between fund managers and CEOs, distribution brokers and fund marketing officers and so on? The solution to ignorance will always be education, never intermediation. ...``}

Well said, my friend... Like the Dark Matter in the cosmos, there is a lot more hidden content between the line of what you have written that most will not see. The eyes do not see what the mind does not know.

Though I do not follow, nor am I too familiar with, the Indian equities market, I see that the same themes are ongoing there as elsewhere. My interest in equities (now only academic) is limited to the US market only. The commodity markets are much more sound and real.

Of your two protagonists you quote, I am not terribly fond of old Maynard, particularly not his ``commie`` economics :) ... My inclinations are more in line with the Austrian School. However, I do appreciate the sage of Omaha and have for years held a token (one share) of Birkshire Hathaway only to be a ``member of the club`` ... Its worth it just for his letters to the stockholders. Apart from that I am totally dysinfatuated with the equities world and have been since 1998-99.

Your article is well worded but most may not be able to get its drift.

However, I don`t think too many chowk readers are interested in the markets or in economics. Give them some juicy gossip or jingoism and you`ll have a huge readership here.

...SR

WOW.U have again turned a wonderful article with liberal sprinkling of pearls of wisdom.I too share your interest in stocks and have a small portfolio.DO do keep up the good work.

Re: # 1- The research was one-country centric. Should have been global perspective and the effect of the bubble in Percentages` share for the major players and of the second tier.

It also suggests that Chowk has majority of literaries and no stock-broker around but FOMC-Minutes.