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How to Manipulate the Stock Market, Legally?

Imagine you win a lottery of Rs 100 crore (just imagine!). What would you do with this “free” cash?

Spend it to buy all the luxuries of life? Maybe!

Give most of it to charity? Really?

Invest most of it in the stock market so that it grows over a period of 5-10 years? Maybe!

What about manipulating the stock market so that your Rs 100 crore doubles in the next 1 year?

“The last option looks great!” you think, and then ask, “But isn’t manipulating the stock market against law?”

Yes it is!

Goldman Sachs paid US$ 535 million (approx. Rs 3,200 crore) in 2010 for misleading investors with respect to a subprime mortgage product.

Then, again in 2010, Citigroup paid a US$ 75 million (approx Rs 450 crore) penalty for its failure to adequately disclose its exposure to subprime mortgage debt.

In India, if you have Rs 100+ crore net worth (which you just won in a lottery!), you don’t get fined much for manipulating stock market and you can enjoy living scot-free for years, as the cases against you won’t be solved for years.

Anyways, the reason I am talking about stock market manipulation today is not to teach you how to do it (I will never ever offer such a course on Safal Niveshak 🙂 )

The reason I am writing this is because I just read of a huge stock market manipulation that is being conducted in broad daylight these days – people know of this manipulation but no one can do anything about it!

“But who is the manipulator?” you wonder.

Global central banks, my dear friend!

As per a recent article I read on Financial Times (FT), central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues.

This is based on a global study of 400 public sector financial institutions.

A report from the Official Monetary and Financial Institutions Forum (OMFIF), a central bank research and advisory group, suggests that “a cluster of central banking investors has become major players on world equity markets.”

It then warns that this trend “could potentially contribute to overheated asset prices.”

The OMFIF report also states that central banks (plus other public investors like sovereign wealth funds and pension funds) globally have already invested more than US$ 1 trillion into the stock market.

This number could go much higher given what the FT article says – that central banks around the world, including China’s, have shifted “decisively” into investing in equities as low interest rates have hit their revenues.

So, while it is illegal to manipulate stock prices and you can get yourself into a big problem if you are caught doing that, the world central bankers are doing it in broad daylight.

We can do nothing but watch the financial and monetary “circus” with one eye covered, fearing that the flying trapeze artist (central banks) may slip and hurt himself big time.

In the meanwhile, as central banks keep their interest rates low, the stock market continues to hit its all-time highs even as the source of its profits – corporate profits – struggles to find its footing.

And as Bill Bonner writes in his latest issue of Daily Reckoning

Now, with money they (central banks) create out of nowhere, they buy real companies. Otherwise, the companies might have been owned by real people….who earned real money providing real goods and services.

And so, more and more of the world’s real wealth shifts from the people who make it…to the people who take it.

Buy, Sell, or Hold Stocks?
If you ask me – “What should I do with my money now? Should I buy, sell, or hold stocks?” – the only advice I can give you is this…

Stop focusing on the stock market’s recent returns, especially because they have been rosy. This is because if you do that (focus on the recent returns), it will lead you to a quite illogical and dangerous conclusion that equally great results could be expected in the short-term future.

Finally, to reiterate the five quick rules I had shared recently…

  1. If you have been sitting on the sidelines for the past five years, and itching to surf the high tide now, don’t start at the top of the tide by investing in stocks that are on a momentum (like real estate, banking, and infra). There’s a chance that you will drown again if you start at the top of the tide!
  2. In real life, things don’t change as fast as the stock market may lead you to believe. So be careful of the kind of businesses you are looking to get into and don’t go by what the stock prices are doing. A complex economy like India won’t change in a year or two, however good the governance may be.
  3. FIIs seem to be rediscovering their love for Indian stocks following their faith in the new government. This is what their latest inflows suggest. Don’t take cues from FIIs and their stock trades. They have always been fair weather friends and may leave out of the exit doors before you can even notice and react.
  4. Remember Graham when he said that in the short run, the market is a voting machine but in the long run it is a weighing machine. So avoid investing in stocks like you vote (emotionally). Instead, invest only after weighing the quality of businesses you intend to invest in.
  5. If you own good quality stocks and want to book profits after last few months’ rally or today’s, don’t! Think in terms of the wealth these can help you create over the next 15-20 years, instead of short term profits you have earned from them in recent times. In fact, if you are young, you have to have a high allocation to equities, and for the next 15-20 years.

In short, don’t get fooled by the stock market manipulation that is being conducted by central banks worldwide.

Focus on the long term (that’s where you want to go), and please play it safe!



Value Investing Workshop in Hyderabad: After a great response from Mumbai and Delhi, I have my Art of Investing Workshop in Hyderabad on 20th July (Sunday). If you want to attend and want to claim an early-bird discount, click here to register now!

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Very True Sir, Excess liquidity is also affecting common man in India due to rally in commodity prices.
    Due to stronger currencies, free market economies, cheaper shale gas among others have helped developed nations have VERY Low inflation and hence low interest rates. Europe, Japan and USA want higher inflation so that they dont fall again into deflationary trap. Whereas in India, controlled market practices, higher MSP for agricultural produce each year, lack of efficient supply chain, have only lead to higher food and other product prices.

  2. Great Article Vishal,

    Today only I was thinking of asking you to address one of my queries and voila you posted this.

    I am invested in MFs through SIPs and recently I thought of increasing my SIP amount (I started investing in MF last year n m in for a long time horizon 5+). With current valuations seem very high, should I increase my SIP amount right now or wait for the tide to pass and then increase it.

    Will be really great if you can please spare some time to address this?

    Thanks

  3. Dinesh Agrawal says:

    Hi Vishal,
    I am lost with this post. What is your concern, I believe investments from sovereign wealth funds and pension funds are very long term in nature so how does that manipulate the market. Problem would be if these investments are for short term like our very own FII. Although I agree that low interest rates in US and Europe is causing asset bubbles in Asian countries including India but don’t think its due to direct investments from sovereign/pension funds.

    Regards,
    Dinesh

    • Hi Dinesh,

      As per the OMFIF report, central banks (apart from other public investors like sovereign wealth funds and pension funds) have invested more than US$ 1 trillion into the stock market in recent years. So my concern is not with respect to investments from sovereign wealth funds and pension funds, which you rightly said are long term investors.

      My concern is with respect to central banks playing the stock markets to prop up their income. And given that they are using their “free” cash to play with, the stock price rise is surely manipulated to that extent.

      Regards,
      Vishal

  4. R K Chandrashekar says:

    Hi
    I agree with Vishal- no problem if the pension and sovereign funds invest in our stock markets as they are for the long haul. However the concern is the guys who print the money(Central Banks) and the excess liquidity which earns piddling interest in the developed markets flow to the emerging markets like India

  5. great article , really enjoyed reading it. I especially liked your 5 rules , they are very valuable rules

  6. Vishal Ji

    First post, reader of your blog from USA…invested in US equity (Invested no trading ) and some exposer to Indian equity…

    You said few post back….

    “Hi Mukul, I am personally invested in the stock market through MF SIPs, and I have not stopped them. However, I have reduced the amount of SIPs while conserving some cash.”

    Assuming no personal requirement for funds, you said you are conserving some cash. Isn’t it one should be always invested? Or we are timing the mkt here? By saving some funds in over heated Indian Mkt are we saying jump later on after budget or some kind of correction… So keep some dry powder…

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