Last time, I was in a mall during the SALE period, I was amazed to see such a large crowd. Some of the shops were particularly packed, with people queued up, waiting for a couple of hours just to go in. Two thoughts came to my mind:
- I would never enter a mall during the SALE period
- Why do people queue up to buy something, as if there were no tomorrow?
# Learning 1: My 1st learning was – SALE works on the principle of scarcity, and that human beings tend to over-value things that we think might get over.
This is the reason why SALE + Last 2 days left!! creates greater anxiety as compared to a month-long SALE. We feel that that with only 2 days or 1 day left, it is more valuable as compared to the one which does not have a time expiry.
Last 5 minutes of the exam were perceived to be more precious and important as compared to the first 5 minutes, isn’t it?
This is the same principle on which companies, which are engaged in bidding at auctions (be it mines, spectrum, or engineering projects) tend to over-estimate its value and thereby tend to over-pay for the captioned asset. History has been replete with examples with how some British telecom companies went bankrupt by over-paying for scarce resources. The current state of Indian telecom companies is no different, when it comes to excessive payment to garner air-waves. Some of them over-estimated the value of spectrum, thereby incurring excessive payments, with deadly combination of increasing leverage, cut-throat competition, commoditized industry and a new competitor with a very large balance sheet.
Obviously, consolidation (Vodafone Idea Ltd.) and, or perishability (Reliance Communications Ltd.) or company with a large balance sheet (Jio – Reliance Industries Ltd.) are some of the only choices available, which are now being exercised.
# Learning 2: My 2nd learning was tendency of people to over-payment arises because of fear of loss. No one wants to lose, especially at auctions when the anxiety levels are high.
The world’s greatest investor, Warren Buffett never goes to auctions
# Learning 3: My 3rd learning was misplaced incentives of the CEO to lead the largest organization in its industry, irrespective of the price of the deal; after all, his bonus could be based on the company’s top-line alone.
After all, the project-based engineering companies are driven by order book. Healthy and robust order book is a good indicator of the future revenue, but does it necessarily lead to profitability? This is a key question which needs to be asked!!!
Insurance companies continue to focus on premiums placed rather than focusing on underwriting profit. Race to becoming the largest premium generator continues to rule the industry.
New outlets emerging in the mall suggest that the old ones, on account of trying to increase revenue alone couldn’t sustain the high rentals and leverage, while the CEO continued rattling about have high sales.
# Learning 4: My 4th learning was Social Proof – just because others are going, we also tend to go as well, irrespective of whether we want to buy the stuff!!
This is also the reason why when one of the shops which is crowded, tends to get over-crowded since people who are on the outside perceive that the concerned shop offers better bargain. Having born and brought up in Kolkata, the two examples which come to mind are – Tiwari and Bata stores. While the first sells some of the finest sweets at affordable prices, the latter is known for its sturdy shoes for school children. Both have remained crowded, and how I have kept going back!!!
Disclaimer: Please note that these are my personal views. I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014. All investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.