Indian Stock Markets and NRIs: a love-hate relationship Many NRIs have, over the years, had a love-hate relationship with Indian stock markets: they love to hate it much of the time (when money invested turns into losses) and hate to love it nearly all the time (when markets are down and they should be investing). I say that from my experience of meeting with NRIs primarily based in USA, UK, the Middle East, and South East Asia over the past 20 years. NRIs, as a group, have the following "characteristics":
In many ways, most NRIs are like a typical investor anywhere in the world, investing in any asset: They work hard for their money and then throw away their savings on some notion and idea sold to them by an agent who wishes to maxmimise his commission, not necessarily meet the client's risk-return objectives. Many of us have heard about the NRIs who invested in Infosys and Zee and made millions in the process. But these NRIs took on a lot of risk in making their investments and got compensated for it. They - and maybe you - have also lost millions in investing in many smaller companies that disappeared. In bull markets, like the one that India - and much of the world has recently experienced - these companies tend to emerge from their deathbeds as rejuvenated, stronger-than-ever champions to be held in your stock portfolio. Your relatives, your broker, your private banker, your friendly mutual-fund are all telling you what a wonderful opportunity you have to make money and how the India Millennium is here to stay. But this "India is forever" theme has come and gone before - many times. We heard that in 1992, when the Harshad Mehta fever drove the Index to 6,000. We tasted foreign blood when FIIs discovered India in 1994 and took the Index to 6,000. We saw it in Technicolor in 1999-2000 when the TMT bulls took their technology, media, and telecom stocks to the 6,000 levels. And we felt the pride in our hearts when the India Shining campaign took the Index to 6,000 in 2003. And we can see the flood of foreign money since 2003 blessing anything Indian with a bucket of cash. After each of these "India is forever" themes, there has been that terrible agony, that painful drop, that tryst with reality when investors - swayed by the themes of fashion, the madness of the moment, had bought anything at any price to get that promised return - wake up to find that they own useless companies, with no sustainable businesses, and loads of worthless shares. This is true of all investors, but NRIs, from my experience are particularly prone to fall into this trap. Like the Japanese who, on the global investment stage, are fabled for being the last to enter a bull market (with the Germans just a little ahead of them), my experience with NRIs, unfortunately, is similar: If NRIs are coming in waves to anything in India (stock markets, real estate) it is the beginning of the end. It is not that NRIs are not smart. It is the distance from the "action", which makes the NRIs the leading indicators of trouble around the corner. Think about a stone dropping in a still pond: the waves reach the furthest part of the pond after a significant time lag and long after the stone has reached the bottom of the pond. So if I am a broker out to make a quick buck from commissions, I will first tap all the bakras close to my home, then I will go to the next galli and find the next bakra there to sell a story too and then, finally, I will sell the myth to keep my commission revenues going to the bakra furthest away from me: the NRI. The relatives along the way, the internet and speed of communications all help in time-compressing this process these days. And the get-togethers the NRIs go to on weekends when they meet are a wonderful forum where Indian cricket, India politics, and Indian stock markets are discussed. With not much to talk about on cricket and politics these days, investments tend to be a focal point of most discussions pretty quickly. And there is always that one NRI there who keeps on telling you how much money he has made in India last week. Having burnt your fingers last year, you do not listen to him. Next week, he is bragging more - you begin to listen. By the end of the month, he is telling you about his next big house or car all thanks to his India investments. Your wife tells you how his wife has got a new car or jewels. At the next party, you are asking him for the name of his broker….and that is probably the top of the market. I have used 916 words to tell you about risk and folly of following the herd. I will use the concluding paragraph to remind you of the very basic, elementary rule of investing: you must adopt a disciplined approach to evaluating your goals and follow a clear, defined, and sustainable path to get there. There are no short cuts to investment heaven. But there are many easy paths to financial disaster. Being an NRI makes you more vulnerable than most other investors so "Beware the messengers and their messages". This article is contributed by Mr. Ajit Dayal, co-founder of Quantum Information Services Ltd. and founder of Quantum Advisors Pvt. Ltd.
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