Mukeshbhai was fond of watching TV programmes like “20:20” and “Bulls eye”. He religiously followed the recommendations of the experts there though he never made any money out of them. Today, he had a premonition that something bad would happen when Lata Venkatesh interrupted his favourite programme to breathlessly announce that the rupee-dollar rate had breached the Rs. 62 mark sometime in the night. Some corrective action was imminent from the RBI, she said. There was something about Lata Venkatesh that got on Mukeshbhai’s nerves though he admired her knowledge of complicated issues like foreign exchange.
“Aaj kuch lafda hone wala hai Boss” Mukeshbhai said to Jigneshbhai with the air of someone who was an expert. “RBI kuch gadbad karne wala hai”. Jigneshbhai had no idea who or what the RBI was and how it was relevant to his daily punting exercise. But he knew better than to argue with Mukeshbhai.
At Dalal Street, it was a scene straight out of Apocalypse Now. Though it was still the early hours of the morning, news that the Sensex had crashed 769 points had spread like wildfire. Thousands of investors were rushing to Dalal Street by whatever means of transport was available to them. Many were in their night clothes. Their eyes were bloodshot and they were panic stricken, running helter-skelter trying desperately to salvage something from the ruins. While the old-timers had foggy memories of similar great crashes in the past, the younger brigade had no reference point. Mukeshbhai and Jigneshbhai were also there, looking lost and bewildered.
However, one man was standing quietly in the corner, grinning from ear to ear like a Cheshire cat. He was leaning casually against a BMW X-7. The car had been polished to perfection and was gleaming in the bright morning sun. He was holding a thick Havana cigar in his right hand. You could tell from afar that it was a very expensive cigar. As he brought the cigar to his lips, the sunlight glinted off the thick diamond ring he was wearing on his index finger. He took a deep drag on the cigar, shut his eyes, and exhaled slowly, enjoying the taste and warmth of the rich fumes as they rushed out of the nostrils. As he brought his hand down to check the time on his diamond-studded cartier watch, you could see that he was wearing a very well fitting Savile Row suit.
It was clear that this was a very wealthy man with a taste for the good things of life.
Shankar Sharma enjoyed coming to Dalal Street early in the morning. The sight of clueless investors streaming in and out of the stock exchange building with a look of self-importance on their faces, buying or selling something, always amused him. “Bulls make money, bears make money, pigs get slaughtered” he remembered Gordon Gekko’s famous saying and giggled.
Shankar Sharma frowned slightly as his memory went back to that balmy day in April 2013 when he had sounded out the warning that a great crash was coming. Shankar Sharma was a devoted follower of Jesse Livermore. Like his mentor, he believed in keeping a close watch on the tape. “The tape never lies” he thought. “And it was telling me a clear story of doom and gloom”.
Shankar Sharma rushed to the TV Studios to share his findings. But, if he was expecting accolades from the investing public, he didn’t get any. Instead, what he got was indifference. Worse, his prophecy was treated with contempt by a section of the investing public. They derisively called him “doomsday prophet” and laughed off his predictions.
“They are not laughing now” Shankar Sharma thought as he watched grim-faced investors jostle each other to get into Jeejeebhoy Towers.
“Now, the jokers know they should have paid more attention to me”, he mumbled to himself as he brushed the cigar ash from his sleeve.
Mukeshbhai and Jigneshbhai were heading for a cutting chai in the nearby gully when they spotted Shankar Sharma, lost in his thoughts. Mukeshbhai, the more extroverted of the two, never missed an opportunity to talk about the markets with anyone who appeared to be somewhat knowledgeable.
He spat out the gutka, cleared his throat and addressed Shankar Sharma. “Shankarbhai, market ka kya lagta hai. Bottom ho gaya na?”. Mukeshbhai always liked to put on an air of being a man of the World.
Shankar Sharma looked on with distaste, unhappy at the unwelcome intrusion. He never liked interaction with the hoi polloi. He folded his arms and moved a step back to protect himself from the gutka spittle.
“Why do you guys start talking bottom the first day the market falls? You do not start talking when will the market top out each time the market rallies 2%? So when it falls 2%, why do you keep start beating the drum of bottoms? Right now capital preservation is the only goal. Forget about bottom fishing and hitting the bottom and buying on dips and all those kind of statements. This is not going to end very soon. This is a global bear market in emerging market countries and India did not fall as much as the others did till a month-and-a-half back” Shankar Sharma replied aggressively, the irritation showing on his face and in his voice.
This exchange of words attracted a crowd of onlookers eager to know what was happening and whether any buying/selling tips were being offered. Shankar Sharma suddenly became the center of attention and he began to warm up to the occasion. Rakeshbhai, a portly looking first-time investor, wanted to know whether banks were now a good buy given the steep fall in their values.
“Indian private banks are still very expensive whether you look at their price to book or the PE multiple” Shankar replied. “The profits for the private sector banks will slow down and may even reverse. In the past, they have been making inordinate amounts of money relative to the quality of businesses and that aberration will not last long” he said. “Banking is a highly leveraged play and in an economic downturn it is a pretty lethal cocktail” he added.
The audience was looking at Shankar Sharma with a skeptical eye. So he continued to explain why banks were a dangerous business “Banks are typically valued on a price to book basis. The problem with that method is that the book value itself is not secure because of the huge leverage that is piled onto that book value. So when you even have modest cuts on your asset value given a cut of 2-3-4%, that is enough to wipe out your equity or at least half of the equity in case of Indian banks. So the book value itself is almost like a chimera, it is not real. When things are bad, book values can evaporate like you know a drop of gasoline on a hot day and that is what is going to happen that you will see big cuts in book value”.
That got Raamdeobhai, a middle aged investor, very worried. He had a big chunk of money in banks and FMCG stocks. “So one is better off buying into defensives like FMCG and Pharma” he asked hoping that Shankar would reply in the affirmative.
“If you have a choice, you should skip. Institutional investors do not have any choice at all because of the mandate they have to remain invested. But that is not the way investing works. First and foremost the first duty is not to lose money, and look in banks you have lost 30-40% and that does not look like a stopping. So if you have choice, stay away” Shankar replied.
Rameshbhai, a scholarly looking investor, was stuck with junk stocks like JP Associates, GMR, GVK and Suzlon which had fallen hard and lost even 95% of their values from their all-time high. Can they fall more he asked hoping that Shankar would console him that these stocks would regain their lost glory.
However, Shankar Sharma dashed his hopes. “They can go to zero theoretically in the sense that if you have a lot of debt on your balance sheet which cannot be replaced with equity in markets like these, then the interest cost of that debt completely erodes your book value. Stocks keep falling, they keep going into a free fall, then leverage companies in a bad economic situation really have no bottom in a manner of speaking”. He cited the example of Kingfisher Airlines which was quoting at Rs 3 though it had no assets worth the name.
As the crowd dispersed, with heavy hearts, Shankar Sharma left them with a bit of advice as he drove off in his BMW X-7 “The simple story is that the structural bull market is over. So now let us try and salvage whatever we can from this very savage bear market, that is clearly upon us”.