How India created a generation of brainwashed investors. And the macro disaster this has created

How India created a generation of brainwashed investors. And the macro disaster this has created

Sometime in the second half of the ’90s, in the wake of Pokhran 2, I wrote out my weekly piece, which I used to contribute to the Business World magazine.

The topic was a burning one back then: what will happen to the market when FIIs decide that they have had enough of our beloved Roadless country and head back to their manicured, sheep-strewn hillsides, gleaming freeways, their white-picket-fenced Connecticut homes with the obligatory blonde lazing poolside in a thong bikini. In other, less graphic words, what would happen to our markets if FII dollars were pulled out en masse?

The consensus was that India would go bust as all the dollars got vacuumed away. The visions of a 1991-type macro collapse appeared real.

However, to my thinking, dollars flying out of India was less probable than pigs flying over Marine Drive.

What was very easily deducible to me was that dollars simply couldn’t leave India. Not because of love for the nation. But because of impossible exit logistics.

My reasoning was: when FIIs decide to sell, they need somebody to buy. But we are a bhookha-nanga desh, with no buying power on the other side. So what would happen? Very simply, the market would crash without volume. Having executed billions of dollars of trades for FIIs over decades, I can tell you that when you try to sell a large number of shares in a market with no buying power on the opposite side, the price collapses without much volume. And that’s such a beautiful thing on a macro basis. In fact, it has to be embalmed. It’s that valuable.

Here’s why: let us say FIIs hold $1 billion in a company. And they want to sell it off completely. They try selling it. And merely with the selling of $1 million, the price collapses by 20 percent. What does the FII think then? Sell more, say another $1-2 million, and see a further collapse of 20-30 percent? Any FII who has gone through a cocaine rehab knows that this is foolish: you have managed to sell just 1-2 percent of your holding and lost around $500 million of paper value in the process. Therefore, in essence, a mass exit of FIIs was a lazy theoretical possibility but had no moorings in the practical reality of the Indian stock markets back then. Like in the Mafia, FIIs could only enter. Never exit.

They could check out anytime. But they could never leave.

The Indian stock market was The Perfect Financial Hotel California.

And therefore, we never actually had any thundering herds of FIIs stampeding out of India because each time they tried it, the markets would collapse, and the herds would get corraled, tamed, and neutered. It was pointless stampeding out if what lay ahead was an abyss of losses. Even cattle are not that stupid.

In fact, many a time, as a smart sales guy, I managed to convince the selling FII to, in fact, become a buyer. My pitch was “Look, this stock has collapsed 30 percent without your selling anything much. What’s the point of selling now? In fact, it has become a deep value Buy . Let’s go buy 10 million dollars”.

This was financial wizardry, even alchemy: instead of the country losing $1-2 million, we ended up bringing in $10 million! This was Desh Bhakti based on bullshit. And it worked.

But not so now. In the last half a decade or so, we have cultivated lovingly a generation of young Indian investors that has been cheered, applauded, steroided, even fattened, into buying when FIIs. are selling, thereby completely negating the essential macroeconomic logic of inviting foreign capital: the core meaning of getting dollars into a poor country is that, in aggregate those dollars cannot leave your shores because if they do, with embedded 8-10 percent dollar returns on top, the country will go bust. So, through any means legal, dollar capital should not be allowed for easy exits.

If dollar wants an exit, it has to get a Greater Fool with Greater Dollars. That’s the only way this economic mechanism of foreign capital into poor countries works. Dollar convinces dollar. Net net: no net dollar outflow.

But instead of “FIIs-wanting- to- exit- having- to- fool- another-FII-to- buy”, our great Indian Unwashed has taken up this role of the Greater Fool.

A whole industry of cheerleaders led by the mutual funds, lubricated by distributors of these funds, commandeered by politicians, and with the financial media providing the mawkish cheesiness, the deshbhakti ka naara, have collectively generated a paradisiacal vision of permanently rising stock prices, in which the bad guys - FIIs - sell their crown jewels, to the good guys - Indian retail. The underlying message: FIIs are idiots. Indian janta is genius.

Any attempt by anybody to inject anything remotely resembling a counter perspective - “Maybe FIIs aren’t idiots. Maybe they see something our investors in Jodhpur can’t” - is surgically eliminated by our financial media.

The brainwashing of India has been covered extensively for the past decade or so. But the financial equivalent of that brainwashing has been less talked about.

That has been next to no education in any meaningful way done by any media in India over the last few years. All inconvenient facts have been conveniently hidden from the public. “Indian equities have returned 15 percent compounded over 30-40 years” is the financial equivalent of “Achhe Din”. Ummm... How about factoring in volatility and then seeing the Sharpe ratio? Does it handily beat FDs?

I made a presentation in 2019 at the MorningStar conference in Bombay. And, the central theme of the presentation was: while all Indian fund managers tomtom the performance of Indian stock markets, the reality at that point was that in the preceding 10 years, dollar returns from Indian equities were.. precisely...Zero!

That was the Tipping Point. That presentation started the mass movement of Indian money into foreign equities, but the point is not that. The point is, why was no education done on this simple metric by anybody?

The story hasn’t changed till now. Our investors of the present generation watch a bit of television and a lot of YouTube, and between these two fountainheads of knowledge, all they get is pure garbage in terms of developing any nuanced investing wisdom. The level of over-simplified, under-analysed perspectives about investing in Indian equities I routinely come across on social media is sickening. Outlier positive events - “XY bought Titan/ Asian Paints right through the periods when they fell 60/70/80 percent and look how much he made” are amplified to appear like The Golden, Fail-Safe Rule.

In our time in the late 80s and the 90s, neither television or YouTube existed, and thank God for that. So, we had to get into real analysis of data and develop perspectives on our own instead of TV anchors shouting “Let’s make money together” whatever that means.

There have been zero analytical attempts by any media, stock market experts, or fund managers about how GDP growth led by increased government capex has propelled fiscal deficits to nosebleed levels. While it has a great wingspan, it sadly has a short lifespan. More like that of a butterfly than a tortoise.

There has been no temporal perspective given by any market participant about the longevity of bull markets, which are typically in the range of 4-6 years and not permanent.

Nobody has ever come on financial TV and said that India’s GDP growth in the period 2014-2020, under the very same dispensation, was anaemic, to say the least, and so were stock market returns - around fixed deposit rates and when you factor in the volatility, then equity investments in the period 2014-2020 were simply the worst place to be in.

Not one TV channel or paper told anybody in the Indian SIP countryside capital pool that India was one of the worst-performing markets in all of 2024. Around Number 24, to be precise.

The Indian investor that we have crafted in the last few years is a simpleton. We have brought them up in petri dishes, in Financial TV- media laboratories. We have rid them of all capacity for intelligent thought. We have made a purely capitalistic art into a commie science, where only one perspective is allowed, and which is the official perspective of the collective financial industry. It is this industry that will decide what investors will see, read, absorb and process.

Investing is all about the intricacies of the micro, married with the sophistication of the macro. When you combine the two, you get the cadence and patterns of the market’s ECG. You can then see whether there is any abnormality. If you are a doctor in the category of the Watchman in 3 idiots “All is Well”, well, you’re better off being a watchman. Hopefully, of course , not of Saif Ali Khan’s apartment.

But why is producing millions of foolhardy investors a problem?

Well, the result of producing such retail investors, nay, automatons, is a macroeconomic disaster. No less.

We have given FIIs, knife-through-butter exits, month after month, year after year. We have extracted no price from them. We have let them have free iced Martini lunches at the expense of our hot money forex reserves.

My personal prop trader over decades in my more active trading days, used to always tell me what the velocity of the market in a particular stock or group of stocks was at a particular fraction of time: “Sir, let us wait.... That is a lot of selling pressure coming through... there is no point in baring our chest and taking these arrows. Let the price collapse under this selling pressure and then we will go and buy”. His “feel” for the liquidity tape never failed to work. I almost always ended up buying 10, 20, 30% lower, simply by tracking the liquidity pulse of the market, like a wise Vaid feeling a Naadi (pulse).

But the collective drum beats of our financial industry gave no such inner “pulse” Intel to our village innocents. I mean, what kind of fool takes pride in absorbing billions of dollars of overseas selling, by saying that “In the old days such selling would take the market down 20 percent but in today’s brave New India, the market does not even fall by 1 percent. Indian retail is doing dant ke saamna”. You hear this chest-thumping from the financial media as well as on social media daily.

Investing is not about bravery. It is about capital preservation at its core. But in our twisted, warped investing marketing in India, taking bullets, arrows, and even mortar shells became substitutes for common sense. When you see a tsunami coming over the sea, you don’t stick around hoping to get a free cocktail at the beach bar’s happy hour. You beat it. Fast.

Through the 90s and subsequently, we used to rally our sales troop, after selling to FIIs our dolled-up rubbish like NEPC Micon, Sanghi Polyester, Pentamedia Graphics, with lines such as “Angrezon ne humey do sau saal loota. Ab hamaari baari hai doston!!”. ( The whites looted us for 200 years. It’s our turn now, friends!!”)

But now, our moorkhs doing F&O, help a crap, satta, business like broking make thousands of crores in profit, and while doing so, they also do this little thing of exporting out lakhs of crores of derivatives profits to funds called Jane Street, etc.

But if the exporting of our precious, rented forex reserves via derivatives was bad , the utter imbecility of allowing FIIs this mass Equity jailbreak, cost and stress-free, saddling our people with devalued junk, will be a horror tale that will be told over decades - of mass- hypnotised lemmings leaping over a cliff, with our Mutual Fund CIOs with lakhs of Twitter followers, looking on adoringly at the these dying Forrest Gumps.

And that is solely because all of us conspired to create millions of gullible investors with no capacity for discerning investment thought.

That is always risk in investing. Intelligent investing lies in discerning what “Acceptable Risk” is and what “Unacceptable Risk” is. But nobody taught our investors this basic concept. It’s in nobody’s best interests to do so.

Buying billions of dollars off from FIIs AFTER markets have run up 40 percent each year... surely that can’t be “Acceptable Risk “?

The above two exit liquidity streams - derivatives and equities - collectively represent the single largest transference of wealth from the poor to the rich in all economic history.

It beats what the goras took out of our Soney ki Chidiya Desh, during colonial rule.

This is also the first time in the history of mankind that the Poor have doled out charity to the Rich.

Dharavi has ended up making Manhattan rich.

Wonders never cease.