Herds galore …

We see many examples of herd mentality in the financial markets. Tulips were a huge craze in Amsterdam in the early 1600s. Dot-Com companies became a rage in 1999-2000. Both these were examples of greed. However, post the sub-prime crisis, when stock markets crashed in India, fear made people flock to the safety of capital protection products and LIC’s Jeevan Aastha – a guaranteed return (but lower than inflation) product.

#RidingTheRollerCoaster – 150

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How we react to current events

“Vijay Mallya is a small defaulter as compared to many others” said a post doing rounds in social media. And then the post lists out some very large debtors to the banks. Some of the industry houses have debts more than Rs. 1 lac crores.

What level of financial illiteracy this is? The person who made this post should be sentenced to an accounting school for a period of five years.

There is a difference between debt and default, though the defaulter was a debtor once. But this is like blaming all marriages for the divorces and all deaths to births.

While Kingfisher Airlines has defaulted on its commitment to the banks, those in the lists have a timely repayment track record, at least so far. They are only debtors and not defaulters.

By the way, some people who circulated and forwarded this message live in houses purchases through home loans. Should they be called defaulters or are they just “small borrowers”? Some also trade in stocks on margin or trade in derivatives. This is debt.

How about Government of India, which is the largest debtor in the country? By the way, whenever this largest borrower wants to borrow money, we queue up. And by the way, I have also read about why LIC policies are safe, as the Government of India backs them. The tax-free bonds of some of the PSUs are selling like hot cakes – once again guaranteed by the biggest debtor of the country.

Debtor and defaulter are not the same. Whereas all defaulters were debtors, not all debtors would default.

Though Kingfisher Airlines’ troubles are not new and the default also was public knowledge, the moment the banks’ exposure to Kingfisher became public, people started to panic. Add to it the recent defaults by some other borrowers and that just added fuel to the fire.

Such reactions to current events or the news makes us commit mistakes. Often, these mistakes prove to be costly.

It is important to maintain balance, and it is not easy.

#RidingTheRollerCoaster – 99