Are all the market crashes bad?

Amit Trivedi of Karmayog Knowledge Academy on why the great Indian securities scam resulted in a better and safer market for the investors.

Click on the link below to read the article:

Are all crashes bad?

#RidingTheRollerCoaster

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Heroes to zeroes and vice versa

Borrowed the following from the book, “The Money Game” by Adam Smith:

Ben Graham, the classics scholar who was the dean of security analysis, started his text with a quote from Horace: “Many shall come to honour that now are fallen, and many shall fall that are now in honour.”

The markets are more powerful that each individual player. There are reputations made and shattered especially at the time of turn of events. The market cycles have the reputation of making and breaking the reputations (and fortunes) of many.

Read the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” to know about such stories ranging from Sir John Templeton, Warren Buffett, Benjamin Graham, Prof. Irving Fisher, Mary Meeker, Alan Greenspan, Harshad Mehta, Ketan Parekh, Sir Isaac Newton, Julian Robertson, Prof. Irving Fisher ….

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Lessons from Unicorn valuations

Read a nice and very relevant post by Joe Duran titled What unicorns can teach you about increasing your firm’s value.

There are a few things that he has talked about. I would like to draw your attention to the valuations some of the financial firms have received.

  • Betterment: After 8 years in business has estimated gross income of $ 10 million and valuation of $ 700 million. Invested capital: $ 205 million
  • Personal Capital: After 7 years in business has estimated gross revenue of $ 17 million and valuation of $ 425 million. Invested capital: $ 170 million

Betterment’s valuation is roughly 70 times the annual gross income, whereas Personal Capital’s valuation is roughly 25 times annual gross income. We are talking about gross income and not net profits.

People argue that this is not about the current revenue, but about the future potential. They could be right. I just don’t know and I am skeptical.

The argument about the future reminds me of the following paragraphs from the book:

Nicholas Barbon argued that “things have no value in themselves, it is opinion and fashion which brings them into use and gives them a value.”

Harshad Mehta argued that the price of a share is a function of the market’s perception about the future and not the past.

Enjoy while the game is on. Have faith in the future, but be cautious.

#RidingTheRollerCoaster – 187

 

plus ça change, plus c’est la même chose

Edward Chancellor writes in Devil Take the Hindmost: ” …the notion of intrinsic value was an oxymoron, since intrinsic suggested an inward quality, while value was always external. For instance, Nicholas Barbon argued that ‘things have no value in themselves, it is opinion and fashion which brings them into use and gives them a value’.”

Compare Nicholas Barbon’s view with what Harshad Mehta said centuries later. Harshad Mehta argued that the price of a share is a function of the market’s perception of the future and not the past.

“plus ça change, plus c’est la même chose”, meaning “the more things change, the more they stay the same”

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Demi-Gods

In every market cycles there are some who attain the Demi God status.

During the DotCom boom, we had many investment bankers achieving that state in the US. In India, we had our own Mr. Ketan Parekh. In the great Indian Securities Scam, Harshad Mehta had a very wide fan following.

Most humans always need a leader to be followed. Sometimes it could be Adolf Hitler and sometimes Mahatma Gandhi, but a leader is needed. The same behaviour is carried forward in financial markets, too.

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The Mazda saga continues …

Just because Harshad Mehta was interested in a company called “Mazda”, many did not even wait to check the full name of the company and wanted to buy it as long as the company had the word “Mazda” in the name. There were 3 to 4 other companies that enjoyed price rises simply because of this magic word – Mazda – in their names. So much for the Midas touch, only that Midas had not even touched these companies.

Attention to details is a rare trait among many. It becomes even more rare when greed takes over and everyone is in a hurry to make money.

#RidingTheRollerCoaster – 143

More on Mazda Industries

After Harshad Mehta took over the company, the stock price zoomed. From Rs. 39 in October 1991, it went to Rs. 1,600 by March 1992. Yes, it was 40 times in six months. This is not a typographical error.

The Pied Piper Hameln led the children of the town to a mountain nearby never to return.

#RidingTheRollerCoaster – 142