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How the investment field is changing...and why you can't afford to be left behind

All of us have heard of the term 'changing the playing field' and while this is normally used as a metaphor it actually refers to something that we can see in the real world - at times literally.

For example, in hockey the playing field changed from grass to astroturf and suddenly a whole different set of skills became important - from skilful dribbling and stickwork of the Major Dhyanchand era, the need of the hour was to be fast and fit. Indians didn't adapt and fell off the top hockey league.

Currently we can see something similar happening in the automobile market where companies who do not adapt to electric vehicles risk becoming obsolete.

On a new playing field, old instruments and techniques don't work, no matter how skilful the player. The legendary Bjorn Borg couldn't make a comeback with his old wooden racket.

The Playing Field is changing in Investment Management ...and How!

Advanced tech is doing to investment management, what it did to many fields of play.

Traditionally, investment decisions were made only by the human mind.

If you put your money in a mutual fund or portfolio scheme, your "human" fund manager painstakingly analysed Company and industry data in order to decide where to invest.

Almost all investment management practices today, remain frozen in a 1940s-1990s time warp.

But the world has moved on

Why the Human only model of Investment Management no longer works

For one, a large part of what made the traditional model work was getting additional or different information by meeting companies and their management. This was true not just of India but of all markets around the world where large fund managers could sit in a closed room with a company and get information.

However, this edge has been regulated away across the world - information availability has been made uniform. All call transcripts for instance have to be out in the public domain.

In fact, now the problem is something quite different which is an absolute surfeit of data which is humanly unmanageable.

And this is where the machines come in...

Advanced computing power makes extreme data crunching prowess accessible.

Models can analyse more securities AND more data points in each than is possible even for large teams of humans.

Most important, they can do  consistently and without bias - something which is impossible for human beings.

Machines do the thinking for you. Machines "learn", quicker and better than humans ever can.

Adaptive learning systems can replicate human inventiveness, only much better.

Artificial intelligence & Machine Learning are set to transform portfolio management.

An expertly constructed Quant ML model can do bewildering things: it can read millions of research papers, balance sheets, conference call transcripts, social media feeds!

It can analyse a company's auditor's reports and management commentary. It can distinguish between good accounting policies and bad.

It can granularly analyse ratios, in time series as well as cross section, across thousands of companies.

A well developed machine can expertly analyse reams of data, discern patterns & linkages, across stocks and securities across the world. No set of humans is equipped to cast such a wide and narrow eye, contemporaneously, on data.

Investing, the way it has been done so far, is nothing but luck masquerading as skill, with most gains coming from just a handful of stocks. As Charlie Munger says: "If you take away our few big winners, Berkshire's record is very mediocre".

This, in mathematical terms, is luck. Not skill.

Machines reduce the role of luck hugely, bringing skill to the fore.

Which is exactly why the traditional investment management business worldwide has been in crisis for years - because traditional fund management simply cannot beat markets, owing to their severe cognitive limitations.

Human beings are biased and inconsistent. Plus they have limitations - for example, at First Global we analyse over 20,000 securities globally and about 6-700 in India. Even a large team if human beings does it, each human being's way of looking at it will be different which means the entire picture can never be consistent.

Machines are consistent. They will look at data with an even, un-jaundiced eye.

And this, in turn, translates into consistent market beating performance which the traditional fund managers simply cannot match.

Another interesting aspect of quantitative investing: the more the data fed into machines, the more accurate predictions they generate. This is absolutely the opposite in humans! Most human brains decline in capabilities, with age and load.

Because humans can process only limited data, they tend to build more concentrated, clustered portfolios, largely around their comfort zones. This increases correlation in the portfolio, leading to very volatile returns. 'I will invest only within my circle of competence'  is just a fancy way of saying that I will only invest within my comfort zone. And as an investor why should your investment be constrained by your fund manager's comfort zone?

In contrast, Machines can build far larger, more carefully diversified portfolios, across a wide spectrum of securities: reducing correlation, thereby reducing Risk, while not sacrificing returns.

Also, machines are clinical about acknowledging and analysing mistakes as well as correcting the process that led to these mistakes. Each of these steps is extremely difficult for a human being as we are hardwired to defend our decisions and stories.

Reality is: humans have limited capacity to absorb data and when confronted with vast amounts of data the human brain simply shuts down and resorts to  reliance on underanalysed, oversimplified lazy opinions and simple stories.

Quantitative Investing is free from behavioural biases and emotions. The human mind, no matter how intellectually sound, cannot be emotionless.

The Investment Playing Field is changing and you cannot afford to be left behind

The Machines are coming to the Investing Game. The playing field is changing. Sticking to the old way of doing things will only mean that you will out of the game.

Don't become obsolete like the combustion engine will be in an era of Electric Vehicles.

(Devina Mehra is Chairperson & Founder of First Global, a Quant Global Investment Management  Firm. Website: www.firstglobalsec.com. Smallcase: https://firstglobal.smallcase.com  She tweets at the handle @devinamehra)

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दिवाली पर हम सभी देवी लक्ष्मी की पूजा करते हैं लेकिन क्या हम वास्तव में उन्हें वह सम्मान देते हैं जो उनके कारण है?

यदि आप अपने स्वयं के धन या निवेश को प्रबंधित करने के तरीके को देखें, तो आप पाएंगे कि अक्सर ऐसा नहीं होता है।

क्या आप 50,000 या 10,000 रुपये की खरीदारी की तुलना में 50,000 या शायद रु. 5 लाख स्टॉक का निवेश करेंगे?

बहुत बार किसी मित्र की किसी टिप के आधार पर किया जाता है, या यहां तक ​​कि चैट समूह में किसी अज्ञात व्यक्ति से, शायद किसी टीवी चैनल या किसी अन्य प्रकार के किसी आधे सुने गए 'विशेषज्ञ' की राय के आधार पर किया जाता है।

निवेश के निर्णय में बहुत कम विचार किया जाता है: आप उस स्टॉक को किस पैरामीटर के आधार पर खरीद रहे हैं, यह आपके पोर्टफोलियो में कहां फिट बैठता है, आपका पोर्टफोलियो कैसा दिखता है, यह विभिन्न क्षेत्रों या परिसंपत्ति वर्गों के बीच कैसे विभाजित होता है - इस तरह के अधिकांश प्रश्नों को संबोधित नहीं किया जाता है

चाहे आप इसे स्वयं कर रहे हों या आपके पास किसी प्रकार का निवेश सलाहकार हो, आज ही तय करें कि आप अपने पोर्टफोलियो में निवेश और निगरानी के लिए एक उचित प्रणाली का उपयोग करने जा रहे हैं। बेतरतीब ढंग से और बिना सिस्टम के निवेश न करें।

स्मॉलकेस प्लेटफॉर्म एक पोर्टफोलियो बास्केट चुनने का एक अच्छा अवसर देता है जो आपके लक्ष्यों और विश्वदृष्टि के साथ फिट बैठता है।

उदाहरण के लिए, FG-HUM (ह्यूमन मशीन), एक बहुत ही परिष्कृत आर्टिफिशियल इंटेलिजेंस मॉडल का उपयोग करता है, जो दशकों की मानव विशेषज्ञता के साथ संयुक्त है।

(  https://firstglobal.smallcase.com )

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On Diwali, all of us worship the goddess Lakshmi but do we really show her the respect that is due to her?

If you look at the way you manage your own money or investments, you may find that this is often not the case.

Don't you spend more time and effort researching a 5000 or 10,000 Rupees purchase than you do a 50,000 or maybe, Rs. 5 lacs stock investment?

Very often the latter is done based on some tip from a friend, or even from someone anonymous on a chat group, maybe a half heard 'expert' opinion on a TV channel or something of the kind.

There is little thought that goes into the investment decision: based on what parameters are you buying that stock, where does it fit into your portfolio, what does your portfolio look like in the first place, how is it split between various sectors or asset classes - most such questions are not addressed at all.

Once you think about it you will realise that no matter how many lamps you are lighting before the goddess Lakshmi you are not really showing her enough respect.

This Diwali take a pledge to really start respecting her which means respecting your own investment corpus.

Whether you are doing it yourself or have an investment advisor of some sort, decide today that you are going to use a proper system for investing and monitoring your portfolio. Don't invest haphazardly and without a system.

The Smallcase platform gives a good opportunity to choose a portfolio basket that fits in with your goals and worldview.

FG-HUM (Human + Machine), for instance, uses a very sophisticated Artificial Intelligence model, combined with decades of human expertise, to come up with a curated, diversified, Multi-cap, multi-sector list of 25-30 stocks that solve your equity investment dilemmas in one  shot. And the investment process is also super simple.

Wish you and your portfolio a great Diwali.

(Devina Mehra is the Chairperson & Founder of First Global, a global quantitative asset management company. Their Smallcase, FG-HUM can be accessed at https://firstglobal.smallcase.com)

 

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Over the last few days, there have been a number of news stories on the Evergrande issue in China. Evergrande is a large property developer in China which has been facing financial difficulties with possibility of default on its debt.

There have been questions like whether it is China's  'Lehman moment' meaning just as the collapse of Lehman Brothers triggered the Great Financial Crisis of 2008-9 will this trigger something far bigger than a single company default? How much of an impact does the property market in China have on prices of materials, particularly Steel, around the world? Is there a cauae for worry for the Indian markets and investors?

In this piece are tried to dig a little deep into what these developments portend.

First off, how big a deal is that Evergrande has been having difficulties? To understand the context, China has been trying to clean up its bad corporate debts for years. The government has been making noises about more market discipline and a transparent process for letting firms default in order to prevent 'moral hazard'.

However, it has taken a caliberated approach for the same. The contrast can be seen in how it dealt with the large lender, Huarong which was facing problems and a possible default a couple of months ago. In that case since it was state owned and considered large & systemically important, the Chinese government essentially engineered a bailout and ensured there was no default.

The Evergrande issue is different. In our view, the Evergrande issue is part of a deliberate move by the Chinese Government to let a few businesses fail if needed, to rein in a bigger problem, so they will not let it go out of hand. The situation is similar to a "controlled detonation". In a relatively controlled economy like China, this is entirely possible.

Of course, for now, Evergrande has not defaulted on its onshore obligations which form the bulk of its debt. It has probably come to some kind of deal with them - the details of which have not been made public.

Plus, for all practical purposes, a default of Evergrande has already been priced in, and not just its own bonds - even overall High Yield bonds in China/ Asia have already reacted, so there's not much further downside there.

Besides, apart from real estate, tech and consumer discretionary, which have also been the subject of the Government crackdown, other parts of the Chinese economy, continue to be robust. That is where are placing our faith.

The primary casualty of the contagion, if any, will be the banking sector. As far as our global funds and portfolios are concerned, this is a sector we are anyway underweight.

In China, we are in sectors which are more robust like clean energy, semiconductors, footwear & chemicals. We have not taken any direct exposure to the finance and property sectors in China. We also cut out the consumer internet/ tech stocks a few months ago after the government pressure increased in various ways on companies like Alibaba, Tencent etc. The way the Chinese government forced the pulling of the Alibaba affiliate, Ant Financials' IPO and thereafter moved against several other consumer tech giants showed that regardless of business potential, the Chinese government would not let any entrepreneur get 'too big for their boots'.

On the other hand Chinese government has put a lot of effort and money behind many identified innovation and high tech areas from semiconductors to neuroscience to blockchain. Hence the opportunities have to be properly sifted and identified.

We will be watching the developments very closely, but one way or the other, it is not going to affect our global fund/ portfolio materially.

While we don’t think anyone realistically sees Evergrande as Lehman, but we’ve also seen these periods of China deleveraging weakness before and they aren’t fun. We don’t need the 0.01% probability tail event to be concerned. However, given the amount of publicity it has already received, property developers and financiers have already seen credit spreads widen. For Evergrande, effectively, a default risk is already built in with its bonds trading at 20-30 cents on the dollar.

Beijing wants to rein in the property sector which has been highly levered for some time now. But Beijing does not want consumers to suffer so the only solution is restructuring and a slow burn in the property sector.  As of June, Evergrande's inventory (composed of largely unfinished projects) accounted for about 60% of its total assets. Properties under development, in particular, ballooned to 1.3 trillion yuan ($202 billion), a 54% jump from three years ago.

If only Evergrande could offload some of these projects to, say, a cash-rich state-owned enterprise, its immediate liquidity crunch would be resolved. Beijing would then have some breathing room to gradually scale down this beast.

While one can bet against Chinese private banks/NBFCs with high exposure to property related sectors, we don't think PBOC will let big banks collapse.

The other possible risk area is investment grade names in the real estate space. The Bloomberg China HY USD index is 66% real estate. Hence, when you look at the aggregate index, it is mostly a real estate picture you get.

So far, we think this a China real estate specific problem. The contagion is likely to be very limited.

This leads us to the question if a Chinese real estate/ property area problem has wider implications? Especially for metals and other industrial commodities.

Steel and iron ore are already under pressure due to Beijing's "Blue Skies" mission for winter Olympics where in order to reduce emissions they're restricting steel production. Iron ore is trading around $100-110, less than half of its May 2021 peak. Australian miners can take a big hit and they already are.

As for implications for Indian metal companies: Metals, including steel, had been big winners in our India portfolio from the third quarter of 2020 but we had started trimming these a few months ago - one reason being that we estimated that US would try to curb commodity inflation by strengthening the dollar which actually happened.

China has been curbing its own steel consumption for environmental and other reasons. However, I think the primary impact of this has been and will continue to be on iron ore prices and stocks - especially, Australian miners.

Indian steel stocks, while no longer the best bets in the market, don't appear particularly bad either. We however prefer non-ferrous metals both in India and globally.

Meanwhile, our systems continue to monitor all macro & market variables for all major economies as well as industry level data and like a Hare we remain alert, scanning the environment and ready to change direction if the situation so warrants.

As of now, we are not worried about contagion from this particular event but we continue to monitor potential risks.

(A version of this article first appeared in The Economic Times)

From the desk of 

Devina Mehra

If you want any help at all in your wealth creation journey, in managing your Investments, just drop us a line via this link and we will be right by your side, super quick!

Or WhatsApp us on +91 88501 69753

Chat soon!

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“The Chinese government wants to let a few businesses fail to rein in a bigger problem ... The situation is similar to a controlled detonation. For all practical purposes, a default of Evergrande has already been priced in,” says the Founder of the brokerage.

Devina Mehra is one of the sharpest minds in the Indian stock markets. An IIM-A gold medallist and Founder of institutional broking firm First Global, Mehra had led research at the broking firm. Her more recent accomplishment is to have built the machine-plus-human approach to investing. First Global is one of the first Indian brokerages to start tracking US stocks way back in 2001, and Mehra has a keen understanding of global markets, and, yes, when it comes to market predictions, she has several firsts to her credit.

In an exclusive interview with Moneycontrol, Mehra talks about the default of Chinese property developer Evergrande, its impact on the Indian market, First Global's top stock and sectoral picks and more.

Q: How big an issue is Evergrande?

A: In our view, the issue is part of a deliberate move by the Chinese government to let a few businesses fail, to rein in a bigger problem. So, they will not let it go out of hand. The situation is similar to a "controlled detonation". In a relatively controlled-economy like China, this is entirely possible. This is in contrast to several somewhat sensational reports and videos floating around.

And for all practical purposes, a default of Evergrande has already been priced in and not just its own bonds - even overall high-yield bonds in China/ Asia have already reacted. So, there's not much further downside there.

Apart from real estate, tech and consumer discretionary, which have also been areas of government crackdown, other parts of the Chinese economy continue to be robust. That is where we are placing our faith.

The primary casualty of the contagion, if any, will be the banking sector. That is a sector we are anyway underweight on.

Q: How much China allocation do you have in your global portfolio?

A: Overall, our exposure to China is just 2.3 percent, well below its representation in the benchmark indices, where the weightage is close to 4 percent. We are in sectors that are more robust -- like clean energy, semiconductors, footwear and chemicals.

We have not taken any direct exposure to the finance and property sectors in China. We also cut out the consumer internet/ tech stocks. A few months ago the government pressure increased in various ways on companies like Alibaba, Tencent, etc.

We will be watching the developments very closely, but one way or the other, it is not going to affect our global fund/ portfolio, materially.

Q: You clearly do not think the Chinese real estate crisis is comparable to the US financial crisis … Like you mentioned, there are some voices comparing it to the Lehman crisis.

A:  We don’t think anyone realistically sees Evergrande as a Lehman, but we’ve also seen these periods of China deleveraging weakness before and they aren’t fun. We don’t need the 0.01 percent tail event to be concerned.

However, given the amount of publicity it has already received, property developers and financiers who have already seen credit spreads widen - people are struggling to find even a single bank to sell them a CDS on Evergrande. Effectively, a default risk is already built in, with its bonds trading at 20-30 cents on the dollar.

Q: How do you see this news playing out in the near term? It seems to be impacting sentiment, at least for now…

A: Beijing's focus is on reining in the property sector, which has been highly levered for some time now. But Beijing does not want consumers to suffer. So, the only solution is restructuring and a slow burn in the property sector.

As of June, Evergrande's inventory (consisting of largely unfinished projects) accounted for about 60 percent of its total assets. Properties under development, in particular, ballooned to 1.3 trillion yuan ($202 billion) -- a 54 percent jump from three years ago.

If only Evergrande could offload some of these projects to, say, a cash-rich state-owned enterprise, its immediate liquidity crunch would be resolved. Beijing would then have some breathing room to gradually scale down this beast.

Meanwhile, this would, by extension, impact the construction space and industrial commodities in China. Steel and iron ore are already under pressure due to Beijing's "Blue Skies" mission for winter Olympics. In order to reduce emissions, they're restricting steel production. Iron ore is anyway trading below $100 now. Australian miners can take a big hit and they already are.

Q: What kind of trades are you recommending to investors with a global risk appetite?

A: Our basic stand is always to err on the side of caution and risk-control.

Since we run long-only strategies, even stocks or areas we do not like, we just steer clear of them rather than shorting them.

With that caveat, our view is that if you were to go with the proposition that Chinese banks can blow out in a tail-risk scenario, you're better off betting against Chinese banks/NBFCs with a high exposure to property-related sectors and the least support from the People’s Bank of China (PBOC), i.e., private banks.

We don't think the PBOC will let big banks collapse, considering each of the Big Four banks remain wholly or predominantly state-owned and headquartered in Beijing.

Another possible pessimistic trade is to bet against investment grade names in the real-estate space. The Bloomberg China HY USD index is 66 per cent-real estate. Hence, when you look at the aggregate index, it is mostly a real-estate picture you get.

If you dig into the other parts of the index, the message is quite different, at least for now. It is hard to find big companies outside real estate that have seen significant spread-widening. So far, we think this a China real estate- specific problem. This is not to say that 'everything is fine'. It is just to be precise about what type of contagion we are observing.

Q: What do you think will be the impact of the Chinese government efforts to rein in Chinese real estate on global commodity demand, supply and prices? Do you think Indian metal stocks, like Tata Steel, have over-run their course?

A:  Metals, including steel, had been big winners in our India portfolio from the third quarter of 2020 but we had started trimming these a few months ago.

One reason is that we estimated that the US would try to curb commodity inflation by strengthening the dollar, which actually happened. China has been curbing its own steel consumption for environmental and other reasons.

However, I think the primary impact of this has been and will continue to be on iron ore prices and stocks - especially, Australian miners. Indian steel stocks, while no longer the best bets in the market, don't appear particularly bad either.

Q: What are the key variables you will be watching over the next few days and weeks to see if things may get out of hand?

A:  Our systems continue to monitor all macro and market variables for all major economies as well as industry-level data. Like a hare, we remain alert, scanning the environment and ready to change direction if the situation so warrants.

As of now, we are not worried about a contagion from this particular event, but we continue to monitor potential risks.

Q: From an Indian market perspective, how do you think the risk-reward is poised for overall markets?

A: Someone recently shared the BSE SENSEX historical data with me, which shows that in the past decade, we have seen the lowest compounding (See chart).

Inherent in these numbers is the risk-reward in the market. Prior to this run, the whole decade gave very sub-normal returns.

As per our Lake of Returns Theory (LORT), returns crash and a bear market comes when the returns have been substantially above trend for a reasonably long time.

As this table shows, we have not had a sustained bull market. Hence, the risk of a sustained bear market is also lower. We have not even come to normal trend returns.

Hence, while corrections can be expected, our systems do not indicate risks of a significant bear market.

Q: Do you think the risk to Indian markets hereon is more local or global? Could you elaborate with data points?

A:  We don't think we are through with the pain points in the domestic economy, with recovery still some way away when you benchmark with pre-COVID levels. Consumer distress also remains. To that extent, we are still lagging many other countries.

Globally, for now, COVID-related news remains a risk area. Inflation is not out of hand, at least in the developed world. Hence, the tightening cycle there remains some way away. 

Some of the emerging market players, however, have already been tightening. If India does not follow suit -- my bet is that it will not -- currency could be a risk area.

Q: What are your top stock and sectoral picks right now?

A:  We have a very diversified basket, with no outsized bets on any single sector. Currently, our relatively higher weights in the India portfolio will be IT, chemicals, cement, and, more recently, telecom. We continue to be underweight on financials as we think the risks there remain relatively high with considerable pain in the economy.

(A version of this article first appeared in Moneycontrol)

From the desk of 

Devina Mehra

If you want any help at all in your wealth creation journey, in managing your Investments, just drop us a line via this link and we will be right by your side, super quick!

Or WhatsApp us on +91 88501 69753

Chat soon!

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The Occasional that talks sense... most of the time

Volume 102 (September 25, 2021)

By: Le Grand Fromage

Email: [email protected]

Are You Ready to Be the Hundredth Monkey?

A few days back, I got a call from a cousin, who happens to be in his mid-30s and recently became a first time father.

He wanted to start a systematic investment plan (SIP) on an equity mutual fund and wanted to know what I thought about it. (He obviously had no idea that last 10 years; I'd worked on a troll farm, where the term SIP stood for Systematic Intimidation Plan).

“If you want to start an SIP, you better be invested in it for at least a decade", I replied. Rather grandly.

“But ten years is a long time”, he yelped, making what he thought was a great observation and what I thought was bad small talk.

And if that wasn’t enough, he explained. “I started SIPs five years back. I also started investing in cryptos three years back and have made a good amount of money quickly, and you want me to invest for at least ten years. My hair will be all gone by then. Give me the next big idea. I am willing to take risk.

He had moved from SIPs to the next big risky idea in a matter of minutes.

That’s what a good bull market does to our thinking capabilities, which aren't worth writing home about, even without the ravages of a bull market.

The rising tide lifts all boats or to put it more simply a beginner’s dumb luck which is a real thing, turns into extreme individual confidence and people start believing that high risk means high returns all the time.

And this makes tremendous psychological sense as well. As William J Bernstein writes in The Delusion of Crowds – Why People go Mad in Groups: “Human beings intuitively seek outcomes with very high but very rare payoffs, such as lottery tickets, that on an average lose money but tantalize their buyers with the chimera of unimaginable wealth.”

My cousin is no different on this front. He wants to get rich as effortlessly and as quickly as any other person. As the economic historian Charles Kindleberger once famously observed: “There is nothing as disturbing to one’s well-being and judgment as to see a friend get rich.”

Or, as a character puts it in the cult movie, 3 Idiots: “If your friend fails in an exam, that causes great pain to you. But it's nothing compared to the pain you feel when he tops the class".

Now, as I have aged and developed some patience, I have learnt that telling people what exactly I think about them isn’t always a great idea. (I tried that on Duterte and he sent a hit squad after me.)

So, I decided to tell him a little story, which I had recently read in a crime thriller written by Louise Penny and rather oddly called The Madness of Crowds.

The story is called the One Hundredth Monkey. And this is how it goes.

Sometime in the 1950s, sweet potatoes were dropped on a Japanese island. The monkeys that lived on that island loved their taste but hated the fact that sand covered their food.

One day a young female monkey behaved smartly, went to the ocean, and washed the sweet potato. A few other monkeys copied her. But most monkeys continued to eat sandy sweet potatoes.

“That’s not much of a story,” my cousin interrupted.

He didn’t want any theory-sheory and waste his time on it. There was only one life and only so much time and money had to be made quickly.

Ignoring him, I continued.

Over the months, the number of monkeys who washed their sweet potatoes in the ocean before eating it, continued to grow, but at a very slow pace. Then one day, the one hundredth monkey as per the scientists’ count, washed the sweet potato in the ocean before eating it.

After this, as Penny writes: “Something broke. By nightfall all the monkeys on the island were washing their potatoes.” In fact, it was soon discovered that monkeys on other islands were doing the same.

The anthropologists carrying out the study termed it as the hundredth monkey effect.

“So, what’s the point?” the cousin interrupted again. “100 monkeys or 99 monkeys, they are still monkeys. How does it matter?”

I almost felt like saying, it doesn’t matter because he was a monkey. But as I said earlier, it’s best to keep things to ourselves.  These days, specially.

Honestly, the number doesn’t really matter, but the broader point here is that after a tipping point is reached and a certain number of people start believing in an idea, it takes off, it explodes and takes on a life of its own.

“Is this really a theory?” the cousin asked looking at us rather dubiously. “If I hadn't wasted time with you, I would have got three good money-making ideas on telegram by now.”

Well, to be honest, the theory has been questioned over the decades, I replied.

But then, who are we to come in between a good story and a ready listener.


“And what do you think about that IPO?” the cousin asked.

Dear Readers, we guess by now you must be scratching your head wondering where we are going with this. So, let’s get to the point.

The stock market is like an island. Investors are like innocent monkeys who inhabit that island. And if enough investors start behaving in the same way, by buying into an idea behind a stock, we reach a tipping point, like it happened on the Japanese monkey island, and the price of the stock shoots up. If more monkeys keep coming along, the price keeps going up.

Of course, since March 2020, investors have bought into multiple ideas that have been shared and a lot of money has been made. But the stock market is always about the future and not the past. And in the next few months a good number of initial public offerings (IPOs) by companies are lined up.

Many of these IPOs will be exorbitantly priced, with the promoters and their VCs, trying to make a quick buck, trying to take advantage of the high valuations that currently prevail.

The IPOs will be promoted big time by its investment bankers, the pink press, the business news channels, the social media influencers, the brokerage analysts and so on. They will do anything and everything to justify the high valuations.

One fashion-cosmetics retail company going public, has had brokers justifying valuations, based on 2041 earnings and I kid you not: "Fashion business is trading at just 10x FY2041 earnings", one broker wrote analytically in their IPO note. Recommendation? Subscribe. Obviously!

Stories will be told over and over again.

Because as human beings who have already made a lot of money in the last eighteen months, the prospective investors in the IPO will prefer to be told stories that tell them that a lot more money will be made in the time to come.

Facts & logic will take a backseat. (Maybe they should. They are so 2019).

The idea here will be to get enough people interested in the IPO, so that there is huge demand for a limited number of shares. This is another version of the hundredth monkey effect. The insiders will talk up the IPO in the hope that many investors get interested and a tipping point is reached.

Once a tipping point is reached, everybody won’t get an allocation in the IPO. The investors who don’t get an allocation in the IPO will then try and invest in the stock on the listing day, leading to an IPO pop. The insiders or those selling the idea of the IPO will end up making a lot of money. So, will the anchor investors and everyone who gets an allocation in the IPO and sells out on the listing day.

As far as the investors who invest after the IPO, it all depends on how many investors continue to be sold on to the idea behind the stock in the days to come. Of course, many a time, this doesn’t end well. If you don’t trust us, do check out what happened to some of the big IPOs in 2008. I will leave that research up to you.

At the end of the day, why should I spoil what has been a good a story after all. Let’s not let the facts come in the way and let the world label us as old fogeys who have been around for a while “with memories long enough, to have seen the play before and to know how it ends”.

Before you start wondering what happened to the cousin, he walked out saying: “This time is different”.

The trouble is it rarely is.

Or maybe it is.

Go figure.

Because I surely can't.

(Le Grand Fromage can be contacted on email: [email protected])

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From the desk of Le Grand Fromage,

Unemployed at First Global

...

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