Investing in a buyer's market

In the beginning of the year I was flooded with queries on my views on the Reliance Power IPO.

I joked with everyone that I’ll buy it at Rs 84 (roughly at two times its cash per share post the IPO). When someone told me that it was oversubscribed 7.6 times in the first two hours and in the black market it is selling at 800 plus, I told him that his information, although correct, doesn’t change my bid.

Last month when it hit a low of 106, my friends were joking that I should get ready with the cash. I told them that I always reserve the right to change my mind and I won’t buy it even at Rs 84 now.

I told them a story about the way bargaining works in Ladakh. I had just landed at Leh. I had to go to the town, some 2 km from the airport. The taxi driver asked me Rs 200 which I found steep. I tried to negotiate for 150 but he didn’t budge. All the other taxi drivers standing nearby said 200. So I agreed but to my shock he said, “No, the rate is 300 now”. I screamed “Why?” He replied, “The rate has changed now and it will be 400 if you waste more time.” I took the taxi. Twice in my life I’ve done 200 km long treks in the frozen mountain deserts of Ladakh and I’ve learnt how bargaining works there.

It’s a seller’s market. Be willing to pay and do the minimum bargaining or pay a hefty price.

In February this year, Warren Buffett threw a $800bn lifeline to bond insurers which they rejected. Few weeks later, when asked if the offer still holds he said, “We give them an offer that's, you know, it's basically--like the used car salesmen used to say on their warranties, 20-20. It was 20 seconds or 20 feet.” He meant if you walk away for 20 feet or wait for 20 seconds the offer is no longer valid. He knows he is in a buyer’s market.

The bottom line of the story is that the strategies in a market skewed in favor of the buyer or seller are very different from normal market conditions. If you are in a seller’s market like that taxi driver in Leh, or in a buyer’s market like Buffett, you have the power.
In such cases
• You should be choosy.
• You should name your price.
• You shouldn’t go on a frantic chase of the opportunities. You should decide what you want to buy/sell at what price and then wait for opportunity to knock your door.
• You shouldn’t be afraid of letting go of some opportunities because there will be many more to come.
• The frenzied crowd will at times throw what may seem to be some pretty good bargains. Only when you are really sure you must act, and decisively.


Vibhas Pande said...

Hi. I liked your style of writing and content.My thoughts on my blog are very similar. I shall visit your site more often in future.
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