Friday, December 09, 2011

Kolaveri & Investing

Kolaveri di, the Tamil song was released digitally on November 16 and became a raging success online with more than 10 million downloads. The country danced to its tunes as the craze spread like wild fire. The song became an outstanding hit for its simplicity, rustic, slang power & contemporary style.

Javed Akhtar calls it an insult to sensibilities and fundamentally weak with substandard singing and ordinary tunes. Yet its popularity spread at hysterical proportions as with rock bands, face book and other fads. Its popularity spread as people do not lose out on what their friends and acquaintances might have gained. So if Kolavari gets a few million hits, be sure that the same hysteria will propel it even greater fame. The fad soon fizzles out when the newness and mystic around it is lost with time.

This Kolaveri phenomenon shows up in the investing world in the form of IPO and hot tips. Word of mouth is a powerful influence. That’s when we see an IPO is subscribed 80 times and when the listing happens, the newness & mystic fades. Soon reality bites as we seek adventure in newer ideas and move on. The scrip then loses its initial high on listing and like Kolaveri, the zeal and enthusiasm dies out. Only that with stocks, it leaves your purse lighter. This has been a great example and should serve like a speed break when we spot on ‘marvellous’ ideas and ‘hot tips’ from friends or brokers.

Recent IPOs of Reliance Power or Punjab and Sind Bank or the deceiving elements of sectoral funds prove this. The reliance IPO was oversubscribed by 77 times at an issue price of Rs 269 (after adjusting the bonus of 5:3) in Feb 2008. There was a mad hysteria around private sector power producers and their great prospects in a power starved country. There was a huge build up and entire country expected to make a fortune by subscribing to it. Virality was induced by word of mouth as people rushed not wanting to lose out what they expected others to gain. This explains why the IPO was subscribed by 77 times. It is trading currently at 85 losing all the money for investors. There was also the case of IPO of Punjab and Sind bank which subscribed 80 times driven by the theme -last PSU Bank to go public. Again the grand expectations built on a simple and easy to understand logic actually made one feel like having an egg on the face. It was issued at about Rs 120 and is now quoting at 68. These are a few examples of how mass hysteria can come in way of logical investment reasoning. During the period preceding dot com bust, the IT sector Funds mobilized huge amounts of deposits riding on mass hysteria that IT was the solution to world hunger. In the aftermath of 2002 meltdown, almost all sectoral funds lost money for investors and closed.

In a Diaspora of people with shared beliefs (of say 'stocks hold the future' ), certain ideas (Power deficit country, or last PSU Bank to list) can cause emotional excesses or create anxieties. They start acting on these (such as subscribing to an IPO or buying into sectoral funds with no research or reason) and soon the magnitude (interest in an asset class measured by how may subscribe) gets out of control. This explains why a dud IPO or a dud fund receives overwhelming interest to a theme and how they assume geometric proportion like getting oversubscribed by 80 times. As with any Fad, investors in such hot tips or IPOs and theme funds, lose out.

No economy in the world has ever grown at a scorching pace continuously. Studying economy moderates our view, that a growth of 4% after inflation is only the realistic estimates in long term. Certain markets or stocks can return higher than the average economy, but will fall back soon to a mean. Hence if there is great run up then it is typically followed by periods of reduced growth or slowdown. Economists call this regression. Investing in a stock that has given scorching gains is fraught with risks as there is no question whether you would lose money, it is only when. As a corollary, great companies that have lagged the markets severely can be expected to gain to at-least to an average mean. I discussed this in the previous post.

It is hard to predict which stock or song will be the next Kolavari as in this case even super star Rajini admits he couldn't predict Kolaveri Di's success. Not to mention Team Kolaveri still wonders why it became such a rage.