The age-old proverb, ‘Let the buyer beware’, applies even today and more so to the financial markets where fear of missing out manifests the most and leads to more irrational decisions.
IRCTC (Indian Railway Catering and Tourism Corporation) was the talk of the town in almost every nook and corner of the country where one can find a stock market investor. In a social gathering, in a small town in West Bengal with a population of around 50,000, guests were discussing IRCTC. How such a premier government company’s stock price fell by almost 30% to 4,000 levels in a matter of few days! No one had a clue if they should buy more or hold on or sell the stock. Reason being, when they bought IRCTC in the first place, they had no clue why they were buying it. Most of them bought because it had rallied by 50% in a matter of few months and some ‘expert’ in some channel mentioned that it is a long-term bullish story being a monopoly and a ‘platform’ business. Some of them added positions when the price was around 5,000. A day later, everyone found out about the central government’s decision to take away 50% of convenience fee charged by IRCTC and they were clueless again on what should be the next step. What is interesting is that all DIY investors who buy stocks (not invest in stocks ) across the length and breadth of India, in a metropolitan city or a small town, focus a lot on ‘What’s Hot Today’ without any clue about the fundamentals of the company!
Younger generation and investors in tier-1 cities are increasingly exploring investments in cryptos and NFTs. Most of them have no clue what Bitcoin exactly is except that it has rallied from a few cents to USD 60,000. These buyers of cryptos have seen their friends and acquaintances who had invested in cryptos, make good returns. They wanted to join the bandwagon too!
Recently twitter was abuzz with news of some Bollywood celebrities foraying into NFTs. This created buzz in online communities as well as HNIs who wanted to invest. It is definitely a lucrative option for the original minter (the Bollywood celebrity in this case) to monetise their collectible which they are offering in the NFT. Most potential purchasers of these NFTs are clueless as to how and why they will make money.
History repeats itself and in financial markets it repeats across different cycles and in different asset classes. The dotcom bubble which busted in early 2000s left behind scores of retail investors who bore the brunt of carrying laggards in their portfolios for next few years as they had no clue as to what was the right price to sell or buy more. It was repeated in the 2008 crisis when infrastructure story busted in India. The post crisis scenario saw more than a decade of no performance by the sector. The peak of Dec 2007 in S&P BSE Capital Goods Index was breached only in Feb 2021.
The point of discussion isn’t that an IRCTC or a platform business or a crypto or NFT is a bubble or not. What is very apparent is that most investors invest in ‘What’s Hot Today’ without understanding the pros and cons of the business or learning about the asset. It has been witnessed in every market cycle of boom and bust. Just that in every cycle, a new set of investors do it to learn the old lesson hard.
What should investor do then?
If investors cannot research about a company, business or asset class themselves, avoid buying into them as you would never know what to do when it rallies a lot or falls a lot. Let the experts in mutual funds take care of it or participate in the broad indices through index funds. Use your advisor to guide you choosing the right index funds or active funds.
SEBI recently banned brokers and then investment advisors from dealing in any unregulated products. Other than digital gold, even NFTs and cryptos fall in the same category. SEBI’s directive is not misplaced as lack of regulatory insight means higher risk of potential issues or frauds resulting big losses.
Innovative and complicated financial products are being launched more frequently now than ever before. The age-old proverb, ‘Let the buyer beware’, applies even today and more so to the financial markets where fear of missing out manifests the most and leads to more irrational decisions.
Source: Business World