The Myth of share Market

Currently the madness is going on in share markets largely driven by shady money inflow in name of FIIs.It is estimated that almost 40-50% of this money is coming through dubious set ups in countries like Mauritius and other places.

The market operators will always advise to invest in share markets as their bread and butter depends on them.The company promoters are biggest beneficiaries of this mad rush as their share has multiplied many many times of what they invested with little efforts.The media runs on the backing of such people who plant bull news in markets.

It is correct that any good average company in India would be looking for at least 15% return on its equity capital and that is not difficult to achieve also in next 10 years at least because thanks to our brainless and ill managed government India will face inflation rate at this figure.So companies will of course generate 15% growth earnings at least which effectively will be zero percent earning in real terms.As far as we can see today.At least for India it is true.

But that is not enough to invest.Take example of L&T share as on date.Its price today is 2171 per share of Rs 2 face value or 1085 times its face value.That is pretty odd.

Now EPS on this scrip in March 2010 ending was Rs 60 which means you earned 60/2171x100 or just 2.76% only in one year( it is earning and not dividen paid). Now suppose the share goes down by 10% which is very reasonable assumption.So straight away you loose 4 years earnings plus you loose 6% per year fixed deposit interest-your opportunity cost. In other words you will loose 34% earning of next 4 years.

Now the argument is that in shares the system does not work that way.Companies keep growing and that is reflected in PEG ratio or P/E ratio divided by annual EPS growth rate for next one year at least hwat finacial wizxards call forward or gamble earnings.So again if we see that earnings of L&T would rise by 50% next year.Okay so it will become 2.76x1.5 next year or 4.14 % a year on your investment which is still less than even 6% your FD interest rate.

In other words you can never make enough money on LT scrip even in next 10 years. Then why people are crazy and buying stocks even now?

The reasons are simple.There is too much liquidity of surplus money coming from abroad where interest rate is almost near zero percent(both USA and japan).There is too much money coming to HNIs and black marketeers and politcians and babus. The PEG ratios in USA are less as it is not easy to do open loot and plunder in USA as it is in India thanks to MM Singh type of people managing the country.The shares graph started rising when he took over.

The entire base of madness in stock markets is capital gains or assumption that scrip price will keep going up by 10%-20%-40% every year in coming times also.The big question is will they? and why should they at all?Can party last for more than 5 years at a stretch? It is a big million dollar question.No one can answer.But looks improbable.

Retail investors in India should not get carried away by cock and bulls stories and media publicity to make them suckers. Of Course there may be some good smaller companies which are under valued and are on growth trajectory.But no one will tell you to invest in them.At current valuations Indian stock markets don't merit any buying at all.Specially the leading scrips.if there are some companies who trade below P/E ratio of 7 or 8.There is something seriously wrong with them since in this mad market it is not possible that these have escaped attention of gamblers.There are softares that detect all types of companies by assigning criteria.

Even if markets don't go down and correct there is little charm left to enter now.The risk reward ratio is against the retail investor.
Unless you have surplus money and you are itching to try your hand in stock markets.

This FII money a good part of which is dirty money is main cause for excess liquidity and price rise in the country in other asset classes like gold and property.When these FIIs buy where the money goes? To existing share holders only and is not at all utilised in new productive assets creation ( that is FDI).When FIIs run away dumping shares who buys these? The rich people and operators in markets who wait for the next cycle of killing and loot.Too many dollars coming in India are appreciating rupee as RBI has stopped exchange rate control( Actually Indian rupee after 300% price inflation in country since Singh has come in power is not worth more than Rs 55 to a dollar).This is making imports cheap and exports costly.More imports means more foreign exchange or trade deficit.More costly export means export margins are falling as majority of our exporters are boneless low end producers who have to quote in dollars and with recession in main consuming markets they can't raise even dollar prices too.Hence the realisation in rupees is going down. I ask Infosys,TCS, Maruti and Tatamotors like companies to dare and quote exports to overseas buyers in Indian rupees if they have guts,quality and technology as they brag.How long they will fool people and demand concessions from indian government.

The fact remains that Indian comparative advantage is dwindling fast now due to meaningless and mad and huge rise in salaries and perks ,transport costs and other mad taxes in country. In other words Indian economy is being very badly managed knowingly and is in unsafe anti-poor hands today.There is systematic loot going on in country and share markets are part of that loot.Bold is beautiful. So take the plunge if you dare.