Each year, India celebrates Diwali with much fun; and why not with so much mythology behind it. Also each year, Indian talking heads talk about top stock picks during Diwali. There's one here; but they are there everywhere. Each has his/her own picks, and no one is spared from hearing it, unless of course one switches off financial media during the time, and stops commuting altogether for you find talking heads in Mumbai suburban trains too.
There is so much fanfare in doing it that for normal humans, filled with the spirit of greed, it is quite difficult not to listen and act. And act they do; every time, each year.
I usually do not give a damn about what these pundits have to say, but sometimes, it is sheer fun to mock them; and I enjoy that immensely. I have so much regard and respect for them that I only just fall short of shorting their buy recommendations.
This year, instead of asking how much money the festival would bring to the investors, I thought of checking out how much money it would take away from them. The festival has its own charm, but people who celebrate it have some perverse attitude, which I attribute to the natural human behavior: being stupid of course. Here's how.
People celebrate the festival by bursting firecrackers. Never mind, there is both noise and air pollution; let's leave that discussion for some other time as I take up bashing one at a time lest I too go berserk. The firecracker industry is estimated to be worth Rs.100 b. So in our analysis, it amounts to taking out Rs.100 b each year and burning it; you hear that noise and smog? I do, but I also see the potential financial loss it brings upon those who burst.
The stock market has the potential to grow more than 12% in the next decade. Then there are dividends. The rate of return is less important (we can choose any rate) compared to the potential financial impact. Let's just use 12% as the opportunity cost. I picked equity markets rather than bank deposits or bonds because these people choose to burn the cash anyway. If this cash was put in equity markets, just the market index, instead, 12% was a probabilistic rate of return.
If we assume Rs.100 b is the market for firecrackers, the cash flow would be worth Rs.1,700 b in 25 years at 12%. The cash flow would earn dividends each year, and also grow further.
Rs.1,700 b is the cost of just one year's stupidity. We know that stupidity carries through the years; Rs.100 b is burnt each year. So the future value of that annuity would be Rs.13,333 b in 25 years. And I have not even considered growth in stupidity, that is, Rs.100 b is not going to stay constant; it is going to increase year after year; think about a perpetual growth rate, and the potential financial loss is staggering.
Sure, we can celebrate the festival softly with family and friends, and have as much fun. I wonder where else we could find a combo of increasing noise, polluting air and losing Rs.13,333 b.
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