Stock Trading Games - boon or bane?

On the day of the last session before Diwali vacations, ICICI Securities came at our Institute of Management, Nirma University to invite us to play Stock Mind, their stock trading game. Even the Placement Committee got so bullish that they took to their ego and made mandatory for everybody to listen to their harangue. The people from ICICI Securities painted rosy picture about stock markets and talked about wealth creation. They took great pain to explain the way inflation ate returns from fixed assets or any other asset class for that matter. I am sure they were able to catch the fancy of most of the lot listening to them.

Most of us would be playing the game by now. And they would definitely be enjoying playing Rs.1,500,000 of virtual money. I am sure some people would have success in terms of making profits while others would be making losses. I hope people having success aren't carried away by their lady luck. And those who are losing might have felt by now that its a pure gambling game. There is no logic involved in it apart from chance, sheer luck. Those having success can boast about having better degree of intuition or God's gift or sixth sense or whatever you name it. There are still days to go into this game and we will all see about that precious gift unfolding.

The point being made here is that one must not be carried by being successful in such trading games. If it would have been a real hard-earned Rs. 1,500,000 in your hands, would one have played such a gamble? Stock markets are about valuations. Those are valuations that go green or red on the marketwatch of your trading terminal. And valuations are reflections of the efficiency of a business. They are not slave to somebody's imagination or intuition. There might be temporary variations. And traders generally try to make hay during this period. But when it corrects, its bad for those uninformed herd-followers. 

We must never forget the 2008 financial apocalypse. It happened because of this particular nonsense intuition where people kept on taking unnecessary risks to the tip of the iceberg. And then, we know about the aftermath, the great floods, the deluge. Economies haven't recovered since then.

Lesson- Intuition is illogical and bereft of any basis. I hope people discover it here in this game, rather than burning their hands out their in actual merciless world.

Effect of elephants on markets

Today while in the marketing class, Prof. P.K. Yadav gave us a situation to work with wherein he took names of four animals and asked us to come out with companies related to the characteristics of animals. One notable name which he took was that of elephant. Elephant is a mammoth mammal which is herbivorous and nobody preys upon it (except when its a calf, some lions might get lucky).This is an animal which feeds upon the natural vegetation merrily without any damn and consequences and isn't part of the food chain later i.e. doesn't become a food for carnivores. It gulps down a huge amount of vegetation and when it gets mad, it causes destruction too. A herd of elephants in an area can be a headache for the local ecology.

It reminded me of companies like Kingfisher Airlines, Suzlon, DLF, Unitech, Educomp Solutions etc. which kept on feeding on the easily available credit of our economic system without any due consideration given to the state of their Balance-Sheets and the damage they were causing to the economic ecology or at least the banking system of our country. Their managements acted like alpha-males taking on unnecessary huge risks and expansions funded by credit as if they were some piece of cake. These companies are still on the horizon mainly because they can't be allowed to falter and that's why there is frequent injection of money supply to let the banking system function to normal pace, but because of which the common man has to suffer the pain or pinch of inflation. And the shareholders have to face the loss of value.

Issues with The Companies Bill, 2012

The main issues still lingering with the Companies Bill, 2012 are:

1. The concept of independent directors is being brought for the first time in the Companies Bill, 2012. 1/3rd of the board will comprise of independent directors. Do we really think promoters will allow "true independent directors" on board?
2. Are there enough "true independent directors" available in the market?
3. Independent directors are allowed 20 directorships at a time of different companies. How can one really contribute in a significant manner protecting shareholders' interests if one serves on 20 different boards simultaneously? Can he or she get that quality time?
4. 2% on profits has been mandated to be spent upon Corporate Social Responsibilities (CSR). But the term "CSR" hasn't been concretely defined. Nobody knows where the money will be directed towards. Whether it'll go to an NGO surreptitiously involved in black money laundering or towards a genuine NGO involved in underprivileged child education, its highly unpredictable. Also, will it be used for building useless temples on government granted lands for pompous religious purposes or their concern will be genuine social upliftment? Things are still to be clear on that front.
5. Class action suits have been enabled in the new Companies Bill, 2012. This'll help protect shareholders' interests and prevent Satyam-like fiascos. Now the hard question is whether the shareholders of government owned companies can sue the government. In 2012, Coal India was directed by government to provide coal at lower prices and pained by this, one of the shareholders', The Children Investment Fund, took Coal India to courts. No such light has been shed on this.
6. There is a provision for at least 1 woman independent director out of 5 independent directors on a board of the company. While the move is directed towards gender equality, there is a huge scarcity for quality women in leadership roles in businesses. Rather than dictating terms on this issue here, the government should focus upon women empowerment and their upliftment. Reservation of any sort in business sphere is going to be counter-productive.
7. A huge responsibility and liability has been attached to the position of the directors of the company. The Board of the Company now straightaway means a collective body of directors of the company. Director's Identification Number (DIN) has been made mandatory by the Central Government for directorship or else he can't be a director in any company. In times like today, where privacy is getting more and more prized and dificult to maintain, getting on the government watch-list can be a serious dissuader for quality directors, especially independent ones who might not like to be pried upon.

Are shareholders part owners of the company?

Shareholders are not part-owners of the company in the eyes of the law. Shareholders can't claim part-ownership in the property of the company. Shareholders simply stay as members of the company. They have been given certain rights by the law such as, to attend meetings, to vote and to receive dividends. This was stated clearly by the Supreme Court in Bacha F. Guzdar vs CIT (supra).

In the eyes of the law, the Company has a separate legal existence as has been envisaged by The Companies Act, 1956. A Company is a juristic person capable of carrying out business activities in its own name. It is a legal entity distinct from its members or shareholders and thus has its own set of rights, duties and liabilities which are separate from the shareholders'. The limited liability of the shareholders or members of the company arises only from this separate legal existence of the company.

RBI issues fresh directive on Gold imports

Earlier Reserve Bank of India (RBI) had restricted import of gold to consignment basis by banks to meet the genuine needs of jewellery exporters. Now, this provision has been extended to all authorised dealers, nominated agencies or star trading houses taken into account the demands of jewellery exporters. All Letters of Credit (LoCs) are to be issued by such agencies on 100% cash margin basis for all categories of gold imports. Futher, gold will be imported against Documents against Payment basis as against Documents against Aceeptance basis. This requirement willn't be exercised in case of exports of gold jwellery.

Effect of Gold on Current Account Deficit (CAD) of India

First I'll explain as to what exactly Current Account Deficit or CAD really is. Current Account Deficit happens when your export income isn't able to match your import liabilities. It happens when you earn dollars less than what you spend. Since, international trade happens in dollar denominations, earning dollars is primarily important which also reflects upon the strength of an economy.

Now, the question arises: Why're we earning less dollars? Its because global demand is lull post recession periods of 2009 and our export sector, whether its a manufacturing or services sector, isn't able to gather much business growth. Also, we're facing increased competition from other developing nations in terms of capturing demand at lower prices.

Shortcomings of Financial Statements

Financial statements are prepared by every company to gauge its performance, to report its performance to its shareholders and to comply by regulatory requirements. Though, financial statements provide wealth of information, but it has loads of shortcomings.

1. Financial statements rely everything on book value. They never give you a reflection of market value. They never tell you about the market value of assets it holds. Suppose, a company buys a fixed asset like land or building, it always gives the numbers in terms of original or historical cost. It never tells you  the present market value of that particular asset. Thus, for every asset, it always gives you the book value. It never gives you the market value.
2. Financial statement records the cost of the "bought" assets by the company in its statements. But it never records assets created by efforts of the company. For example, a company never records the value of the product or patent created by its Research and Development, though it'll record the value of a bought patent in its financial statements.
3. Financial statements categorise expenses as operating, financial and capital expenses. Financial statements often err while categorising a particular expense. For example, expenses made on fixed assets are considered as capital expenses by a company and are depreciated or amortised over a period of time. Patents are also assets, but expenses made on its R&D are considered as operating expenses. Similarly, operating leases are also considered as operating expenses which rather should be considered as financial expenses.
4. Financial statements report the assets on which investment has been already made, but they never tell us about assets on which investment is to be done. This later investment will open new growth avenues for the company. For example, fruits of R&D and patents can be considered as such assets.
5. Like assets, financial statements don't reflect the market value of liabilities, like debt and shareholders' equity. They simply reflect the book value as usual.
6. While financial statements are geared towards finding whether a company will be able to meet its obligations of debt and payments to suppliers, they don't throw any light on risk to equity investors.

Why stock market defies the natural law of economics?

In Economics, its stated that with higher prices, demand falls and when prices drops, demand increases. Its just the opposite when it comes to stock markets. People buy when prices are sky-rocket high and they stay away from stock markets when its cheap. People often turn a blind eye to stocks when the valuations are at dirt cheap and will rush to grab when the valuations are sheer nonsense. Its very difficult to comprehend this situation when people don't buy a dozen of banana at high prices, then why they happen to buy stocks at costly valuations. When people stop buying and consuming a kg of onion at Rs. 40-50 as part of their food, then how they were able to buy Suzlon Energy at Rs. 500, Educomp Solutions at Rs. 800 or DLF at Rs. 1200 prior to the recession of 2008-09. Currently, Suzlon Energy is trading at Rs. 15, Educomp Solutions at Rs. 158 and DLF at Rs. 205. And when people rush to buy a kg. of onion at Rs. 20-25, they were too sceptical to buy Hawkins Cookers at Rs. 130, TTK Prestige at Rs. 90 or Titan Industries at Rs. 35 during the downturn of 2008-09. Currently, Hawkins Cookers is trading at Rs. 1800, TTK Prestige at Rs. 3100 and Titan Industries at Rs. 275. This is where investors defy the basic law of Economics that with higher prices, demand falls and when prices drops, demand increases. People are all vice versa to that in respect to their stock investments. This is a question worth pondering over. I'm not able to find the answers. Perhaps people can. Kindly comment.

Dynamics of Profit and Loss Statement

The Profit and Loss Statement of a business or a company tells a lot about the business. Analysing the statement historically can give one important insights into the functioning of the business. The Profit and Loss statement tells us about what the business has done and what it has earned over a period of time. It tells us about the working dynamics of the business.

The Profit and Loss statement consists of following parts, in general:

1. Operating Revenue
2. Cost of Raw Materials
3. Purchase of Traded Goods
4. Salaries and Wages
5. Sales, Promotion and Marketing Expenditure
6. Other Expenditure
7. Depreciation
8. Financial Expenditure
9. Other Income
10. Taxation
11. Profit after Tax

Operating Margins

Every business has its characteristic Operating Margins. Operating Margins don't expand and retract radically with passing time. Its the level below which the business doesn't wish to sell. Operating margins are calculated after taking into account fixed operating costs. It simply can't be calculated straightaway. The level is reached after a number of internal assessments. In case of brands, supposed brand value is also incorporated into the margins. A healthy Operating Margin is essential for the growth of the business.

Operating Margin can't just be increased at will as it'll result in increment of prices taking into account that fixed operating costs is constant. Increased prices of products can result in your competition eating into your market share or customers turning away from you or cutting their discretionary spending. Increased Operating Margins from increase in prices shall be viewed with caution. Operating Margins can also improve from certain structural changes in fixed operating costs. Reduction in any kind of fixed operating costs can lead to improvement of Operating Margins which must be welcome.