Why should we welcome the stock market crash

Economics assumes that human beings are rational. But human reactions to stock market movements are utterly irrational. When markets rise, everybody cheers. When markets crash — as has been the case for two weeks — everybody moans.

A hunt for culprits often ensues. No such hunt is ever announced when the markets are rising. In past scams, when manipulators like Harshad Mehta and Ketan Parekh sent share prices through the roof, they were hailed as geniuses and became celebrities. Some market experts cautioned that the markets had shot up to insane levels. But this plea for sanity was widely dismissed as stupid, and ordinary housewives and college kids bought frenziedly in the belief that share prices could only go up.

However, when the markets inevitably fell, the hero-manipulators were suddenly denounced as villains. They were accused of the dreadful sin of rigging markets, and thus misleading small investors. Ironically, no investor complained as long as the manipulators rigged prices upward.

The complaints began only when the manipulators were unable to rig markets any more, and prices crashed. Truth be told, the real public complaint against Harshad Mehta and Ketan Parekh was not that they manipulated prices upward, but that they failed to manipulate it upward forever. For that, this could not be forgiven.

The underlying assumption of small investors is that share prices should rise forever. Now, if the price of rice, sugar or petrol rose forever, the small investor would complain bitterly. Yet he seems to think it perfectly fair that share prices should go up forever, and very unfair if share prices crash. How greedy and hypocritical humans are!

Consider the current moaning over the stock market crash. The fall of the sensex from 12,624 to 10,400 represents a sharp 20% decline within two weeks. But few people seem to remember that sensex was at just 9,390 at the start of 2006. So, even after the crash last Monday, the sensex was still up 10.5% since the start of the year. No bonds or fixed deposits could give such a high return within five months. This point escapes the CPI(M), which sees the market crash as reason enough to stop pension funds from investing in equities.

Remember that the sensex was around 5,000 during the last general election in 2004. It then slumped to 4,282 on panic selling. From that low point, the sensex tripled in two years to 12,624 on May 10, 2006. That has been a bonanza, fuelling speculative frenzy. So, the 20% correction is to be welcomed. Stock market valuations remained stretched by historical standards, though not by developed market standards. If the sensex falls all the way to the 9.390 level at the start of the year, the market would still have yielded enormous gains to investors since 2004.

The long run prospects of the economy are excellent. So, some investor exuberance is understandable. Yet such exuberance needs to be tempered by sharp corrections from time to time. This sends the valuable message that exuberance is no substitute for judgement.

Human beings quote many aphorisms that they seem to forget when they enter the stock market. All that glitters is not gold. Don’t be penny-wise and pound-foolish. Look before you leap. There is no such thing as a free lunch. Better safe than sorry. A fool and his money are soon parted.

All who invest in markets must remember these aphorisms. Risk and reward go together. If there were no risk, there would be no market reward. Share prices represent subjective judgements of the day, so bouts of euphoria and depression will necessarily drive share prices up and down.

Marxists find this terrible. They deplore “casino capitalism”, and lambaste foreign institutional investors (FIIs). Marxists cannot bear to acknowledge that FII pressure has sparked capital market reforms that have made Indian markets among the best in the developing world, far ahead of China or South Korea. FIIs were earlier reluctant to invest in a market where one-tenth of all paper share certificates were forged, settlements were delayed for months on end, and thin turnover facilitated rigging by big brokers (and by companies before every public issue).

But after capital market reforms, FIIs have flooded in. They have invested in all emerging markets, but disproportionately more in India. They have favoured companies with good governance and transparent accounting, rewarding these traits for the first time (earlier, the ability to rig markets was rewarded most). Stock market reforms and FII inflows have hugely improved the ability of Indian companies to raise equity finance for expansion. This has reduced their dependence on debt, thus reducing interest rates as well as over-leveraged balance sheets.

The CPI(M) can see none of this. It believes only that foreign devils are making millions and paying no tax. So it demands a capital gains tax and an end to the Mauritius treaty that has been used as a tax loophole by FIIs. The CPI(M) seems unaware that Mr P Chidambaram is in fact taxing dividends and capital gains in ways that have made the Mauritius loophole irrelevant, and so ensured that FIIs are indeed taxed.

Dividend tax is now paid by companies rather than recipients; so FIIs cannot avoid it. A transactions turnover tax is being collected in lieu of capital gains tax. This brings all investors including FIIs into the tax net, and the Mauritius route has been rendered irrelevant. Domestic crooks used to avoid capital gains tax through benami small accounts, but now cannot escape the transactions tax. Thus Mr Chidambaram has ended tax avoidance and evasion, brought FIIs and Indian crooks into the tax net indirectly, and created a level tax playing field between domestic and foreign investors. That is a considerable achievement.

So, our problem today is not untaxed FIIs. It is the notion that markets should rise forever. They will not, and should not. We need sharp dips, not Marxist controls, to remind investors from time to time that stock markets have risks as well as rewards.

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You've got to find what you love

This is the text of the Commencement address by Steve Jobs, CEO of Apple Computer and of Pixar Animation Studios, delivered on June 12, 2005.

I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I've ever gotten to a college graduation. Today I want to tell you three stories from my life. That's it. No big deal. Just three stories.

The first story is about connecting the dots.

I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why did I drop out?

It started before I was born. My biological mother was a young, unwed college graduate student, and she decided to put me up for adoption. She felt very strongly that I should be adopted by college graduates, so everything was all set for me to be adopted at birth by a lawyer and his wife. Except that when I popped out they decided at the last minute that they really wanted a girl. So my parents, who were on a waiting list, got a call in the middle of the night asking: "We have an unexpected baby boy; do you want him?" They said: "Of course." My biological mother later found out that my mother had never graduated from college and that my father had never graduated from high school. She refused to sign the final adoption papers. She only relented a few months later when my parents promised that I would someday go to college.And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my college tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting.

It wasn't all romantic. I didn't have a dorm room, so I slept on the floor in friends' rooms, I returned coke bottles for the 5¢ deposits to buy food with, and I would walk the 7 miles across town every Sunday night to get one good meal a week at the Hare Krishna temple. I loved it. And much of what I stumbled into by following my curiosity and intuition turned out to be priceless later on. Let me give you one example:

Reed College at that time offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer, was beautifully hand calligraphed. Because I had dropped out and didn't have to take the normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and san serif typefaces, about varying the amount of space between different letter combinations, about what makes great typography great. It was beautiful, historical, artistically subtle in a way that science can't capture, and I found it fascinating.

None of this had even a hope of any practical application in my life. But ten years later, when we were designing the first Macintosh computer, it all came back to me. And we designed it all into the Mac. It was the first computer with beautiful typography. If I had never dropped in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts. And since Windows just copied the Mac, its likely that no personal computer would have them. If I had never dropped out, I would have never dropped in on this calligraphy class, and personal computers might not have the wonderful typography that they do. Of course it was impossible to connect the dots looking forward when I was in college. But it was very, very clear looking backwards ten years later.

Again, you can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.

My second story is about love and loss.

I was lucky — I found what I loved to do early in life. Woz and I started Apple in my parents garage when I was 20. We worked hard, and in 10 years Apple had grown from just the two of us in a garage into a $2 billion company with over 4000 employees. We had just released our finest creation — the Macintosh — a year earlier, and I had just turned 30. And then I got fired. How can you get fired from a company you started? Well, as Apple grew we hired someone who I thought was very talented to run the company with me, and for the first year or so things went well. But then our visions of the future began to diverge and eventually we had a falling out. When we did, our Board of Directors sided with him. So at 30 I was out. And very publicly out. What had been the focus of my entire adult life was gone, and it was devastating.

I really didn't know what to do for a few months. I felt that I had let the previous generation of entrepreneurs down - that I had dropped the baton as it was being passed to me. I met with David Packard and Bob Noyce and tried to apologize for screwing up so badly. I was a very public failure, and I even thought about running away from the valley. But something slowly began to dawn on me — I still loved what I did. The turn of events at Apple had not changed that one bit. I had been rejected, but I was still in love. And so I decided to start over.

I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life.

During the next five years, I started a company named NeXT, another company named Pixar, and fell in love with an amazing woman who would become my wife. Pixar went on to create the worlds first computer animated feature film, Toy Story, and is now the most successful animation studio in the world. In a remarkable turn of events, Apple bought NeXT, I retuned to Apple, and the technology we developed at NeXT is at the heart of Apple's current renaissance. And Laurene and I have a wonderful family together.

I'm pretty sure none of this would have happened if I hadn't been fired from Apple. It was awful tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle.

My third story is about death.

When I was 17, I read a quote that went something like: "If you live each day as if it was your last, someday you'll most certainly be right." It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: "If today were the last day of my life, would I want to do what I am about to do today?" And whenever the answer has been "No" for too many days in a row, I know I need to change something.

Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.

About a year ago I was diagnosed with cancer. I had a scan at 7:30 in the morning, and it clearly showed a tumor on my pancreas. I didn't even know what a pancreas was. The doctors told me this was almost certainly a type of cancer that is incurable, and that I should expect to live no longer than three to six months. My doctor advised me to go home and get my affairs in order, which is doctor's code for prepare to die. It means to try to tell your kids everything you thought you'd have the next 10 years to tell them in just a few months. It means to make sure everything is buttoned up so that it will be as easy as possible for your family. It means to say your goodbyes.

I lived with that diagnosis all day. Later that evening I had a biopsy, where they stuck an endoscope down my throat, through my stomach and into my intestines, put a needle into my pancreas and got a few cells from the tumor. I was sedated, but my wife, who was there, told me that when they viewed the cells under a microscope the doctors started crying because it turned out to be a very rare form of pancreatic cancer that is curable with surgery. I had the surgery and I'm fine now.

This was the closest I've been to facing death, and I hope its the closest I get for a few more decades. Having lived through it, I can now say this to you with a bit more certainty than when death was a useful but purely intellectual concept:

No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma — which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.

When I was young, there was an amazing publication called The Whole Earth Catalog, which was one of the bibles of my generation. It was created by a fellow named Stewart Brand not far from here in Menlo Park, and he brought it to life with his poetic touch. This was in the late 1960's, before personal computers and desktop publishing, so it was all made with typewriters, scissors, and polaroid cameras. It was sort of like Google in paperback form, 35 years before Google came along: it was idealistic, and overflowing with neat tools and great notions.

Stewart and his team put out several issues of The Whole Earth Catalog, and then when it had run its course, they put out a final issue. It was the mid-1970s, and I was your age. On the back cover of their final issue was a photograph of an early morning country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath it were the words: "Stay Hungry. Stay Foolish." It was their farewell message as they signed off. Stay Hungry. Stay Foolish. And I have always wished that for myself. And now, as you graduate to begin anew, I wish that for you.

Stay Hungry. Stay Foolish.

Thank you all very much.

Red Herring meets CEO Ramadorai

Tata Consultancy Services' CEO steered his company to the top of the pack in India. Now his challenge is to face global majors IBM and Accenture.

If India is the crown jewel of outsourcing destinations, Tata Consultancy Services is the company spearheading this movement. As the largest Indian outsourcing company in terms of revenues and profits, TCS has become a force that is challenging global firms such as IBM, Accenture, and EDS.

In March, TCS became the first of the Indian outsourcers to cross the $2-billion revenue mark. For fiscal year 2004-2005, TCS' revenue reached $2.24 billion and its net income was $512 million. When the Mumbai-based company went public on the Indian stock markets in August 2004, shares were oversubscribed 7.8 times and the $1.2-billion IPO become the second largest in Asia that year.

S. Ramadorai started working in 1971 at the then-fledgling company as a programmer after completing a master's degree in computer science from the University of California, Los Angeles. Despite lucrative opportunities in the United States, Mr. Ramadorai returned to his home country to join what was then just about the only IT company around.

Since taking over as CEO in 1996, Mr. Ramadorai has led TCS through massive changes to become one of the leading IT companies worldwide. TCS is part of one of the largest Indian conglomerates, the TATA Group, which includes markets that cover energy, telecommunications, financial services, chemicals, and engineering and materials.

In September, TCS secured the largest-ever deal by an Indian outsourcer to provide application support and enhancements to Dutch bank ABM Amro; the work will generate $247 million in revenues over five years. In mid-October, TCS made another big move by entering the U.K. life insurance and pensions industry with a 12-year, $847-million contract with the Pearl Group. And in November, TCS bought Chilean outsourcing company Comicrom for $23 million.

Mr. Ramadorai is also extensively involved in the academic world, and is on the corporate advisory boards at the University of Southern California 's Marshall School of Business and several institutions in India. Earlier this year, Mr. Ramadorai was appointed chairman of Nasscom, India 's influential software trade association; his mandate is to drive initiatives to spread technology nationwide.

However, TCS faces challenges in the form of increased competition from smaller Indian players as well as Chinese companies, and still lags behind global players like IBM and Accenture. On a recent visit to the United States, Mr. Ramadorai fielded questions from Red Herring about the Indian IT environment, and how he plans to compete with the global giants.

Q: How does TCS plan to overtake global players such as IBM and Accenture?

A: We build scale.This year we plan to add about 13,000 people and [the total] are going to be 60,000 people by the end of March 2006. One dimension is the number of people, but we need to be very clear what we mean by going forward. Growth without profitability doesn't make sense. Growth with the right margins is very fundamental and we'll be picking the right kind of opportunities for us to grow in the places that will give us margins.

Q: TCS is facing significant competition from smaller, upstart Indian players such as BirlaSoft, Larsen & Toubro, and Bharti Telecom—how do you plan to face them?

A: TCS has been in the business for the last 36 years and has an enormous amount of competencies and client base. The total outsourcing out of India is still less than 3 percent than the total of IT spend in the world, so we still have a lot of upside in the game.

While there may be a number of other players that are emerging—which I believe must be necessary as the chairman of Nasscom, because we want to build an industry rather than one company—I think each of these smaller ones must find their own niche and find their opportunities for growth.

Q: How do you intend to grab the best talent in India, where there is a huge entrepreneurial wave catching on with all the startups and VC funding?

A: The TCS brand and the TATA brand, how it builds excellence in people and the kind of opportunity we give, is a very natural attraction. Secondly, we also have an enormous amount of innovation in the company where entrepreneurial culture and spirit is encouraged, a lot like idea generation and building a small niche product or service.

Thirdly, we have participated in funding some of the startup initiatives within the company and we ourselves act as a VC at times. Finally, we partner with some of these VC companies extensively because today startup companies with core technology will not see the market unless it is part of a solution. So some of these startups see us as a great system integrator to take them to market.

Q: The top management owns about 80 percent of TCS and employees hold very little. Is that likely to change?

A: The change came about when we went public in August 2004 and we gave stock grants to a number of people as well as cash for people to buy the stocks that were allocated to employees. Going forward, we still continue to give cash rewards but we will look at various ways as we see it necessary. If that is an option program that needs to be put in place, we will, so we are completely open and flexible.

Q: How do you see consolidation playing out in India 's IT industry?

A: Consolidation will always happen and inorganic growth can always happen. TCS acquired CMC about four years ago, now we are integrating and merging Tata InfoTech, and we entered joint ventures with airline companies like Singapore Airlines and Swissair. Finally, we bought a captive entity of insurance company back office called Phoenix Global in Bangalore, which brought in about 500 people. When you add up all of these we have almost added up 7,000 people inorganically, plus the Pearl initiative is going to bring another 950 people. We are talking about almost about 8,000 people coming into [the company] in an inorganic manner. It's a big deal—few companies have done these kinds of things out of India.

Q: TCS has been rooted in a family-owned environment—is there rigidity in the company that could impede its ability to become a big global player?

A: The Tatas were never family-owned because if you look at the historical significance of the group itself, it is completely professionally managed and the family holding is not even 2 percent of the total.

Family ownership is disappearing in India, not just in the IT services but in any part, because the next generations of the work force who want to run these companies are spreading, the companies and professional management is coming into place, and that's what we are witnessing in India. Changes are happening faster than we all believe.

Q: When is TCS planning to float American depository receipts in the stock market, if at all?

A: I can't make any prediction on when it will happen, how it will happen, and whether it will happen. But we always said on the IPO road shows that it was the beginning of a journey by the first dilution, by the listing in the Indian stock exchanges, so we will view this in the right context and the right opportunities and certainly consider it.

Q: So sometime soon

A: We don't rule out anything. We don't have any plans, or any decision on what we are going to do.

Q: What are some of the trends in the software and services space in India?

A: Open source is getting a lot of traction and attention. The second one is clearly the distributed computing and distributed infrastructure because of the communications link availability and its usage beyond urban areas in rural areas through a kiosk and a service-based model. Some states like Andhra Pradesh have partnered with TCS to create a portal to provide citizen services as a joint venture.

Q: Where do you think India stands against China?

A: China is absolutely clear that they want to grow in the globalization of IT services and software. They have a fairly long way to go, not only because of the language skills but also to migrate from a hardware mindset to a software mindset. India has a natural advantage where they have been in the software game for a long time. So the potential innovation that we can do in software is our biggest opportunity, and we will still focus on the commoditized types of services like [business process outsourcing]. So China will find its own position in the world, but at the end of the day it will not be at the cost of India or vice versa.

If we want to participate in the Chinese domestic market, we have to build local competencies. We view China as a market, as a competitor, as a source of talent to address external markets, and to service multinational companies. That's the way India will have to play in the Chinese markets.

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Hell and Heaven !!

One day while walking down the street a highly successful Human Resources Manager was tragically hit by a bus and she died. Her soul arrived up in heaven where she was met at the Pearly Gates by St.Peter himself.
"Welcome to Heaven," said St. Peter. "Before you get settled in though, it seems we have a problem. You see, strangely enough, we’ve never once had a Human Resources Manager make it this far and we're not really sure what to do with you."
"No problem, just let me in," said the woman.
"Well, I'd like to, but I have higher orders. What we're going to do is let you have a day in Hell and a day in Heaven and then you can choose whichever one you want to spend an eternity in."
"Actually, I think I've made up my mind, I prefer to stay in Heaven", said the woman
"Sorry, we have rules..." And with that St. Peter put the executive in an elevator and it went down-down-down to hell. The doors opened and she found herself stepping out onto the putting green of a beautiful golf course. In the distance was a country club and standing in front of her were all her friends? Fellow executives that she had worked with and they were well dressed in evening gowns and cheering for her.
They ran up and kissed her on both cheeks and they talked about old times. They played an excellent round of golf and at night went to the country club where she enjoyed an excellent steak and lobster dinner. She met the Devil who was actually a really nice guy (kind of cute) and she had a great time telling jokes and dancing. She was having such a good time that before she knew it, it was time to leave. Everybody shook her hand and waved goodbye as she got on the elevator.
The elevator went up-up-up and opened back up at the Pearly Gates and found St.Peter waiting for her. "Now it's time to spend a day in heaven," he said. So she spent the next 24hours lounging around on clouds and playing the harp and singing. She had great time and before she knew it her 24 hours were up and St. Peter came and got her.
"So, you've spent a day in hell and you've spent a day in heaven. Now you must choose your eternity," The woman paused for a second and then replied, "Well, I never thought I'd say this, I mean, Heaven has been really great and all, but I think I had a better time in Hell."
So St. Peter escorted her to the elevator and again she went down-down-down back to Hell. When the doors of the elevator opened she found herself standing in a desolate wasteland covered in garbage and filth. She saw her friends were dressed in rags and were picking up the garbage and putting it in sacks. The Devil came up to her and put his arm around her.
"I don't understand," stammered the woman, "yesterday I was here and there was a golf course and a country club and we ate lobster and we danced and had a great time. Now all there is a wasteland of garbage and all my friends look miserable."

The Devil looked at her smiled and told...

“Yesterday we were recruiting you, today you're an Employee. . .”