How 'free' stock tips can get very expensive sometimes

Sep 3, 2010

In this issue:
» India calls for a reverse brain drain
» Greenspan pegs the chances of a double-dip recession
» Large BRIC companies no longer looked down upon
» India caught between tug-of-war of politics and economics
» ...and more!!

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The stock markets are characterised by a constant hustle bustle. And if stock tips were rainfall, we would have enough of a deluge to drown the entire island city of Mumbai. They come from numerous sources. Through the talking heads on TV, ridiculous stock market games on business channels, magazines, newspapers, SMSes, brokers' sales forces, ads, the list goes on. The average person having even the slightest interest in the stock markets is bombarded with stock tips. All the time.

Amongst all this noise, it is often difficult to keep track of who said what, and just how much actually came true. Over a long period of time, finding out which source of 'tips' have consistently lost investors money, and who those tips belonged to, can be next to impossible. There is no regulation governing this activity. And no official record keeping.

This sorry state of affairs though is a huge opportunity for many. It creates a platform where almost anyone, no matter how clueless or unscrupulous, can come along and throw in a tip or two. And get away completely scot free. Even if that tip turns out to be a disaster of a long term investment. And even more alarming, without any records of past performance, he can continue to do that over and over again without ever being held accountable. Bad advice very easily drowns away in the incessant noise of the markets. And so do the deeds of bad advisers.

As things stand today, probably the most important thing for an investor to do is to ascertain the credibility of his source of investment advice. And strictly keep away from those sources of tips that have no accountability whatsoever.

 Chart of the day
We at Equitymaster have always been skeptical about IPOs in general. That's because companies try to strategically come out with theirs when their business is doing good. Further, their timing is also in sync with markets being in an optimistic and generous mood. Thus except for the lure of a very short term listing gain (which is speculative to say the least), IPOs seldom leave much value on the table for investors. Today's chart of the day confirms that. Over a span of more than 6 years since May 2004, the BSE IPO Index has significantly underperformed the BSE Sensex.

Source: BSE, CMIE Prowess

Stocks from the BRIC group of nations seem to have certainly run out of steam. Year to date, they have moved in lock step with their developed counterparts. A surprising turn of events when one considers the fact that economic prospect for BRIC countries remains much better than the rich west. A leading daily has opted to offer an explanation. It adds that large BRIC companies are no longer looked down upon. Instead they are increasingly being clubbed with other large companies from the Western world and are thus being pursued as more stable than before.

Furthermore, most large BRIC companies tend to be manufacturers of commodities and are thus more a play on global rather than local economic growth. Add to this the fact that BRIC stocks had a bumper 2009 and all of this helps explain why BRIC countries have remained a non performer of sorts so far in 2010.

Thus, this grouping of BRIC stocks with those from mature economies will be an interesting new trend to watch. Of particular importance would be their fate when equities worldwide would come under intense selling pressure. Would BRIC stocks fall more than their developed counterparts or again move in sync with them? It is the latter outcome that will finally mark the arrival of BRIC stocks on the global stage.

The much maligned, but still-much-invited former chairman of the US Fed Alan Greenspan recently spoke again. This time about the chances of a double-dip recession in the US. He believes the odds are about 25 to 30%. And guess what his solution to reducing the chances are? He believes recovery in asset base should be created through rising asset prices. He also believes that the influence of stock markets on economic activity is underestimated. He says, "Stock markets should be seen as a leading indicator to the economy. The rebound in stock markets and other asset markets could help revive sentiments. Stock prices will be a lead indicator for a turn in any economy."

One can hardly expect anything else from a man who presided over the US's largest bubble. Also, expectedly, he also gives a lot of credit to his own ilk. "You have to have sovereign credit for private credit in the wake of the crisis", he adds. Frankly, we are baffled why people still seek out his opinion.

Call it reverse brain drain. An Indian job portal is organizing a job fair in the US to attract Indian workers to come back to India to work. As per the sales head of the company, "The Indian economy is booming and there is a sudden huge requirement for people to lead new projects and divisions." And thus the need to get people back to the home country. We are not sure the about the response to this fair given that it will be hard for Indian workers to leave the lure of an American job to head back home, whatever be the opportunities. However, the fact that an attempt is being made to get quality talent back to the country is a step in the right direction.

Given that Indian stockmarkets have been rising, the average assets under of management (AAUMs) of mutual funds have also done well. Especially in the month of August. These AAUMs have grown by 3.3% to Rs 6.87 lakh crore. That said, most of the rise can be attributed to a rise in the valuation of equity assets held by some ultra short term schemes. Moreover, SEBI has introduced new valuations norms with respect to the same. These require ultra short-term plans to value their debt securities with a maturity of more than 91 days to be marked-to-market.

Not just that, the overall rise in the BSE-Sensex and NSE-Nifty has also bolstered the AAUMs of MFs. For instance, the Sensex and the Nifty have returned around 2% gains over the past one month. In that same period, the category of diversified equity schemes has clocked in an average of around 3.4% returns. Infact, most diversified equity schemes are reporting NAVs that are close to their 52 week highs. Indeed, investors will have to be choosier while picking stocks or investing in MFs at the current levels.

There is a strong disconnect between politics and economics in the minds of those at the helm of affairs in India. An article in Economist brings out this poignant truth in an elaborate way. It outlines how the incumbent government has fallen short of its duties. Especially when it comes to bringing about economic reforms. How India's 'economist' Prime Minister is not such a good politician. And how the 'politicians' manning the affairs are least interested in economic reforms.

Whether it is building world class stadiums for Commonwealth Games or 20 kms of roadways a day, most have remained promises on paper. India's GDP growth may be rapidly steering close to the double digit figure. However, the government elected to bring in the necessary reforms to make the growth sustainable has left a lot to be desired. We wonder if India needs politicians who understand economics or vice versa.

After opening well in the green, markets had a volatile trading session. The BSE Sensex was trading 4 points higher at the time of writing this. Stocks from the realty and auto space were trading positive. Metal and oil & gas stocks were in the red. Sentiments were positive in the rest of Asia, with all major markets in the green. Japan was the top gainer, up 0.6%.

 Today's investing mantra
"There are all kinds of businesses that Charlie and I don't understand, but that doesn't cause us to stay up at night. It just means we go on to the next one, and that's what the individual investor should do." - Warren Buffett

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7 Responses to "How 'free' stock tips can get very expensive sometimes"

VIjay Bahad

Sep 6, 2010

Although it appears to be very pleasent scenerio that Indian companies are trying to get back the Indian talent from US , the reality is that the same companies do not give any opprtunity to the inhouse talent . Unfortunatey its fashionable in India to treat so calledd foreign educated poeple with plump posting and very lucrative salaries . However the same is not extended to the Inhouse capable people. The local management are alwaws suppressing the inhouse talent and running around these foreign junkies who have very little exposure to real world. These junkies and so called talented people only created the havoc in American market and see the state of affires in US economy. Its high time that Indian managenment give credit to thire own talented people and reward them handsomley than falling pray to these foreign trained so called talended pool .



Sep 5, 2010

Time has come to regulate this activity. There are very glaring examples of so called advisors openly declaring their interest and recommending such stocks. They have recommended such obscure stocks which are worth nothing. Similar recommendations/bad publicity have marred the prospects of some IPOs also. Some of them had to withdraw. What this indicates? There is strong possibility of underhand dealings while recommending such stocks and in the same way failure of deals can lead to bad publicity. SEBI should intervene and act in the larger interest of the investors.



Sep 3, 2010

Rightly said about the STOCK TIPS Issue. Remember those guys who were on TV shows recommending to sell Tata Motors and Tata Steel at 150 Levels are recommending a strong buy for Tata Motors at 1000/- levels without any shame and accountability.


s kalyana krishnan

Sep 3, 2010

on tips:-
going by constant reading of your predictions and nothing comming true, such airy tips seem to be much much better.



Sep 3, 2010

good mail 4 get idea about market


navin kumar chaurasia

Sep 3, 2010

this is true but necessary for watch your advice



Sep 3, 2010

"Disconnect between politics and economics"
Our PM is unable to institute any good economic plans, thanks to VOTE BANK POLITICS and COALITION CULTURE.Luckily his detractors are busy only in politics, because of which he has freed the private economy from any political interference.
What we need in India is a one party government.

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