Yada Jeevam, Sukham Jivet.
Rinam kritvam, ghritam pibet.
This Sanskrit saying about materialistic mentality refers to the belief of obtaining and sustaining material pleasure by all means, even if that amounts to leveraging debt. Though, the saying is century’s old, its relevance in the material word holds true till-date. This relevance was exploited by the market-movers to plough the land with crops of “easy” money by spraying pesticide of “loan”. Now, it’s well evident, this pesticide has poisoned not only the very same “market-movers” (Investment Bankers, Car Finance Companies) but also has affected “credit-famine” across the globe which is casting shades of gloom to the New Year celebrations. Lot of analysis and action has gone through about this whole episode resulting in bail-out (AIG insurance) and ball-out (Lehman Brothers). However, I am trying to do an independent analysis on the whole scenario with a perspective of a student, who was always confused with the business models based on figures, which was based on too much of optimism, something I can draw parallel to “figures” of “models” in entertainment business, the real figure is always covered under the curtain of “make-up” but we hardly see real-figures. I want to analyse the various aspects of this economy and want to possibly un-cover some aspects of this “make-up”. There were various actors which were acting in unison and I am going to analyse each of these actors, surprisingly I and most of you were not an audience but participant in this whole drama knowingly or unknowingly.
Ownership – Confusion overruled Confidence
The market economy has bestowed ownership status to general public, but I am concerned about the way this ownership status has developed. I wouldn’t delve much in history, as the year 2008 provides sufficient defining data for this.
The graph above depicts the story of declining capital which precipitated fall in confidence of the so called owner (investor). An article in the “economist” states that the global capital market has lost $30 trillion (30,000,000,000,000), i.e. reduced to half (though Times of india states the figure at $40 trillion). This loss has not only affected the direct-investors but all those whose pension funds returns were dependent on the market, thus in effect pinching the ones who saved for their rainy-days, but the irony is the umbrella had holes all-over. The most dreaded aspect of this loss is that the “loss” amount has vaporized. Now, who is responsible for this? There is lot of blame on CEO’s, market regulators but nobody seriously speaks about the role of individual investors, whose appetite of easy money fuelled numerous illogical financial products and the media which in all ways behaved like “bull” in bull-market(when market is up, media provides thumbs-up to the market) and as a “bear” in a bearish-market (media swipes the market-behaviour with hard hitting comments). I am going to analyse more about these two segments.
At Good Times – “Scam seems Strategy”
Lehman or Meryl Lynch were trying to cash on, the appetite of general public for easy credit, also at the same-time creating value for their investors. Now, why the investors or the regulators or the media didn’t question their actions, which when looked in hindsight seems to be highly fraudulent. Why every fraud seems to be an intelligent move until the system breaks? Though, a lot has been discussed about the role of the management team, but didn’t the same Lehman management team work for increasing the value from $113 million to $4.2 billion in Sept 2007. Now, let’s see why investors and regulators didn’t probably step-in.
There was a growing hype that earning money is not a science or art it’s actually a craft to stitch together available information. Media, analysts were providing the stimulus to this hype. Becoming rich became an obsession, as the media around the world put the story of “rags to riches” (I still remember media highlighted a driver of an renowned IT organisation becoming a millionaire, on account of his stock-holdings of the company, coincidentally my many friends are employees of that organisation and definitely they can be millionaire in ways not through easy cashing in stock but through their hard-work), such stories induced greed of easy money-makers to market. However, the insights of media, intelligence of its analysis and its ability to forecast, were null and void when the growth journey met with road-blocks. Their power and their value to society is unquestionable but some-how the Sanjeev-Pooja’s “model-figure” theory suggests that media has become theatre of entertainment playing on the models based on the figures rather than analysing the data in its information-centre. I have observed my friends sitting in-front of business channels throughout the day and still getting the price wrong. So, I will analyse the so called “analysts” and try to break the myth that ordinary investors, sometimes believe that they can out-perform market on such information, instead they use lot of quantitative tools, yet there are factors which go unnoticed or simply the market is irrational to rational thoughts.
Analysts Role – What they do? How they do? - Breaking Myth of a “Magic-Money-Mystery”
The ordinary investors at times do tremendous due-diligence to navigate through all corners of information before they embark on the voyage of “wealth-creation”. However, my understanding (from sample of my friends) suggests that apart from the judgemental reviews of “Buy”, “Hold” and “Sell” by the analysts, little they could differentiate and hence far few they could fathom the market-magic or the research reports. Analysts use several tools to calculate the implicit price in a very basic manner they try to estimate the revenues for the future (what they call as earning estimate or revenue guidance), then they use prevailing discount rate for determine present value of those future revenue projections. We know, given rate of interest “r”, if we invest ‘P’ amount then in n years, the amount will be FV = . This, is the basic logic used for calculating implicit price, as a company would need to invest a particular sum of money for earning a projected sum of revenue. Therefore, this is more of a back-calculation i.e. the present value of all the future guidance amount and also the possible discount cash flows (FV), are determined by the following formula ( .
This value is divided by the total outstanding stocks in the market and that gives them initial estimate of the possible price of the stock. However, the value of “r” is a very subjective value, as every analysts uses their own expected rate of interest for the risk of investing in a particular stock. Let’s not get into detail, it just to demonstrate that what analysts uses, is lot of estimation regarding the expected growth in future and the associated risk. They are also human and hence they err. However, the ordinary investor is always glued to their analysis. Also, to give benefit of doubt to analysts, I would say that their projections can’t beat market owing to common-information effect.
The interactive chart in yahoo finance is a quick and dirty way to understand the trend corresponding to the stock’s pricing in response to analysts views and other events. I analyzed on two stocks, GM and Oracle. I selected GM because this represents an industry which is going through tremendous downturns and Oracle, because it was one of those few companies which reported better than expected earnings during this frugal fiscal year.
The figure below depicts the analyst’s projection and the Oracle share prices for the year 2007 and 2008. In the graph below, you can note the gray spots are analysts’ projections on those days. Irrespective of the recommendation (Buy/Sell/hold), one fact is vividly evident that they couldn’t predict anything near peaks. In fact they missed peaks and droughts by a very wide margin. Though, definitely they can’ control market behaviour but this clearly states that market behaviour is not comprehendible by analytical logic.
Rinam kritvam, ghritam pibet.
This Sanskrit saying about materialistic mentality refers to the belief of obtaining and sustaining material pleasure by all means, even if that amounts to leveraging debt. Though, the saying is century’s old, its relevance in the material word holds true till-date. This relevance was exploited by the market-movers to plough the land with crops of “easy” money by spraying pesticide of “loan”. Now, it’s well evident, this pesticide has poisoned not only the very same “market-movers” (Investment Bankers, Car Finance Companies) but also has affected “credit-famine” across the globe which is casting shades of gloom to the New Year celebrations. Lot of analysis and action has gone through about this whole episode resulting in bail-out (AIG insurance) and ball-out (Lehman Brothers). However, I am trying to do an independent analysis on the whole scenario with a perspective of a student, who was always confused with the business models based on figures, which was based on too much of optimism, something I can draw parallel to “figures” of “models” in entertainment business, the real figure is always covered under the curtain of “make-up” but we hardly see real-figures. I want to analyse the various aspects of this economy and want to possibly un-cover some aspects of this “make-up”. There were various actors which were acting in unison and I am going to analyse each of these actors, surprisingly I and most of you were not an audience but participant in this whole drama knowingly or unknowingly.
Ownership – Confusion overruled Confidence
The market economy has bestowed ownership status to general public, but I am concerned about the way this ownership status has developed. I wouldn’t delve much in history, as the year 2008 provides sufficient defining data for this.
The graph above depicts the story of declining capital which precipitated fall in confidence of the so called owner (investor). An article in the “economist” states that the global capital market has lost $30 trillion (30,000,000,000,000), i.e. reduced to half (though Times of india states the figure at $40 trillion). This loss has not only affected the direct-investors but all those whose pension funds returns were dependent on the market, thus in effect pinching the ones who saved for their rainy-days, but the irony is the umbrella had holes all-over. The most dreaded aspect of this loss is that the “loss” amount has vaporized. Now, who is responsible for this? There is lot of blame on CEO’s, market regulators but nobody seriously speaks about the role of individual investors, whose appetite of easy money fuelled numerous illogical financial products and the media which in all ways behaved like “bull” in bull-market(when market is up, media provides thumbs-up to the market) and as a “bear” in a bearish-market (media swipes the market-behaviour with hard hitting comments). I am going to analyse more about these two segments.
At Good Times – “Scam seems Strategy”
Lehman or Meryl Lynch were trying to cash on, the appetite of general public for easy credit, also at the same-time creating value for their investors. Now, why the investors or the regulators or the media didn’t question their actions, which when looked in hindsight seems to be highly fraudulent. Why every fraud seems to be an intelligent move until the system breaks? Though, a lot has been discussed about the role of the management team, but didn’t the same Lehman management team work for increasing the value from $113 million to $4.2 billion in Sept 2007. Now, let’s see why investors and regulators didn’t probably step-in.
There was a growing hype that earning money is not a science or art it’s actually a craft to stitch together available information. Media, analysts were providing the stimulus to this hype. Becoming rich became an obsession, as the media around the world put the story of “rags to riches” (I still remember media highlighted a driver of an renowned IT organisation becoming a millionaire, on account of his stock-holdings of the company, coincidentally my many friends are employees of that organisation and definitely they can be millionaire in ways not through easy cashing in stock but through their hard-work), such stories induced greed of easy money-makers to market. However, the insights of media, intelligence of its analysis and its ability to forecast, were null and void when the growth journey met with road-blocks. Their power and their value to society is unquestionable but some-how the Sanjeev-Pooja’s “model-figure” theory suggests that media has become theatre of entertainment playing on the models based on the figures rather than analysing the data in its information-centre. I have observed my friends sitting in-front of business channels throughout the day and still getting the price wrong. So, I will analyse the so called “analysts” and try to break the myth that ordinary investors, sometimes believe that they can out-perform market on such information, instead they use lot of quantitative tools, yet there are factors which go unnoticed or simply the market is irrational to rational thoughts.
Analysts Role – What they do? How they do? - Breaking Myth of a “Magic-Money-Mystery”
The ordinary investors at times do tremendous due-diligence to navigate through all corners of information before they embark on the voyage of “wealth-creation”. However, my understanding (from sample of my friends) suggests that apart from the judgemental reviews of “Buy”, “Hold” and “Sell” by the analysts, little they could differentiate and hence far few they could fathom the market-magic or the research reports. Analysts use several tools to calculate the implicit price in a very basic manner they try to estimate the revenues for the future (what they call as earning estimate or revenue guidance), then they use prevailing discount rate for determine present value of those future revenue projections. We know, given rate of interest “r”, if we invest ‘P’ amount then in n years, the amount will be FV = . This, is the basic logic used for calculating implicit price, as a company would need to invest a particular sum of money for earning a projected sum of revenue. Therefore, this is more of a back-calculation i.e. the present value of all the future guidance amount and also the possible discount cash flows (FV), are determined by the following formula ( .
This value is divided by the total outstanding stocks in the market and that gives them initial estimate of the possible price of the stock. However, the value of “r” is a very subjective value, as every analysts uses their own expected rate of interest for the risk of investing in a particular stock. Let’s not get into detail, it just to demonstrate that what analysts uses, is lot of estimation regarding the expected growth in future and the associated risk. They are also human and hence they err. However, the ordinary investor is always glued to their analysis. Also, to give benefit of doubt to analysts, I would say that their projections can’t beat market owing to common-information effect.
The interactive chart in yahoo finance is a quick and dirty way to understand the trend corresponding to the stock’s pricing in response to analysts views and other events. I analyzed on two stocks, GM and Oracle. I selected GM because this represents an industry which is going through tremendous downturns and Oracle, because it was one of those few companies which reported better than expected earnings during this frugal fiscal year.
The figure below depicts the analyst’s projection and the Oracle share prices for the year 2007 and 2008. In the graph below, you can note the gray spots are analysts’ projections on those days. Irrespective of the recommendation (Buy/Sell/hold), one fact is vividly evident that they couldn’t predict anything near peaks. In fact they missed peaks and droughts by a very wide margin. Though, definitely they can’ control market behaviour but this clearly states that market behaviour is not comprehendible by analytical logic.
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