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How to Avoid a 70% Speculative Loss

Jul 5, 2016

In this issue:
» Why Small Firms Are in Dire Straits
» Has Real Estate Turned Around?
» ...and more!
Rohan Pinto, Research analyst

'It's for my daughter's education.'

It would have been a normal comment. A responsible father putting money away for his daughter's college fees. But that was not the case.

I overheard a conversation between two men on the local train on my way to work. One of them was talking about his recent trades in the stock market. Due to the noise in the compartment, I couldn't catch the name of the stock. But that didn't matter. I understood what he was saying. And the story shocked me.

This man was betting a lot of money on just one stock. Apparently, a takeover was involved. The company was not doing well. The stock had fallen. He had bought it. He was betting that the company would be taken over by a competitor at a high price. He was waiting for the stock to run up so that he could sell at big profit.

Now there may be nothing wrong about speculation per se. But it shocked me that he was playing with his daughter's education fund in such a manner.

The conversation disturbed me because I had read about a similar story that ended in disaster. In her brilliant book, Quiet, Susan Cain describes a man who likewise speculated when General Motors (GM) went bankrupt in 2009.

Many months before the bankruptcy, he kept betting on a possible bailout from the US government. Amazingly, he risked his entire retirement corpus of US$1 million!

Talks between the US government and GM moved at a snail's pace. The stock went down after he bought it. He booked a big loss on his first trade. But he entered the stock again at a lower price. The stock kept falling. The second loss was even bigger. But he bought again at an even lower price believing the bailout was close at hand. When the stock fell to US$2 per share, he finally gave up.

GM eventually filed for bankruptcy on 1 June 2009. His bet had ended in disaster. Total money lost: US$700,000. In other words, 70% of his retirement corpus - gone.

I hope nothing like this happens to the man I overheard on the local train. But I couldn't help thinking what would happen if the supposed takeover did not happen. Even if it did, what if the offer price was below the current market price? Also, if the market is aware of all this, then why hasn't the stock price run up yet? Is his information accurate?

Stories like these are upsetting. But the good news is that it's easy to avoid all this...and still make a lot of money.

The key lies in answering only two questions in the stock market:

That's it. Everything else can be mostly ignored.

This is exactly what we do for a living. Our Hidden Treasure subscribers can attest to this. We have come across an opportunity that throws speculation completely out of the window. The stock in question is trading well below its intrinsic value. We believe, this provides an excellent long-term opportunity.

Meantime, the next time someone gives you an 'exciting' stock tip, please check if it's based on speculation. Most of the time, it will be.

Do you agree that speculating in stocks can lead to huge losses? Let us know your comments or share your views in the Equitymaster Club.

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02:35 Chart of the Day

In the March 2016 quarter results we saw some turnaround in the corporate sector in terms of sales and profit growth. As per an RBI study reported by Livemint, the private corporate sector reported aggregate sales growth of about 2.3%. This is noteworthy because this hints at a likely change of trend after four consecutive quarters of growth decline. Aggregate net profit grew at a higher rate of 16.4% during the quarter. However, if you only focus on this major statistic, you are going to miss out some crucial information.

We came across some interesting piece of data about small firms. Take a look at today's chart. On the aggregate level, firms whose annual sales size is below Rs 250 million, reported 48.6% decline in sales growth during the quarter ended March 2016. And as you can see, the chart shows a very clear trend. The smaller the size of the firms, the steeper is the fall is sales growth.

Smaller the Firm, Weaker the Performance

Does this mean you should be wary of small cap stocks? Yes, and no. Here's Richa Agarwal, managing editor of Hidden Treasure, our small cap stock recommendation service...

Investors are attracted to small cap stocks in their search for 'multibagger' investment opportunities. Let me tell you that the small cap space is indeed the right place to seek the big winners. But this does not mean that any small cap stock is going to make you rich. For every single money-multiplying small cap stock, there are dozens of value destroyers that can be a drag on your portfolio. You have to learn to separate the wheat from the chaff. If the business fundamentals of a company don't appear convincing enough, it is best to avoid it.


For the last three years, the real estate industry in India has been in a slowdown. If you have been a regular reader of Vivek Kaul's Diary, you would know that Vivek has written extensively about the real estate Ponzi scheme and how overpriced Indian property prices are.

So, I'm sure many of you may be wondering when the slowdown in real estate will finally end. An article in Livemint suggests that according to property consultant Knight Frank India, the Indian real estate market could be on the path of recovery...the key reasons being improved home sales and lower unsold inventory in the first six months of 2016. During the period, homes sales in the top eight cities rose 6.6% YoY. At the same time, unsold inventory dropped by 7% YoY. Mumbai and Bengaluru reported the highest growth of 23% YoY and 18% YoY, respectively. However, the National Capital Region (NCR) - India's largest real estate market - is still in doldrums. While the region witnessed 3% YoY decline in home sales during the period, new launches saw a whopping fall of 41% YoY.

Measures such as the Real Estate Regulatory Act (RERA), the recent amendments to real estate investment trust (REIT) norms, a correction in property prices, and lower home loan rates will improve homebuyer and investor sentiment. But we believe, it's too early to read the recent trends in real estate as a clear sign of revival.


After opening the day flat, the Indian stock markets drifted downwards and were trading below the dotted line at the time of writing. The BSE-Sensex was trading lower by about 100 points (down 0.4%), while the NSE Nifty is trading down by 35 points (down 0.4%). Most sectoral indices were trading on a weak note with stocks from the auto sector leading the losers.

04:50 Today's Investing Mantra

"The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values." - Warren Buffett

Editor's Note: There will be no edition of The 5 Minute WrapUp tomorrow on the occasion of Id-Ul-Fitr.

This edition of The 5 Minute WrapUp is authored by Rohan Pinto (Research Analyst).

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4 Responses to "How to Avoid a 70% Speculative Loss"

Saroj Kumar Maheshwari

Jul 6, 2016

Control greed.



Jul 5, 2016

This is not meant for NRI's as they can never get such copies from 2013 I have not received any such offer



Jul 5, 2016




Jul 5, 2016

I have invested in a falling share. I bought SRS ltd at Rs18/-. It fell and I have again bought at Rs8.80/-. But before that I have verified and found that it has good PE and EPS(unless financial statements are coocked up). May I hear from your side?
Thank you

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