Posted by: John Elliott | January 23, 2008

India’s investors lack sophistication

India has unsophisticated investors. I’m talking about stock market investors of course following the stock market crash, with Mumbai’s key Sensex index plummeting 19% from an all time and over-priced high of above 21,000 on January 8 to under 17,000 by Tuesday. Such a remark, judging from past Riding the Elephant experience, will generate a furious tirade of comments, especially from readers based in the United States who are always anxious to protect India’s reputation.

But how else can you explain a market which swings from such extremes. Last week it mobilized bids totaling an astronomic $180 billion for the $2.9 billion initial public offering launched by Anil Ambani’s Reliance Power (which has yet to produce a revenue stream). On Monday and Tuesday, it crashed, seemingly ignoring the country’s strong economic fundamentals. As Palaniappan Chidambaram, India’s finance minister, pointed out when he tried to calm nerves during the slide, the fundamentals are strong. The economy, he pointed out, is growing at around 9%, and the prime minister’s economic advisory council is forecasting 8.5% for 2008-09.

It’s not just Indian retail investors, but foreign funds (many of them based in the United States) that have been rushing herd-like into Mumbai in recent months – and then rushed out on in the past days. This afternoon I spoke to a leading Mumbai banker who has close links with the United States. “If anyone thought that having strong foreign institutional involvement in the Indian market would bring stability, it is clear that that assumption was misplaced,” he said (anonymously because of his links). He complained about a “lack of conviction and analysis” by foreign funds which “on Tuesday told me they were ‘getting the hell out of India’ and today are saying ‘buy.’”

The same line came from Pradip Shah, chairman of IndAsia, a Mumbai private equity firm, who said there were “a lot of unsophisticated players” and added: “Many are naïve and felt left out of the growth so rushed in thinking India was the center of the universe and that nothing could go wrong.”

With earnings and economic growth scarce elsewhere on world markets, funds have been scrambling irrationally, with little analysis, to be part of the record 21,000-plus levels. But for some time there have been worries about when the bubble would burst and what would cause it. Now we know – a combination, as had been feared, of international market falls and a local factor.

The story of the slide in world wide markets is well known. The main local factor was the $180 billion bid for Reliance Power’s IPO – $120 billion from foreign and local funds and $60 billion from private investors. That took $27 billion “out of the system” in deposits and was not available to cushion the market’s fall, says Manish Chokhani, a director of Enam Securities, one of the IPO’s lead managers. As the market fell, it was consequentially difficult for investors to meet “margin calls” for them to top up advance-payments on share purchases. Investors then sold existing holdings to raise the money, which added to the downward trend. Chokhani expects some $20 billion of that money to be released within a few days, improving liquidity.

Today the market has recovered on the back of the U.S. Federal Reserve’s 75-basis-point cut. The Sensex rose to a high during the day of 17,997 – up 1,267 points from last night’s close, its biggest-ever one day gain. It finished the day at 17,594 – up by over 5% from Tuesday, ending a seven-day losing streak.

Across India, small investors are feeling badly bruised, even wounded, by the crash. But some professionals seem almost relieved that what they have long expected and feared has at last happened – and are glad that what some call “absurd over valuations” have now been rationalized. “This is now a much safer place to be,” said one. They just hope that today’s bounce will neither be reversed, nor be followed by too fast a climb back to irrationality. Some people, they know, never learn.


  1. In the past, we have always said that the trouble with emerging markets is that they are difficult to emerge from. Now, liquidity seems not to be an issue anymore, but volatility seems here to stay in all of the global markets. We have done some analytics on the various India funds, ETFs, and stocks, which can be viewed at

  2. Nimesh is right.

    Despite all of the progress made in the last 20 years or so, India is still a third-world country. Most third-world countries are similar to India. They have extreme wealth and growth in some places while the masses are uneducated, living in squalor, and die from disease. India is not going to become the world’s next superpower until they improve their educational system, build a solid middle class, eliminate the spread of preventable disease, and build a strong military.

    It took the U.S. hundreds of years to get where they are today. Just because some people in India are getting rich does not mean this country is paradise on Earth. All of the people who were insulted by this article are closed-minded and are not living in reality. Stop attacking others and work to make India better. India is not unsophisticated in many other ways besides investing.

  3. Wednesday, February 6, 2008
    Open a Short ?? /Pre-Open/

    Yup thats right .. with the asian indicies tanking big time following the sell off in the USA .. one could expect the markets in India to act no different .. one might benefit from picking up a Put at the money that is if our Broker Chaps dont turn off their terminals 🙂 .. Happy trading and hope you folks were in the money and had no longs .. because it seems that the markets arent going anywhere soon


  4. Well well well ! lovely way to elicit the exact reactions that one seeks .. John elliot You do enjoy Your Drama 🙂


  5. iski maa ki! US is not New York and Mumbai is not India. all over the world there are dumb investors and there are smart investors. The big money loots the small money

  6. Give a blog a fancy title, and a well-known publication, and what you’ll get are generalizations and unsubstantiated feelings. John Elliott reminds me of the talking heads on TV who claim to find trends in chaos and read the “pulse” of the market.

    It was an astronomically simple assumption that led to the creation of this blog: that one man can speak for what happens in India. The reality is that India’s complexity can’t be captured by pithy statements, no matter how blunt or cute they sound.

    I liked it when John merely reported the news and investor sentiments. Not when he entered the fray with his own sentiments. Have you invested money in the markets? Have you been observing the sequence of trades in the market? Not to offend you, but what could a private equity fund manager be expected to know about stock market minutea anywhere? Have you talked to hedge fund managers? Have you talked to institutional investors to understand their motivations? I’m sorry, but that’s where the story lies and seems like you have a lot of homework to do.

    Yes, the Indian stock market doesn’t reflect the fundamentals. Yes, there are unsophisticated investors in the market. Pray tell, what new insight have you developed here?

  7. I amnot completely agree with your statement because
    1)All over the world all small investors are unsophisticated. It doesn’t matter whether you are in US or in India. The amount of money invested by individual is so small that they can’t afford the sophisticated tools(computer softwares), services or matter of fact hedging instruments.
    2)There are little choices left in the market for small investors. But only market is the real hope to make more money than regular income from job or business for small investors. Definitely this market went up so fast it no need expert to say that some or other day it will come down. At this moment require some patience. In the world specially in US due to sub-prime mess recession is looming. Still in India, the companies which are not depend on external factor will not affect much.
    3)Sophistication does not give returns otherwise every first world citizen will be abundent of money.
    4)For analysis one need kind of economical data which is available in India comparable to data available in any advance contry. If compared to the China it is far better & more reliable.
    Read new book of Tarun Khanna in this regard. Tarun Khanna is Harward Business School professor.

  8. Wall Street Dow Jones come down from high 14,200 to 12,207 as of today. Drop 14%. Sensex come down from high 21,000 to 18,152 as of today. Drop of 13.5%. I don’t see any difference as far as the market come down from 52 week high. So if Indian investors are foolish then should be the Americans equally. I think these feagures speaks louder than the whole senseless blog.

  9. Nimesh from Chicago the problem is not with the content of the article but with Mr. Elliot’s sweeping statement.
    He does not even know who comprises the ‘investors’ that he is calling unsophisticated….it is the American FII’s and the and not retail investors are the ones who are causing panic.

    Nimesh keep to the topic and stop being a Paki in disguise., the Indian economy, unlike the Chinese economy is not overly dependent on exports. It is largely driven by domestic consumption. A Japan type scenario is totally out of the question.

  10. Well Marut and Pratik, I see that one person is writing from Canada and the other gentleman is writing from the U.S.A. If you folks believe that India is so great, then why are you living in first world industrialized countries? Why can’t you face the fact that indeed India is a Third World Country and it has a lot to do before it becomes a developed country? Also, Mr. Elliott is NOT an American.

    Yes, I have read Mr. Elliott’s other articles and I don’t see him as an “India basher”, “a typical Westerner”, “a person who degrades Indian culture” , etc… All of those types of allegations are ABSURD.

    Why attack Mr. Elliott for bringing out factual information about India? Go look at the facts yourself. According to the United Nations Human Development Index, India is in the bottom 80% in most categories. India has a lot of work to do and India won’t get ahead if Indians want to bury their hand in the sand. It seems to me that people like the above are the PROBLEM and not the SOLUTION.

  11. There would not be any fun and excitement without such “unsophisticated” investors, they are the prime reasons to drive the markets.

    Unsophistication knows no boundary, it is equally applied to all the investors everywhere. There always will be unsophisticated investors till human-fear remains.

    Assume ,for a moment , that all investors are calm, cool minded, sophisticated, there would not be any greed and panic which would make stock markets most dud places.

  12. Nimesh, nobody wants to know where you were born or raised or how many times you visited your relatives or your views on immigration. The issue here is the “unsophisticated” investors……John has yet to clarify who they are and why he used that phrase in particular reference to India and Indians…Such sweeping generalizations (true or untrue) do not make for good journalism. I am surprized his editor has not pulled him up on this issue.

  13. Hello Nimesh, I think you have not read some of Mr. Eliot’s earlier articles. Also constructive criticism has its limits, it cannot and should not turn into an India bashing affair all the time. Mr. Eliot would have realized by now, that most of his readers are associated with India in one way or another and are fairly “SOPHISTICATED” in their knowledge about the country. So his attempt to pass off terrible journalism should not be accepted. He deserves the criticism that he is getting. It is typically American to run down other cultures and countries. It must be a national policy of some kind or maybe its taught to kids in school as a healthy thing to do.

  14. I am an India. I was born and raised in the U.S.A. I have visited relatives in India six times. I don’t understand why Indians can not take a little bit of constructive criticism. Folks, India has many problems. The way to solve them is not by attacking someone who brings out your fault. The way to attack a problem is by implementing a solution.

    Now, as far as Indian investors not being “sophisticated” well the same can be argued with investors everywhere else. But Indian investors don’t have as much experience as the ones in America do.

    Also, for anyone who attacks this author just for pointing out India’s faults, answer this question for me: If India is so great, then why do so many Indians want to come to America?

  15. Although the heading is misleading, I think John was referring to foreign investors as the ones who turned out to be ‘unsophisticated’, rushing in and then pulling out like there was not tomorrow,only to rush back again today!

    There may be arguments about the valuations. But one thing is clear: India is likely to keep powering ahead while the US struggles to get a move on. With that kind of attractive growth in future, quite like the one China has shown for a long time now, there is no choice but to invest in India.

    And when the inevitable storms of sudden, sharp corrections do occur, normal investors will do well to just sit tight and let them blow over. Those who have the money to spare, and the balance to invest at those times of total pessimism, will be the ones who will be laughing all the way to paradise with obscene returns!

    Happy hunting! Just make sure you pick the right scrips. Easy? Ha! Ha!

  16. I think this gentleman has come from Mars and is not aware of the state of America’s economy. If America is today into such deep crisis who is to blame? Its prepostorous investment planning.

    And to be very specific you are talking about Anil Ambani’s IPO, Let me tell you out of US$ 180 billion, US$ 120 billion worth of applications have come fron FIIs,(which are mostly from USA), Are they sophisticated investors?
    If Indian markets are giving crazy returns, why? who is playing behind it? All these FIIs. They drive valuations of most useless companies here because USA stock markets are not fetching good returns. They buy into anything. Is this sophisticated investment?

  17. John, you bring it upon yourself. When you use lines like “India has unsophisticated investors” surely in times like these (when the boot is on the American foot)you don’t expect people to applaud you. You rightly deserve the flak you get.

  18. When investors pour in $200 billion for an IPO it tells you a lot about Ambani’s credibility. Indian’s who have a reputation for being over-analytical and conservative investors would never back a wild horse….and then the bulk of that IPO subscription came from foreign investors……what does that tell you?

  19. John you have me laughing. Infact a lot of people who read this would be laughing……the ‘sophisticated’ investor seems to be a rare if somewhat extinct breed nowdays.
    If you find one let me know.

  20. John, India’s reputation does not need to be protected. From Enron to Sub-prime, they had no role in any of this stuff.

    What’s your take on the financial sophitication of the foreign institutional investors who are creating all the mayhem…..?

  21. Looking at the Sub prime fiasco one could say the American financial system looks unsophisticated!

    Are Indian investors responsible for the present misery?

    John you have to be less fuddy duddy….

  22. You sound like a bruised man John. Looking at how Wall Street behaved, you can bet there are some unsophisticated investors there too! How would you rate POTUS?

  23. John, the investors everywhere in the world are unsophisticated. Its the FII’s who should have a lot more sense. Unfortunately they rush in and rush out of the markets creating panic all around.

  24. Indian fundamentals are strong in the long run, however, there is still a heavy biding to the US economy. With substantial percentage of Indian GDP still relying on Indian exports, with US dominating that pie, it ultimately means that the Sensex is subjected to volatility in the days ahead until we see US consumer confidence.

    From a long term view, within a span of 2 years, the Indian economy will play a dominant role following the output of FDI investments currently at work.

    Meet me at

  25. Its true the fluctuation happen in big level in India.But one should also consider being a Rapidly developing nation ,Bruise in the run is Inevitable.

  26. India’s market is simply a microcosm of the U.S. markets during the past 20 years – savings and loan debacle, tech bubble, and now the sub prime credit bubble. Seems Wall Street never learns either.

  27. John,
    Very true, some people never learn. Everyone knows that the major crash on monday was caused by FIIs (Foreign Institutional Investors). They sold to the tune of Rs.4000 crores while the DIIs saved the market on monday by buying half of what the FIIs sold.

    I am sure the same FIIs who supposedly said on monday that they will get the hell out of India would have bought like crazy on tuesday. I bet they will invest so much in coming days that they will take the sensex to new highs in 2 months (can be much earlier than that).

    Again, I very much agree with you that THE INVESTORS investing IN INDIA need some sophistication!!!

    worth reading

  28. The more irrational they are, the better it gets!

  29. John: If Wall Street is the bar that Indian Stock Market is being measured against to gauge investor sophistication or market integrity then the bar is not very high.
    Let’s talk about the pervasive securitization of ‘NINJA’ loans (No Income, No Job and No Assets) and the complete absence of regulatory oversight that has eroded investor faith in US markets. Good luck trying to generate no doc mortgages from Indian banks and then getting Dalal Street to securitize it into worthless bonds. The Indian market needs to improve continually, however Wall Street is not the bench mark and John cannot play the Pied Piper for the Indian investors. There are enough problems in the US financial market and John would be well advised to focus on that instead.

  30. John ..You shouldn’t forget US markets history. It has history of same kind of problems in 60’s, 70’s and 80’s. The indian markets are very younger compared to western and US markets. ..

  31. Yes..u r true that indian markets are crowed with either ill-matured or naive people.

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