Herding Behavior: Failing Conventionally

Failing conventionally is the route to go. As a group, Lemmings may have a rotten image, but no individual Lemming has ever received a bad press.
                                   -Cialdini

Reputation is at stake…underperformance is easily measured, instantaneously available, and highly visible. The ease with which a fund manager can imagine getting sacked for this crime inclines him towards decisions that can be most easily defended after the fact. As ever, failing conventionally is the way to go.

The greater the ambiguity – as with technology stocks, for instance- the greater the likelihood that social influence will dictate behavior. Instead of focusing on what businesses will do in the years ahead, many prestigious money managers now focus on what they expect other money managers to do in the days ahead.

Besides, the market may actually be right; it is efficient. Perhaps other people know something I don’t?
               – Excerpts from the book “The Real Warren Buffet: Managing Capital, Leading People

Money has been pouring into Indian stock markets and the Indian indices have been touching new levels every fortnight. While money is being raised from Japan (with real negative to zero interest rates) and petro dollars flowing in from the middle-east, money managers are finding it difficult to invest. Also the domestic retail money is flowing in the stock markets, with new offerings from Mutual funds garnering huge interest. The domestic investment in equity is relatively low at 2-3% of savings, living a lot of scope of domestic liquidity even if FII flows dry out or channeled into cheaper emerging markets.

What needs to be highlighted in the Indian context is the lack of investble listed paper, which is pushing the prices of the good paper to record levels. The recent sops in the Indian budget to MF industry might have enhanced the investment opportunity but it is still not sufficient.

What needs to be done is to provide avenues to absorb the excess liquidity into India is:

  1. More paper- some big ticket IPOs :Airlines (Deccan, Kingfisher, Spicejet – they will all be needing funds to expand), Telecom – ( Hutchison, Idea etc)
  2. Partial or complete Disinvestments –  BSNL, LIC etc
  3. FDI or FII limits enhancement. – Banking, retail, Construction, real estate…
  4. Increase liquidity in Corporate Debt market & Government securities.

Till then, it is the Private Equity investors who will rule- having more breadth for investing. Where as the Mutual fund managers will exhibit Lemmings like behavior and continue to invest in the Large caps and companies of repute ignoring valuations – as nobody will reprimand you for investing in Tata’s, Birla’s, Bharti’s, Infosys , SBI etc for Perhaps the Markets-may-actually-be-right.  

So it is highly unlikely that Money mangers are now going to sit on cash , as he may be reprimanded for – missing the Bus or not having the Visionary insight of “how the Indian demography is changing”. However, the blame of low returns or negative returns could easily be attributed – “everybody is losing money” or “the markets are moving down”.

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