Spot the difference – Tulip bulbs and IPO of Reliance Power

In 17th century Amsterdam, there was a mad rush about buying and selling tulip bulbs. Speculators were scrambling over one another to profit from this rare opportunity of making money.

A tulip bulb becomes a good investment only after it is being put in the ground and then the plant bears beautiful flowers. However, the speculators had no intention of putting the bulbs under the ground.

Centuries later, we saw a similar mad rush in India when a record number of demat accounts were opened only for the purpose of buying the shares of a company in its IPO – the company was Reliance Power Ltd. It was a greenfield venture of the Reliance Anil Ambani group that was setting up mega power plants. However, while the power plants were to set up after a few years (the project’s gestation period was more than 4 to 5 years), those rushing to buy the shares in the IPO had no intention to see the plants being erected. They simply wanted to sell the shares immediately on listing at a profit – speculation of the highest order.

In both the cases, the participants were under a false notion that they were investors, whereas their action of nothing but pure speculation on the price movement of the instrument. They were looking for a “greater fool” to help them make money.

Instruments change, time changes, people change, geography changes – man would remain constant factor in all manias.

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There is not a lot in the name, it seems

Yesterday, we posted about changes in the names of companies only to cash in on the story of the times. We tend to look for such short cuts.

Kareena Kapoor said in an interview after her marriage with Saif Ali Khan that she now has the two most famous surnames in Bollywood. Well, she still had to act well to maintain her stardom. A name may open the doors but to stay there, you need merit, you need to perform.

This same logic applies to companies, too. Just because a company belongs to a business group or is promoted by a successful promoter or the name of the company resembles another successful company; there is no guarantee of success.

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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.

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Crazy valuations

At the peak of the market craze in the late 1980’s, the PE ratio of the Tokyo Stock Exchange Index, TOPIX, was above 100

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IPO mania of the mid-1990s

In the IPOmania or the IPO craze of the mid-1990s in India, application forms were sold at a price (unofficially)

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Man and mania

Tulipomania, Ulipomania or IPOmania – “man” is the common denominator in all “manias”

 

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