Stock Market = Gas balloon - Keeps drifting upwards unless acted upon by external unbalanced force

Stock market is like a gas balloon, it tends to drift up slowly unless there is an external unbalanced force trying to pull it lower.

The above statement has a strong message in it which can act as a double edged sword. Before understanding the legitimacy and the sensibility of it, let us explore the various participants in the stock market and understand how prices move.

a.       Mutual Funds

Many of the mutual funds have a mandate to allocate a fix sum of capital into equity and hence no matter what the price is, they would buy into it as long as funds are flowing into it. Besides, they cannot short sell markets and hence are net buyers only. Hence from this side, we have net buyers coming in at every price in a stable environment.

b.      Investors

The investors include various players like pension funds, mortgage funds, insurance companies, NBFCs, Banks etc. They generally have surplus funds and are in the game for a long horizon. They also allocate ever increasing capital into equity funds despite increasing valuations. The only option they have is to decide on capital allocation between various asset classes and in a stable environment, most of them end up being on the buy side only despite any valuations.

c.       Retail investors

This is a very interesting phenomenon and really funny to analyse sometimes. A retailer investor always invariably enters from the buy side only as he feels the prices may go up further. They end up being bullish not just because of their own understanding but also on understanding of various traders who are always bullish in a bullish market. So most times, they are also net buyers in a stable environment.

d.      Traders

They are the only ones who can be net buyers or sellers during a particular phase but most times, they would avoid going against the general market sentiment and hence will not sell into the market unless there is a dampener to the gas balloon. Hence they are net buyers too..!!

So in a stable environment, even if the companies are not performing exceptionally well or there has been over stretched valuations or any other reason, stock markets will still keep going up unless there is a dampener coming from macro-economic factors or political factors or some other areas. The only argument against this is that investors can allocate capital amongst asset classes. That is true, but the general investor sentiment is that allocate more capital to equity when environment is stable and less to debt. This ends up creating a self fulfilling prophecy in which more and more allocation keep pushing the equity market higher.

So it is very common to see over stretched valuations during stable times and this over-stretching can keep on increasing until there is dampener.

The stock market rally in USA in 2013 is the most perfect example of it. Most companies have not shown exceedingly exceptional performance results nor have they been able to do extra-ordinarily different from what they did last year but still the equity market has rallied more than 50% and most analysts still say that the market can be bought into.!

So the next time, you see a huge stock market crash, don’t fear, as the gas balloon has come lower, look for the opportunity to hold onto it and wait for the dampener to go away and enjoy the drift higher ever after..!!

Attractive gravity

Gravity or gravitational force is a force with which every object attracts every other object around it.

The essential words here are that “every” object attracts “every other” object with a force. That means, even a table, chair, tree, human being have gravitational force. Then why aren’t they felt. By definition, the gravitational force is proportional to the mass of the two concerned objects (F = GM1*M2/ R*R). Most of the objects do not have sufficient mass to be able to attract each other. The difference comes in when one or both the concerned objects are of planetary sizes or bigger. As in such cases, the mass of the objects attracting is huge leading to strong gravitational pull between the two.

Hence, we are attracted by the gravity of the earth. This is also a flawed statement. It is actually that the earth is also attracted by us and so are we to the earth with a common force which is the gravitational force. The only difference is that the acceleration of earth due to our gravitational pull is insignificant for the earth considering its mass, leading to almost zero displacement and acceleration whereas it is very significant for us and other objects similar to us leading to huge displacement and acceleration.

On similar lines, the earth is attracted by the gravity of the sun and sun is attracted by some other star and so on. Thus every interstellar object is attracted by every other object which leads to relative motion between them.

Now let us explore how gravitational force affects the launch of a space ship and also the orbit of it. In order to enable that, lets first delve into the understanding of how artificial and natural satellites are continuously orbiting the planet they orbit.

When a space shuttle is launched, it accelerates away from the earth and reaches a point at which it is supposed to leave the satellite into the orbit. When the satellite is launched in this orbit, it experiences a strong gravitational pull from the planet (Earth). Now to ensure that the satellite doesn’t fall on the earth and stays in the orbit, another force needs to be active which is equal and opposite to the force of gravity. To ensure this, the satellite is launched into the orbit with a velocity and starts moving in a circular motion. Due to its circular motion, it experiences a force called the centrifugal force which tends to push it away from the earth. This is the force which tends to balance the gravitational force. To ensure that the force is exactly equal, the satellite must orbit at a velocity called the critical velocity. If the velocity is lesser, it will soon be attracted to the earth. If it is greater, it will move away. If it exceeds a threshold called, escape velocity, it will escape the earth’s gravity and move into space to be attracted by the gravity of some other planet/ star. As this force is pretty weak, it generally tends to drift slowly in space with very little motion.

So the next time when you see a star, feel the force of attraction from it and feel how earth’s gravitational force (which is more powerful than that of the star) helps you on holding on to your ground!

Loyalty program in Consumer goods industry !??

A few days back, I was looking into various industries which organise loyalty programs and the various benefits (mutual) for both the consumer as well as the producer. I was completely astonished to see that a huge industry (a big ticket one) of consumer goods almost completely lacking this program. Most industries having high value purchases like automobiles, luxury brands, luxury hotels, airlines etc generally have a loyalty program. Won’t a company in the consumer goods space benefit by applying similar principles to retain its consumers? Let us look at a crude idea on this.

Let us look at a company like Samsung and see how the program can apply to it. Consider a hypothetical case where Samsung creates a family called a “Samsung family” which has its high value customers (Like customer who has brought a TV of more than INR 80000 or a fridge of more than INR 50000 or a Samsung galaxy S4 etc). These are generally the consumers who have high disposable income or are more tech savvy or have high affinity to expensive goods. Now these consumers are more likely to buy the next expensive tablet that Samsung might launch or more likely to be the first people to buy the next Samsung smart watch. Besides, they are more likely to buy another expensive consumer good at a later date. So targeted marketing into them will be a major benefit for the company. Isn’t it? Also, considering a country like India, where this set is relatively small but growing at a rapid pace, this database can be a major source of strategic advantage in marketing and sales.

Besides, if the company can ensure the “consumer delight” of such clients, they would help in generating more customers through positive word of mouth. They are more likely to be the ‘mavens’ in the tipping point phenomenon thus positively influencing the sales.  Also, it doesn’t make any sense to lose these consumers to a competitor as it is not just one sale lost but a loss of huge amount of business. Generally, these consumers influence the buying behaviour of a lot of people in their vicinity and hence can be a major source of business and competitive advantage. The bigger and stronger the database of the company containing this set, the higher is the chance of the success of the company.

Apple has indirectly been able to do this. They have been able to engage a huge set of mavens who have been able to positively influence their sales as the product is technologically different than most of its competitors products. If the product is similar to competitors, as is the case with Samsung, they can attract mavens by providing something different in their overall product package to be able to stand out from the clutter. A loyalty program can thus provide a huge edge in attracting and retaining mavens who can then be opinion leaders positively influencing the product sales. They have been able to attract mavens and hence have been able to create a mass drive for the purchase of their product.

I am completely surprised that why these principles are not applied in this industry. The next time you buy a consumer good, do look into it!!!

Fjords... Creative Erosion

Fjord is a long narrow inlet of water into land from an ocean which is surrounded by steep mountains on either side. It is generally formed by galactic erosion of mountains into the sea. They are mainly observed in the Polar Regions as these are the places on earth which have glaciers at the lowest altitudes.

They are commonly observed in Norway, Greenland, Iceland and New Zealand.

These are one of the most scenic natural forms as they provide a perfect blend of natural formation and erosion.

As generally observed, a river erodes its bed and thus the depth of the river continuously increases. On similar lines, a glacier which is a slow moving mass of ice erodes its base (which is a mountain in the case of a fjord) leading to the glacier bed getting deeper. After centuries of erosion, this bed becomes so deep that it ends up reaching the sea level and in some cases even lower than that thus giving an impression that the mountain which got eroded never existed. Hence a fjord is formed which has mountains at the edges and the thin slit of ocean or sea in between.

Every year, these fjords attract millions of tourists, researchers, photographers as well as movie directors. It is hardly a surprise that most of the countries that have these fjords end up marketing them heavily as a tourist destination considering their natural beauty as well as the varied flora and fauna found in the region. On many occasions, the depth of these fjords end up being greater than the surrounding sea and oceans which give a lot of clues about the mysteries of the geographical formation of the area. 

Some of the most famous fjords in the world are as follows:

• Hardanger fjord in Norway
• Fjordland in New Zealand
• Geiranger fjord
• Killary Harbour in Ireland
• Scoresby sund in Greenland
• Magdalena fjord.

Norway has few of the most beautiful fjords in the world. New Zealand’s Milford sound is also a very famous tourist attraction. It is 300 km away from Queenstown and is highly inaccessible for the major part of the year still it generally ends up figuring at the top of the most beautiful places to visit in the world.