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Stock Market hype - Investors beware... - Views on News from Equitymaster
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  • Mar 6, 2007

    Stock Market hype - Investors beware...

    23 year old Rohit wanted to make some money from the "pre-budget rally", a phenomenon that he had come to know from a business channel. All the panelists they had on TV were expecting a rally before the budget. So he bought some of the stocks mentioned on the channel, expecting to make a quick money out of this trend. However, instead of a rally, markets witnessed a sharp correction and he ended up losing a significant sum. Welcome to the "Stock Market Hype" created by the present-age media.

    True, there have always been losers and winners in the stock market, but never before did we have a media playing as large a role of "stock market experts" as in the present day and age. Moreover, if one happened to see the advertisement of brokerage firms beamed on these channels, they will make a novice believe that stock-market is a place to become rich and that too in a short span of time. One such advertisement had investors explaining the benefit of trading in futures, wherein an individual can earn high returns by paying only the margin money instead of the entire contract value. But what about the risk? What if the price of the stock goes down? Wouldn't the investor lose a significant sum of money? Such misleading ads by broking firms have become commonplace in this bull market.

    This kind of media and marketing deluge has spawned a new type of investor. These are 'novices' who take their buy-sell decisions based on information circulated by the media. This investing phenomenon is far more widespread and faster growing than even day-trading. Young individuals with new jobs in hand, students and housewives are the ones who have been found to dabble in stock markets based on such unreliable advice. They buy on short-term tip and end up burning their hands and much more in the process.

    The bull market also seems to have changed the role of analysts, who are becoming less of a researcher and more of a PR person for his employer and the stocks they recommend. Even the greater cause of concern is the tendency of these analysts to give 'Buy' calls and their reluctance to put 'Sell' ratings. Find out for yourselves how many sell ratings you have seen from prominent brokerage houses before the current correction and you will realise what we are trying to highlight. The reasons for this are ingrained in how the financial industry works. Just to illustrate, when a brokerage firm also provides investment-banking services, they tend to provide 'Buy' or positive ratings on the companies who are their investment-banking clients. Having a negative opinion on stocks of their own corporate clients may create a conflict of interest, which they would want to avoid at all costs. Besides, a 'Sell' call may not go down well with the company, who may restrict the flow of information to the analyst who has issued a negative rating.

    In this euphoric-market, even companies are not left behind in giving a push to their stock, especially through earnings releases, media interviews and analyst/broker meets. Companies are often found to present a rosy picture of their future by highlighting only the positives and giving aggressive earnings guidance. Companies are also found to issue press-releases when their stock prices dip to reassure the market that everything is fine.

    Finally, we have 'Operators' who manipulate the stock prices and make a fool of small investors. Brokers often make small investors buy these stocks and give them a price target at which they should exit. The idea is to make money by watching the operator's action and book profits before he exits the stock. But more often then not small investors are the last one to enter the counter and end up buying when operators are about to exit or have already exited. In fact operators use the demand of these investors to exit the stock. Since there is no one to push the prices further, the stock crashes and investors end up losing their shirts.

    Having listed the malaise afflicting stock market investments and not mentioning the measures to avoid them would result in the job being just half done. Hence, we advise investors not to invest purely on the basis of such advices and conduct one's own research. In this regard, investors would do well to invest in companies that have a proven track record of consistently growing its profits, have manageable debt on its books and above all should have a competent shareholder oriented management. Last but not the least, great deal of consideration should be given to valuations because no matter how good the business is, if you don't buy it at attractive valuations, you might not get the desired rate of return. Hence, next time you switch on the TV, do not ever buy things at face value but do your own thorough research. For investing without knowing is akin to gambling and if one would like to indulge in the latter, casino might be a much better place. Happy investing.



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