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Goats Are Better Than Monkeys

And maybe banking stocks are better than realty stocks. Dhirendra Kumar tries to explain why

During the recent stock market carnage, two sectors that investors seem to be complaining the most about are real estate and banking. Many banks' stocks, even those of major banks have fallen by around 50 per cent. As I write this, SBI, HDFC Bank, and ICICI Bank are all down around 50 per cent from their one-year high points. However, real estate stocks have done far worse. The stocks of companies that were once pointed to as leading lights of the industry have fallen by 70 to 80 per cent or even more in some cases. Curiously, the fall in real estate stocks appears to have surprised many people far more than banks' declines have.

The reason appears to be that there are plenty of stories around that supposedly explain why bank stocks have declined. The agricultural loan waiver was one, the rise in interest rates is another and the subprime mayhem in the financial sectors in the US (and to a lesser extent, Europe) is yet another. Do these stories make sense? By themselves, they do, yet they don't add up to the kind of price decline that has happened.

Interestingly, unlike real estate, there are still buyers for bank stocks. Many mutual fund managers for example, are happy that they can now buy bank stocks at far more reasonable prices. It seems that bank stocks are basically suffering from a stampede towards the exit from foreign investors who are now painting all financial stocks around the world with the same brush.

Investors in both these sectors are complaining loudly. So does that mean that bank investors and real estate investors are in the same boat? Not quite. Here's a story that will help you figure out the difference: One day a man appeared in a village and said that he would pay a thousand rupees for each monkey that the villagers could supply. The villagers caught all the monkeys in the neighbourhood and sold them to him. Soon a second man appeared and offered two thousand for each monkey. Since all monkeys were with the first man, the villagers had no choice but to try and return his money and take the monkeys back from him. However, the man refused. The villagers hiked up the price to Rs 1500 and then to Rs 1900 but he still refused. The villagers were at first puzzled by this refusal of the first man to make profits but they figured that there must be more buyers who were on the way to the village to offer higher and higher prices. So they hiked up the offer and bought back the monkeys for Rs 3,000. The two men then went away and the villagers then started waiting for more buyers. They waited and they waited but no one ever came.

Nearby, there was another village where exactly the same story happened, in the same way, except that the animals in question were goats. Here too, the villagers waited and waited but no one ever came to buy their goats at a higher price. However, there was a big difference. In the first village, everyone soon realised that the monkeys were a nuisance. They shouted and shrieked and bit people and were worse than useless. In the second village, the goat-owners were better off. The goats could be milked every day and the milk was good and healthy. When the goats eventually grew too old to be milked, the villagers could kill them for mutton.

Even though goats and monkeys had both been extremely overpriced, the goats turned out to be not such a bad deal. However, the monkeys were a complete disaster. The monkey-owners had to eventually abandoned the animals in the jungle and try and forget about their losses.

And that's the difference between having bought overpriced goats and overpriced monkeys. Just like the stock markets.