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Choose your 'loss'... - Views on News from Equitymaster
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  • Sep 26, 2005

    Choose your 'loss'...

    Last week saw investors' (particularly retail) so-called 'best friends' in this bullrun, especially since May 2005 when the current leg of the rally began (at about BSE-Sensex levels of 6,000), have turned out to be their biggest betrayers this week. However, this is not something strange or anything new, as these friends have only displayed their true characteristics. And kudos to the regulator, Securities and Exchange Board of India (SEBI), who made investors realise by its action last week, that the mid-cap and small-cap has to end, before it was too late. While some may argue that the regulator should have already taken the necessary steps earlier, which we do agree too, but then why blame the regulator alone. Investors, who invested in these penny stocks, with most of them, now unable to get an exit from these stocks, are equally at fault, or probably more.

    Last week, the Indian stock market regulator, SEBI, which had been watching the action from the sidelines (along with the Finance Ministry), warning investors along the way to invest in fundamentally sound stocks only, decided to finally put its foot down. The regulator not only brought certain mid-cap and small-cap stocks, especially the penny stocks, under its scanner, but also levied rules pertaining to additional margins on scrips in the 'T', 'TS' and the 'Z' groups. Further, in order to reduce the volatility in these and curtail their inexplicable rise, it reduced the circuit filters in these to 5%. Adding fuel to the fire was the news in the media of Income Tax raids on few brokers in Ahmedabad, which was later revealed by the IT department to be a mere coincidenceof taking place in conjunction with SEBI's new rules and had nothing to do with SEBI's diktat.

    Further, though SEBI's actions were not aimed at spoiling the stockmarket party and were rather designed to put an end to the small-cap and penny-stock mania, bring the culprits (if any) to the books and protect the retail investor, it seemingly inadvertently managed to hurt the retail investor class the most. This is because, most domestic mutual funds (MFs) and Foreign Institutional Investors (FIIs) take very little or no exposure in the 'T', 'TS' and 'Z' category of stocks and these are rather largely held by retail investors.

    It must be noted that even today, a large part of retail investors follow what their brokers or friends advice them to invest in rather than reading themselves about the company and its fundamentals or relying on expert advice. Further, with penny stocks showing astounding 3 and 4-digit returns, another reason for small investors is the lure to make a 'quick buck'. But, they do not realise that when the tide turns, there is nothing that would save them. Even the brokers and friends that gave them the advice to invest in such non-fundamental scrips turn a cold shoulder and snap back, "I had told you that these are high risk investments".

    But, at the end of all this, who is the ultimate loser? It is, not surprisingly, as always, the retail investor. Today the scenario is such that there is no exit route left in these penny stocks. There are numerous stocks that have gone up by 10 times on 10 times their average historic traded volume, which could run into millions of shares. But today, these shares are not finding any buyers (zero traded volume) and are hitting the lower circuit every day since the last 3 to 5 trading sessions. In such a scenario, while the fundamental investor can be assured of his returns in the long-term, the 'punter' can only 'hope' of a revival in trading sentiments. Until then, the latter will have to sit on his 'forced long-term investments'.

    To conclude, while it is easy to point out in hindsight (when the damage has been done) that 'I told you so', the only way an investor can prevent himself/herself from getting hurt the second time is by strictly investing on the basis of fundamentals. Even on the basis of fundamentals, valuations are the most important determinant of investing in a particular stock. This is because, investing in good but expensive scrips could put the investors investment at risk.

    Moreover, do not invest just because the markets are headed higher or because we are in a bull run or because FIIs are positive on India. This is because one may think that if he/she does not invest at the current levels, he/she could potentially miss the upside and thus miss the chance of making money, which in other terms would be a 'notional loss'. However, investment in a wrong stock or a good but expensive stock could lead to an 'actual loss'. Thus, an investor has to decide what 'loss' suits him/her best.



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    Aug 17, 2017 03:37 PM