by Santosh Nair
I began my assignment the following week. The promoter was true to his word, and I had a free run in deciding my trading strategies. He never haggled when it came to sharing profits, and I managed to meet his expectations, thanks to a fairly buoyant market riding the BJP’s thumping win in the general elections.
Sometime during the year, I happened to renew contact with Dipesh, a close friend of mine from my schooldays. Dipesh, or Dipya, as we used to call him, had returned from Dubai for good two years ago and was now working for a management consultancy. During our conversation, I learnt that he had been bitten by the stock market bug after having got lucky with a few investments.
‘I have been regularly trading in small stocks for nearly a year now, and have made decent money,’ he said.
‘Good for you, Dipya, but invest the profits from trading wisely, that is the only way to grow your wealth,’ I said.
‘Yes, I will. But first I need to make some more money through trading. I think I am getting a good idea of how the market works. In a few months, I should be making money on a more regular basis,’ he said.
‘That thinking has been the undoing of many big players in the past,’ I told him as diplomatically as possible, actually meaning to tell him that he should not confuse luck for skill.
‘That’s okay, Lala, I am not a big player and I know where to draw my limits,’ he said. ‘Where I need help from you is to understand a few technical things about the market. Right now, I just fire in the direction my broker suggests. Can I call you up at least once a day?’ he asked.
I told him that he was free to call me up whenever he wanted to. Over the next few months, he would regularly call me up with his doubts.
‘Lala, my broker tells me the company is going to announce a stock split. Should I buy the stock?’ he asked on his first call.
‘Ten notes of Rs 100 each and one note of Rs 1,000 are the same,’ I told him.
‘Company X will announce its results the day after tomorrow, and my broker tells me that the numbers will be good. Should I buy?’
‘If your broker knows the results are going to be good, many others too will know. Check how much the stock has risen over the last month. If there is a decent appreciation already, it is unlikely that you will make much money. In fact, there is a high probability of you losing money as those who have got in early will start selling out.’
‘Company Y is facing labour trouble and the stock is down 5 per cent. My broker tells me it will fall further. Should I sell the shares I am holding in my portfolio?’
I recalled GB telling me that the market always seemed to delight in instant judgement before it had even ascertained all the facts.
‘What stock market traders forget is that businesses are built over a period of time. Like us, businesses too have difficult phases. But if the business model is good and the promoters’ intentions are fair, it will overcome the problem before long. You can’t write off a company for one setback, just as you can’t sack an employee for a single offence,’ he had once told me when an automobile stock got hammered after a new model it introduced fetched a poor response.
‘Dipya, the market tends to overreact both on good news and bad news. Unless you are a trader buying and selling by the minute, it is safer to wait till the dust settles,’ I told him.
‘Promoter X has been regularly buying the shares of his company. My broker says this is a definite indicator that the stock is undervalued. Should I buy?’
‘A promoter buying his own stock shows his confidence in the prospects for his company. But he may be taking a two-year view. Are you willing to take a similar view?’ I asked him.
‘Ace investor Y has bought a big stake in a company and has been saying in the press that the company will do very well. Is it a good buy?’
‘If he is going around talking up the stock, it means that he has bought the entire quantity that he was looking to buy. Again, you don’t know his investment horizon. There are many companies with sound fundamentals whose shares have languished for years before the market appreciated their true worth. Their stocks have risen manifold once the market has taken notice, but you would need lots of patience to make money on them.
T have also come across quite a few instances where the purchases by a reputed investor or fund house are actually financed by the company. On paper, the ace investor may be buying the stock, but he may be getting reimbursed by the company in some way. The company benefits because the investor’s endorsement will have his followers buying the stock and boost the stock price. I am not saying this happens all the time. But it does happen.’
‘Stock X will be dropped from the Nifty next month. What does it mean?’
‘It means the stock has lost favour with the market, Dipya. A long period of underperformance usually precedes removal from the Sensex or Nifty. But the exclusion is not always the end of the road for these companies. Fund managers who buy only stocks that are part of the major indices may ignore these fallen stars. But if the companies do well operationally, the stocks will be back in demand and even return to the indices. For every ten stocks that fade into obscurity, there is a handful that manages to make a comeback. Hero Motocorp, Dr Reddy’s, Sun Pharma and SAIL are comeback stories.’
‘Company X is making a preferential allotment to institutional investors at a 10 per cent premium to the market price. Is that a good sign?’
‘That new investors are willing to pay a premium is a good sign. But also check how often the company keeps raising equity capital. The corollary of equity raising is equity dilution. Value investors are not happy if a company raises equity capital often, even if new investors are willing to pay a premium.’
Epilogue
My association with the industrialist did not last long. Non-interfering at first, he slowly began to get demanding. He did not quite like it when I refused to kowtow to his wishes. When a couple of trades went rather badly, our relations soured further.
Towards the end of 2014, we parted ways as amicably as we could. My bank balance swelled some more, but I was beginning to get disillusioned with the stock market. Close friends advised me to reinvent myself as a venture capitalist and look for potential winners in start-ups. My previous experience with start-ups had been disappointing. But the landscape had changed considerably and I did not mind trying my hand at it.
I began to take a deeper interest in my farm at Murbad and I am now also working with a non-profit organization when not meeting budding entrepreneurs. I cannot help my gut feeling that the financial markets – particularly the stock market – are so disconnected from the real world. The non-profit organization I support runs a skills training centre, and counsels and provides shelter for girls and women who have suffered abuse and violence. It was a humbling experience for me when, during a talk on the importance of saving money, a girl, perhaps eighteen, told me that she had made it a point to save at least Rs 50 every week, and hoped to own a place of her own some day.
I dropped by GB’s office one day when I was passing that way. More than nine months had passed since my last stock market trade. I found GB in a dark mood, though he was trying his best not to let it show.
We exchanged pleasantries and reminisced about the good old times. I asked him about some of the big guns of the market, remarking that they still seemed to be in good form, going by what I had read and heard about them.
I unwittingly appeared to have touched a raw nerve.
GB did not respond immediately. He seemed to think over it, then said: ‘You must have heard the Gujarati saying that if a dog walks under a moving bullock cart, you may get the impression that the dog is carrying the cart on its back. But that is an illusion. It is the bullocks who are doing the heavy work.’
‘I don’t get it,’ I said, though I had a vague idea of what he was trying to get at.
‘What I meant to say is that it is the promoter and the employees who are doing all the hard work. Just because you identify a good company to invest in,
it does not make you great. The so-called legendary investor or fund manager owes his fortune to the management and the hard work of the employees. Why do you all glorify the investors so much?’ GB ranted.
‘But that is too extreme a view, Govindbhai. Having worked with some of the best people in the industry, I am sure you know that identifying good companies is hard work. If it was all about luck there would have been many more wealthy people in the market. And your experience will tell you that those who relied solely on luck have not lasted long,’ I countered.
‘Maybe . . . let us talk of something else, Lala. How are your investments shaping up?’
A few days later I met up with Monk and told him about my conversation with GB.
Monk laughed.
‘Maybe one of his big-ticket clients shafted him. Or maybe he is disillusioned with life in general and the market in particular. Or maybe he recently read Taleb’s Fooled by Randomness (a book in which Taleb argues that winning in financial markets is about chance and not skill). But don’t worry; knowing him, GB will soon get over this mood. Meet him a month later and you might hear him hold forth on the stock market’s contribution to the economy,’ Monk said.
We chatted for a while, and Monk ordered bhel from the same place he had at our first meeting in his office years ago.
‘Almost feels like going back in time,’ I told Monk.
‘Thankfully, some things never change, like this bhelwallah and his stuff. He has put up half a dozen stalls in Bandra and Khar, but the stall across the road remains, what shall I say, his corporate headquarters,’ Monk said, grinning.
I asked Monk how his business was faring.
‘The fun has gone out of this business. It has become too tough for traders and brokers. But it’s not so bad for investors, though,’ he said. ‘Too many rules and regulations, and SEBI is now quick to pounce if it suspects something.’
A few months ago, SEBI had come down heavily on a group of listed shell companies that had been created just to help tax evaders. These companies would issue shares to investors who wanted to avoid taxes. Their share prices would be artificially inflated over a period of time. The investors would then sell the shares in the market to entities fronting for the company. These transactions were just book entries. If the investor had bought a share for Rs 10 and sold it at Rs 100 a year later, he could show Rs 90 as legitimate income from the stock market and not pay any tax on it. Not that the company was giving Rs 90 to that investor; that money would be reclaimed through a chain of bogus transactions.
Using the stock market to launder money and evade taxes had become much tougher over the last few years as the government and the regulator joined hands to plug leakages. Making money from confidential information too was no longer easy. In March 2014, L&T Finance shares fell sharply, just a day before the company issued shares to institutional investors at a sizeable discount to the market price. Somebody had leaked the pricing of the share sale, and a fund house heavily short-sold the stock. In less than two months, SEBI had hauled up the offending fund house.
I am not saying that malpractices in the market have stopped altogether. While earlier there was a 20 per cent probability of getting caught for malpractices and an 80 per cent probability of getting away, the ratio has now reversed.
A few days later I met a leading market operator of the 1990s at the wedding reception of a common friend.
‘Algo has been the ruin of even the best of traders, Lala,’ the operator told me as we tucked in at the food table. ‘We are just no match for the smart trading software. The machines are doing to us what we did to the retail investors and day traders; they (software) pre-empt our actions and even panic us into selling out. I see a price on the screen and try to buy it, but it has already move up by 5 paise; the software has snatched it from me. I have to buy at a higher price. When I try to sell the position, the blasted software again beats me to it. I have to sell at 5 paise below what I would have liked to,’ he said ruefully.
I was reminded of the days when market operators could control a stock at will once they had soaked up sufficient floating stock. They would play on the psyche of the smaller players and swing prices in such a way that at least eight times out of ten, the small fry would lose out. And now, sophisticated trading software programs were giving operators a dose of their own medicine.
‘I now hand some money and shares from my portfolio to some of these FIIs that excel in algo trading; they generate a 12-14 per cent return for me annually. That is a far more peaceful way of making money than competing head on with those buggers and coming out bruised,’ the operator said.
As he got up to refill his plate, I said, ‘But my friends in the market tell me you can still move prices at will, as you used to back then.’
He paused, then wryly said, before walking away, ‘Oh, do they? I don’t want to disprove them. I can get business from promoters only if people think I am skilled at swinging prices even now.’
The rules of the game had completely changed in the last seven years. Through the late 1990s and until the early years of this century, when the market was still shallow, dealers at foreign broking houses and money managers at large fund houses were kings. And so were the market operators. All these players had access to information that mattered. But as the market grew bigger, the sphere of influence of each of these players shrank more and more. Yet, the hierarchy in the stock market food chain remained pretty much the same.
The jobbers who played for a spread of a few paise would be at the mercy of the traders who could hold their positions for an hour or two. They in turn were at the mercy of the bigger traders who could carry their positions over to the following day. Above them would be the traders (or retail investors, if you may) who had the capacity to hold positions for a month. They deferred to the market operators who could carry their positions for even longer and had crucial information at their fingertips. But the operators were no match for the FIIs, and the FIIs would be outsmarted by promoters who dabbled in their own stock. Not that promoters could sit comfortably at the top of the food chain; even they were helpless against changes in policy decided by powerful bureaucrats and ministers.
I was reminded of Amitabh Bachchan’s famous dialogue in the 1990 blockbuster Agneepath:
Cheenti ko bistuiya kha jaata hai, bistuiya ko mendak, mendak ko saanp nigal jaata ha, nevla saanp ko maarta hai, bhediya nevle ka khoon choos leta hai, sher bhediye ko chaba jata hai, idhar har taqatwar apne se kam ko maarkar jeeta hai. (The lizard eats the ant, the frog the lizard, the snake swallows the frog, the mongoose kills the snake, the wolf sucks the blood of the mongoose, the lion tears the wolf apart. Out here, every strong person survives by killing those weaker than himself.)
Stockbroking is hardly a lucrative business, and even the big domestic brokerages that went public at the peak of the bull market of 2007-08 earn much of their profits from their NBFC, wealth management and financial products businesses.
The other day, I was watching a big name on Dalal Street being interviewed on a business channel. When somebody in the audience asked him to recommend a multi-bagger stock, the ace investor uttered a single line that said a lot about stock investing. ‘Only posterity will tell.’
The man in the audience pressed him for a recommendation, but the investor repeated his answer. Everybody thought he was being snobbish, but he was merely speaking the truth. No value investor can say for sure that a stock he is going to buy will become a multi-bagger. He can take a calculated bet based on his reading of a few parameters. But so many things have to fall in place for that stock to eventually become a multi-bagger. Even if one or two things go wrong, the stock will never realize its true value. Conversely, even the most undeserving of stocks can briefly rise to absurd valuations for reasons that have nothing to do with the company’s performance.
When the BJP swept into power in May 2014 with a comfortable majority on its own, everybody thought the market was now poised for a historic bull run. But e
ighteen months later, the returns have only been modest. The Indian market is struggling, like most of its emerging market peers, for reasons mostly beyond its control. That should tell you how difficult it is to make money in the stock market.
I haven’t heard from my friend Dipya in a while now. Maybe the market has cured him of his delusions. Or maybe my pearls of wisdom worked and he is doing so well that he no longer needs my advice.
Bulls, Bears and Other Beasts
Santosh Nair is Editor, moneycontrol.com. He has been Markets Editor at The Economic Times and has reported for Business Standard. He has also worked at myiris.com and CRISIL Market Wire. Santosh lives in Mumbai.
First published 2016 by Pan
This electronic edition published 2016 by Pan
an imprint of Pan Macmillan India
a division of Macmillan Publishers India Private Limited
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ISBN 978-1-5098-5239-0
Copyright © Santosh Nair 2016
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