When you buy, why does someone sell? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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When you buy, why does someone sell? 

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In this issue:
» Indian banks to face the music for flouting regulations
» George Soros shares some pearls of wisdom
» Developers enter a debt trap
» Will Saudi Arabia boost oil capacity?
» ...and more!


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00:00
 
"If only I had done the opposite, I would have been a millionaire."

Have you ever had this feeling about your investment decisions? Doesn't it seem like what you often do turns out to be a perfect loss-making strategy? Some will surely agree.

Let us reconsider a few simple facts. Everybody herds into stock markets with an intention to make money. Nothing wrong with that. We all think we are smart. Nothing wrong with that as well. We also think that we can outsmart all others all the time. Well, that is something we should reconsider. Because the fact is that everyone cannot be right at the same time.

Remember that every time you buy a stock, there is someone selling at the other end. Now, this is such a ridiculously simple fact. Yet, we so often and so easily ignore it. Do you sit back and consider why the person at the other end is willing to do the opposite of what you're doing?

Next time you are about to invest in a stock, do this little exercise. Ask yourself, "How about doing exactly the opposite?" In case you are planning to buy a stock, think from the seller's point of view and vice-versa.

This exercise will force you to look objectively at both the sides of the investment. If you are able to honestly ask the right questions, you will come out wiser and wealthier. Because as we said, both the parties cannot be right. Either of the two parties is acting out of greed, fear or mere ignorance. Are you the one doing that? If yes, then you know that the guy at the other end is smarter and doing the opposite transaction for a good reason. In the process, you will also realise the reasons for your previous losses.

With this knowledge, you can rid yourself from the loss-making exercise. And needless to say, you can march ahead on your way to becoming a millionaire.

Have you ever felt that you would have been richer if only you would have done the opposite? Share your comments with us or post your views on our facebook page.

01:23  Chart of the day
 
30% of India's population is concentrated in urban areas. And at a projected 2.4% rate of urbanisation, this number is only set to grow. As the chart of the day shows, two out of the 5 largest urban agglomerations are from India. An urban agglomeration is defined as comprising the city and the suburbs or the thickly populated territory adjacent to the city. Both Delhi and Mumbai have a population of over 2 m. It is the failure of the government to create jobs and the poor infrastructure in the country that causes such massive migration to metros.

Data source: CIA World Factbook

01:33
 
The nightmare of 2008 subprime crisis seems to be coming back to haunt Indian banks. The derivative deals that sunk big names in investment banking globally, caught the regulator's eye in India too. In fact, the RBI has been studying the derivative books of banks in India for some time. This includes the PSU, the private and the foreign entities. The banks have stopped vending complex derivative products since 2008. That is ever since they incurred huge losses on the accounts. However, the RBI probably wants to make sure that the act is never repeated.

The RBI has now pulled up 7 banks including some foreign entities, charging them of misleading customers. The regulator may also end up heavily penalising some of them for their past acts. The 7 banks are part of the 22 that had submitted the details of their derivative deals to the RBI. One can estimate that the size of penalties could also be meaningful. This is given the size of forex losses that some corporates have endured thanks to their banks' derivative offerings until 2008. We believe that when it comes to taking prudential regulatory action it is 'better late than never'.

02:08
 
A leading daily picked the brains of George Soros, one of the most successful investors of our times, recently. In keeping with the man's reputation of being a top notch 'big picture' guy, the discussion covered a wide range of topics. Soros argued that the financial crisis was the outcome of a blatantly false idea. The idea that the markets correct their own excesses and you can really allow markets to operate without regulation. Thus, the need of the hour is to have a truly global regulating agency. This, though, is a very difficult task as per Soros as different countries have different interests.

However, the 'big picture' expert did have some good things to say about India. Soros believes that India may not be growing as fast as China but is also not as exposed to overheating as the Asian dragon. Hence, India is actually relatively very well situated as per him.

02:52
 
It is a known fact that real estate developers stretched their arms beyond their means during the real estate boom. Many developers piled up huge debt on their balance sheet in order to shore up their land banks. And now when these debt repayments are falling due, developers are facing the heat.

However, it seems that they have found a way to get out of this vicious debt trap. And that is by taking more debt! It is interesting to note that in order to solve the current debt repayment crisis, developers are taking more expensive loans from NBFCs. They are also raising structured debt from PE firms. So, basically low cost debt is replaced with high cost debt.

Apart from this, developers are also selling land parcels in order to repay the existing debt. However, we believe that the strategy to take on expensive debt and/or to sell land parcels to repay the existing debt will further worsen the situation. The most prudent alternative in order to get out of the existing debt trap is to reduce the prices. However, developers still don't seem to budge on that front.

03:36
 
As per some news report, Saudi Arabia sees medium to long-term oil demand higher than it had expected and hence feels the need to raise its supply to 9 m barrels per day or even higher. This stance is in stark contrast to OPEC policy that has kept a lid on oil supplies since last two years.

However, we don't think that the statement should be taken on face value. Going by latest statistics, the actual supply from the country was down by 9% in March on a month on month basis. Why will Saudi Arabia wait to release supply some time in future when there are chances of demand destruction by high prices and not do so now when both prices and demand are hard to resist? The real reason could be actual production constraints. If that is the case, it puts a big question mark on the spare capacity it claims to own and expand. What supports our concerns are some desperate measures that Saudi Arabia is taking to boost its capacity. Hopefully, we will get a better clue on actual scenario when OPEC holds its next meeting in June. Till then, we would prefer to believe statistics rather than Saudi Arabia's statements to increase supply in the near term.

04:04
 
In line with the government's focus on ramping up infrastructure in the country, eight coastal states have submitted plans for the development of non major ports. They house about 200 non-major ports possessing a capacity to handle 346.31 MT of cargo at present. But the state that leads the pack by a big margin is Gujarat. Gujarat has come up with an ambitious Rs 742.4 bn plan for its ports in the next 10 years. The next in line is Andhra Pradesh which is quite behind with an investment plan of Rs 335.4 bn. Given the scale and size of these projects, most of them will be on a public-private partnership (PPP) basis with the private sector contributing majority of the funds. It must be noted that at present, India has 13 major ports which fall under the purview of the Centre. The non-major ports are covered by the states. India needs a serious scaling up of infrastructure to do across areas going forward with port infrastructure being one of them. But while the intentions of the state governments are in the right direction, execution will once again be the key.

04:30
 
In the meanwhile, the Indian stock markets are trading flat, after starting the day on a positive note. Oil & gas and realty stocks led the declines while consumer durables and IT stocks witnessed buying interest. At the time of writing, India's benchmark index, the BSE-Sensex was trading higher by about 16 points or 0.1%. Asian indices were trading mixed. China was down 1.2% while Hong Kong was up over 1%.

04:50  Today's investing mantra
"A public-opinion poll is no substitute for thought." - Warren Buffett
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11 Responses to "When you buy, why does someone sell?"

S.K.DAMANI

Apr 26, 2011

If you find any person, who says contrary to your question, please take his photgraph and paste it on the your site. He would also deserve a special award as the best investor.
Most of the investor very easily turn into traders and than they always loose.
BUT YOUR QUESTIONS IS VERY V V IMPORTANT and hopefully I am definetly going to apply it.

Many many thanks.
Damani

Like 

Sonny Jacob

Apr 25, 2011

Intra day traders basically do a speculative business and the "bigger fool" theory is pertinent on both the occasions.

Like 

J Johnson

Apr 25, 2011

I agree with Shankar when he says that the subject cannot be simplified - and generalised. The matter is subjective. It was Peter Lynch who wrote : "There could be a 101 reasons to Sell... But only One reason to Buy" It is quite possible that one person could be selling a stock for Rs. 100.- at a profit of 100% (having bought it for Rs. 50).. and another..who could be selling the same stock also for Rs. 100.- but at a loss of 20% (having bought the stock at 125). Who is more right or more wrong here.

Like 

mahadevan

Apr 25, 2011

Yes, I sold 160 shares of Unitech in 2002 for want of funds, also not actively traded at that time. Had i held it now u can calculate the growth my investment now. 13:1 bonus, stock split, 1:1 bonus etc. Long term pays provided it is a growth oriented company.

Like 

Digambar Kulkarni

Apr 25, 2011

Remember, you are selling it now because you bought it some time back when it was cheap!

He is buyng it now to sell at a later date when it will be costly!

Both are right because both are making a profit because both make a right choice about the movement of the price of a stock!

The converse will be also true!

Like 

Anupam Garg

Apr 25, 2011

this is a question which i ask everytime b4 i trade. i just can't find the answer as to y tht person is always doing the opposite. We hav the same level of info +/- lil bit...so y? Unfortunately, noone else tells me the answers either. Thr's no way out of this.

I just hav 2 tell myself tht i m the smartest person on planet when i go ahead with a move & tht the other person is really stupid for going for something which i ain't buying.

Like 

Rasik Kamdar

Apr 25, 2011

It may be that the sellers had already earned,and are now need money to buy other opportunities. It so happens that we tend to buy because the script has shown some momentum. Most of the time these momentums are artificially created by someone who wants to sell of his burden.

Like 

Shankar

Apr 25, 2011

I am not 100% sure about this, though I am not a punter. People sell and buy for thier financial needs as well. Some times I am happy for what I got, so I quit the race. I purchased a stock at 200 and now it is trading at 260. When I see its last 52 week's performance the high is 255. I will quit and make money. Why should i wait!!.

The other guy who is buying would have listened to advice from professionals like you(based on research)Note: I always respect your advice. and buy the stock as the new high indicated is 380 in next 6 months time.

In principal I agree with your prentation of your point, but I feel, it can not be simplified to this level.

With Regards,
Shankar L

Like 

Nandkishore

Apr 25, 2011

Often, the "greed, fear or mere ignorance" are not the only drivers; maintaining or generating liquidity could also be valid reason for one to consider selling. Sudden influx of money eg from tax refunds or arrears could incentivise one to buy shares.
It would appear that at least 70% investors in India are those with severely limited or erratic liquidity which often forces them to take take adverse decisions.
Do give your feedback on the above comment.

Like 

Ganesh K

Apr 25, 2011

Simple reason why when one buys stock other sells it. Because stock market is nothing but perseption. I feel the price is low so I buy, man at other end thinks it is high enough so he sells. Otherwise if both think rationally and consider the Yield per year it will be less than 1% in most of the blue chip stock. And if they go by the yield figures, the American or Japanese bonds will look like gold mine and all stock exchangaes will close down.

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