Retail investors... The step sons

Does this graph strike a bell? Its is not the blood pressure reading of someone... Its the price chart of Reliance Petroleum for the past one year. It is quite possible that this graph definitely might have a strong correlation with the blood pressure of its retail shareholders. Reliance Industries has sold about 18 crore shares or 4 per cent in Reliance Petroleum (RPL) recently. The sale happened when the price was near its peak. This deal has hogged considerable media light and has opened more questions than answers. Consider the following facts in this deal:

1. With the rise in prices RPL, a refinery which is still under construction and to be ready by only next fiscal, has overtaken the combined shareholder wealth of the three PSU refiners-cum-marketers - IOC, HPCL and BPCL.

2. The modus operandi of the sale is still not known. Whether RPL shares were sold in small lots or in huge block deals to small investors or private equity firms is still a matter of conjecture. These details were neither available in the block or bulk trade details of BSE and NSE, nor was it put on the stock exchange notice board.

3. Reliance Industries communicated about this deal to the stock exchanges late on Saturday night. (Of course both the exchanges are closed on weekends)

4. Earlier this month, the RPL share was on the rise on a market rumour that Chevron could pay $6 billion for 21 per cent in RPL. The US oil major promptly repudiated the news, but Reliance was slack in denying it and RPL shares climbed northwards probably on this rumour, to a 52-week high of Rs 295. Mind you the sale happened sometime after this.

5. While all these were happening on one side, there were players who were building huge short positions (betting that the stock price will fall) in the derivatives segment. There were 16 crore shares position built up in this category (which is around 250-300% the normal levels). These short positions peaked on the same day, the promoters began selling shares. Of course we only know it post mortem. Needless to say that these guys must be laughing their way to banks.

Thats "transparency". RIL's communications post this sale are even more curious.. "The sale of RPL shares was conducted by transactions through the stock exchanges and has helped to further broad-base the shareholding pattern of RPL and is a bid to maximise overall shareholder value".. said the company statement.

"Maximize shareholder value".... thats a nice and neat phrase. At who's cost?

RIL made a profit of Rs 3662 crore in the deal... and as usual retail investors like you and me (thank god i am spared in this case) would have been caught on thier wrong foot.

Gymoconomics

If you enrol into a gym which offers us two payment options - Either a pay-per-visit of Rs.100 or a flat fee of Rs. 1000 per month, which one would you choose?

Most of us end up choosing the flat fee option. We calculate that with this option we would be better off, if we end up using the gym more than 10 times in a month. However, if we were to do a true audit of our own behaviour subsequently, a significant portion of us would have actually visited the gym less than 10 times in a month. Yet we all fall into this trap of not choosing the pay per option. Behavioural Economics throws some light..

We tend to overestimate our needs and fail to change our views on it. Most companies understand this behaviour of ours and rightfully exploit us. Most of us fall into the trap of "zero interest rates for the first three months" in our credit card. Even if we knew upfront that the rate increases to 20% after three months, we end up choosing this option thinking that we would stop using the credit after the offer period. But if we are like a typical customer, we will not have the self control to do it.

Another case in point. For pay-per-use TV, we end up choosing a bouquet as against an a-la-carte option. The problem is, we may never watch all the channels we have subscribed to.

Coming back to initial gym example - Some might argue that they chose the flat fee option because it will then force them to use the gym and in the process keep them fit. Yet if we reflect on our own actual behaviour, we will understand that this never translates into reality.

P.S: This article appeared in Business Line.

Business Plan - II

Looks like the judges seem to share our enthusiasm. Our plan has got shortlisted for three prestigious B Plan competitions. Lets see where this takes us.

The biggest pat on our back came when we were presenting the B-plan to a panel of judges, one of whom is a Venture Capitalist. The VC commented that he is mightily interested in our area of work and has asked us get in touch with him.

Am reading some extremely interesting articles on Behavioural Economics, which explains why we do things, the way we do it. Watch this space for a few interesting pieces...

Interviews

Attended two interviews over the last three days. Could not make it beyond Round 3 in both. Despite doing an in depth review of what could have gone wrong in either of this, i am honestly not able to come out with even a single answer.

In the consulting interview in round 2, i got to solve 4 cases. I solved all of them. The interviewer was visibly impressed and acknowledged it during the interview itself. But i got a reject mail later during the day. The story is no different in the Investment Banking interview. I got 5 puzzles in round 1, solved all of them (and that too very quickly). In Round 2, they tested my banking knowledge and understanding of stock markets (both my passions) and i did a pretty neat job. Proceeded to Round three, where they just spent 5 minutes with me and we had a general chit chat and nothing went wrong there as well. I did not take any controversial stance, no showing off, i did nothing to put of the interviewer, showed genuine interest in the job and the firm.... Reject mail promptly finds its way to my mail box later in the day.

I have never really faced failures in my life. I take these as good learning experiences. I am learning to handle failures. I will never be able to find a reason for these failures today, but i am sure someday i will be able to connect these dots and it will form a brilliant design.

Nothing can separate me and my self confidence.

The Business Plan

I have never written a business plan in my life. I have never forced myself to write one, for i never had any idea that is strong enough to influence me to write one. But now this is a thing of the past...

For the first time, I have written a new business plan (jointly with another friend of mine at ISB). We are excited by this idea and firmly believe that this idea may have strong implications in future. I do not know if the judges would perceive the business plan with the same enthusiasm as ours, but our journey was wonderful.

From a mere idea (a random thought) we have now travelled a long way to conceptualize and give life to this idea. It had forced us to think in a structured manner and challenge assumptions and we have come out victorious.

Or have we? As always time will tell us. But right now, its time to bask in this comforting feeling..