"Sab bhav ke khiladi hain”

The stock market defies all laws of rationality and economics

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On a muggy Thursday evening in 1990, one of my friends told me that he was taking me to meet Manubhai Maneklal the following week. Not many from the current genre may have heard about him but "Cobra" Manubhai as he was referred to by some, was the uncrowned king of Dalal Street in the 1980s and 1990s. Manubhai would descend in the ring himself in his characteristic white starched dhoti and Jaipuri moharis. As per rumours, he would do hundreds of trades without once making any notes. He had an amazing memory and he never forgot anything. Most brokers feared and revered him due to his financial clout — he was the largest financier of rollovers (the badla king) in those days and given the usurious rates of 2% per month for rolling positions, was known to have a predisposition to be bearish. His dominance in the markets allowed him to know the technical position of every key speculator and broking firm in the shares being traded on 'vaida' or the futures markets in those days.

Dalal Street was the largest informal financial market of Asia but had antiquated systems in those days. The market was inundated with bad deliveries due to signature mismatches as all trades were done in physical shares. The sources of funding of 'badla' were rare and fairly opaque. There was no regulator of essence and the market was easily manipulated. These were fertile grounds for the financial growth and might of Manubhai. He thrived in this environ dominating the markets like few had before him. However, his bearish nature and outlook went against the grains of what drew most to the stock markets.

I was just seven years out of IIM Ahmedabad but I already enjoyed a young but successful career in investment banking. Quick decision making and navigating financial markets and risk came naturally to me. Like many others I also suffered from a misplaced sense of confidence based on a fair amount of headiness that comes with financial success in the markets. Friends, family and their extended circle had started seeking and following my investment advice by then. My friend told me that Manubhai had heard of me and was curious to meet me. We were invited to his office after market hours on a Monday.

I was meeting Manubhai for the first time. I was excited but wary having heard stories of his ruthless disposition and his indomitable hold on the markets. The man sitting opposite me seemed fairly benign and unlike what I had imagined. Manubhai was a very hospitable host and ordered us tea and vada pav before we even settled down. I still remember his piercing eyes as he made me comfortable and asked me about my background. He spoke very little and at one point asked me, "Aapko market kya lagta hai?” I was well read and an avid follower of the global markets. I had read everything about [Warren] Buffett and [Peter] Lynch and most of the popular financial literature. Very few firms on Dalal Street did quality research or financial analysis those days. India was an island in itself and the government had yet to liberalise and open its markets. I launched on a long monologue about global markets and the potential of a few companies in India and the long term fate of the Indian stock markets. Needless to say I was starry-eyed and bullish. He spoke very little during the brief meeting but listened and observed me carefully.

The meeting was over and as we were leaving I couldn't resist but ask him, “What is your opinion about the fate of long term investors vs. traders ?” He took only a minute and replied, “Do takka vyaj mein kaun paisa banayega? (Who can make money after paying 2% per month as interest) He then patted my arm and said something I’ve never forgotten, “Market mein koi investor nahin hota. Sab bhav ke khiladi hain” (No one is a true investor, most are players of the psychology of pricing). That was the first and the last time I met him. But he taught me an important lesson.

The import of his one liner has only grown with me over the years. It is the quintessential science behind greed and fear. Over the years, I’ve only grown to appreciate the psychology and behavioural science that drives the markets. The stock markets defy all laws of rationality and economics. Demand is highest for stocks when prices are up and supply is highest when prices are falling and markets are down. I have seen the most professional and large broking houses justify a PE ratio of 60 while recommending a stock which has been on a tear. This is the folly of rationalisation. I’ve also seen the same research houses downgrade the same stock within 18 months after it has been struggling to hold its price and is available at a PE of 12.

Human beings are not rational creatures. We live in a perpetual state of rationalisation or denial. It is a bias of the human nature to be optimisitic about the future. We all have an ingrained herd mentality. People who stuck in herds survived longer in the distant past. It is difficult for us to accept our mistakes and usually losing stocks are nursed for this reason. That comes from the tendency of denial. We also suffer from FOMO — the fear of missing out and this is why the highest participation comes from the most reluctant investors towards the end of a rally. The most astute and conservative analyst is an easy victim to the snares of greed and fear. In a rising market which rises even further, the conviction of the analyst comes more from the price action than any rationality. This is the key reason fund managers will stock up on companies that have superior price performance ignoring all their financial discipline and the very calculus of valuation. It is also the reason why many stocks that are slow on price uptick are ignored and shunned despite strong fundamentals.

In the end Manubhai stands supreme and final in his one line "Sab bhav ke khiladi hain”. We all follow the price and rationalise it.

Neeraj Batra is chairman and co-founder at Decimal Wealth Partners and OnCourse Vantage, he tweets at @batra_neeraj