Markets with Bertie: The risks of buy now pay later in stock market investments

Two of the three venerable consulting companies have offices close to where Bertie works. One of Bertie’s batchmates, Ken, has been a lifer at one of the firms, and on the rare occasion that he is at his office, Bertie tries to catch up with him. To be honest, ever since he was asked to calculate the number of ping pong balls that can be fitted into a Boeing 737 in a consulting interview, Bertie is not a fan of Ken’s tribe. Bertie had laughed at the question, thinking it was a joke, but sensing that he was the only one laughing, he had then undertaken multiple geometry operations in his head to arrive at the answer. The number that he had come up with, Bertie was told, was more than the global production of ping pong balls over the last decade. The interview had ended swiftly thereafter.

But Ken was different. Despite two decades of PowerPoint, he did not speak in jargon. In fact, his Hindi is like Rohit Sharma’s, and though he will never admit it, so is Bertie’s. Over cups of masala chai in Ken’s plush office, Bertie started, “Tere staples ki to vaat lag gayi hai.” Ken specialized in advising consumer staples companies, and Bertie’s opening salvo was a comment on their recent weak growth numbers. The rest of the conversation has been translated into English for the ease of readers. To provoke his friend, Bertie said that staples are now well-penetrated in India, and so growth will always remain pedestrian. He advised his friend to switch to hot sectors like renewables and biotech.

This had the desired effect on Ken. He launched into how dim-witted fund managers are, and after berating each other’s professions for a while, Ken got serious. “Yes. Growth is a problem right now, but not because penetration is all done. The problem is income growth for middle India.” He showed Bertie income data that supported the view that the top 10% of India had done well due to asset price inflation, and so had the bottom 20% due to various government handouts. It was middle India whose income had not kept up with overall growth and that belly was the bulwark of staples companies’ consumers.

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“And that’s not all,” Ken continued. “There is another squeeze.” Bertie was all ears. “From direct-to-consumer brands at the top and from the resurrection of local and unorganized manufacturers at the bottom.” Bertie nodded. “This double squeeze can last for a while, but longer term, the basic drivers of consumption growth are simple. More people buy stuff, the same people buy more stuff, and people buy better stuff. And across categories, none of these drivers have been exhausted.” Ken signed off emphatically.

Buy now pay later

Nostalgia was the only reason Bertie ended up watching the insipid India-Pakistan game in the just-ended Champions Trophy. Since there wasn’t much to notice in Pakistan’s batting, Bertie noticed the advertisements between overs. The one that stood out was of a retail brokerage extolling the virtues of buying equity shares today but paying later. Instead of selling television sets to young shoppers, this strategy was now being used for shares. No matter how glib the marketing, Bertie, the astute investor, instantly recognizes when someone is hawking margin-trading loans.

Given the state of the markets, this exhortation to buy shares with leverage sounded clumsy. In any case, Bertie is of the view that irrespective of the state of the markets, buying shares with borrowed money is a bad idea. Also, unlike the BNPL scheme for a TV, where the cost of borrowing is funded by the TV manufacturer, for shares, it is borne entirely by the investor. The interest rate can be as high as 20%, which makes it juicy for the lender but risky for the investor.

Bertie’s thoughts then drifted to the recent brouhaha over the advice from the fund manager of a mutual fund to redeem investments in mid- and small-cap mutual funds and stop monthly subscriptions to such schemes. For Bertie, the fact that the aforesaid retail brokerage and mutual fund were sister concerns became a bit hard to reconcile.

The thing about Bertie’s mind is that once it starts to drift, there is no telling where it will go. It went back a few years to something that the chief of the mother ship of these two organizations had said. A media article quoted that the CEO always asked his teams to make products that they could sell to a family member. Bertie remembered being impressed by the principled stance the organization had taken against selling par and non-par products of their life insurance subsidiary. They had opted to sell only term insurance and Ulips.

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As he contemplated the portfolio of the organization’s model customer, further confusion arose. By now, they had likely redeemed their mutual fund investments in mid- and small-cap funds and stopped SIPs. They had a term policy and Ulips but no non-linked savings policies. And all this while they were buying shares hand over fist using the BNPL facility offered by the brokerage at a very high interest rate.

Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.