Investing

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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!

Read Richard Feynman Before You Buy Your Next Banking Stock…

First things first. This post is not about my analysis of banking stocks and how I expect them to do in the future. But it is something far more important than that. Thus, proceed only if you are interested to read further.

I am seeing a lot of research reports and recommendations these days on a lot of banking and finance companies – like Gruh Finance, Repco Home Finance, HDFC Bank, and Axis Bank, to name a few.

A lot of these banking and financial stocks are being recommended and bought because these companies are expected to be big beneficiaries of a revival in economic growth.

So, a lot of people I know who cannot differentiate between a bank and an NBFC, or NPAs and CASA, or GPMs and NIMs, are lapping onto these stocks…because their prices are rising…because a lot of “other” people are buying them.

What is more, a lot of others are buying some of these stocks because…

“CASA is going to increase”
“NPAs are going to come down”
“NIMs are improving”

If you are one of such people, and own these stocks for the above-mentioned reasons, or are looking to buy these, you must read this below note from the celebrated American physicist and a great teacher Richard Feynman.

I have picked this note from Feynman’s marvellous book – The Pleasure of Finding Things Out – and you will know by the end of it what it is doing here.

Why Smart People Like You Make Stupid Money Mistakes

Imagine yourself in the following situation: You sign up for a psychology experiment, and on a specified date you and nine others whom you think are also subjects arrive and are seated at a table in a small room.

You don’t know it at the time, but the nine others are actually associates (planted subjects) of the experimenter (they know about the experiment), and their behaviour has been carefully scripted.

You’re the only real subject.

The experimenter arrives and tells you that the study in which you are about to participate concerns people’s visual judgments.

He places two cards before you. The card on the left contains one vertical line. The card on the right displays three lines of varying length.

He asks all of you, one at a time, to choose which of the three lines on the right card matches the length of the line on the left card. The task is repeated several times with different cards.

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On some occasions, all or a majority of other “subjects” unanimously choose the wrong line. It is clear to you that they are wrong, but they have all given the same answer.

What would you do? Would you go along with the majority opinion, or would you “stick to your guns” and trust your own eyes?

Poke the Box: The Uncomfortable Solution

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days and weeks…

Are you right because your stock moved up 200%? Answer here.
Is the Sensex heading towards 30,000…40,000…100,000? Find out here.
Follow these 5 simple rules of investing successfully in a Modi-fied India

Book Worm
“The Little Book that Builds Wealth” from Pat Dorsey is a wonderful book if you want to understand the concept of economic moats and how companies and their shareholders benefit from them. Here is an important excerpt from the book on the various ways to make money in stocks, and why moat investing stands out…

There are lot of ways to make money in the stock market. You can play the Wall Street game, keep a sharp eye on trends, and try to guess which companies will beat earnings estimates each quarter, but you’ll face quite a lot of competition.

You can buy strong stocks with bullish chart patterns or superfast growth, but you’ll run the risk that no buyers will emerge to take the shares off your hands at a higher price.

You can buy dirt-cheap stocks with little regard for the quality of the underlying business, but you’ll have to balance the outsize returns in the stocks that bounce back with the losses in those that fade from existence.

Or you can simply buy wonderful companies at reasonable prices, and let those companies compound cash over long periods of time. Surprisingly, there aren’t all that many money managers who follow this strategy, even though it’s the one used by some of the world’s most successful investors. (Warren Buffett is the best-known.)

Are You Right Because Your Stock Moved Up 200%?

I find a lot of Mrs. and Mr. Right these days in the stock market – people who bought a few stocks in the past 6-12 months and have seen all or most of them sky-rocket 100-200% since then.

For instance, a schoolmate who is a housewife with no business dealing in stocks, has started recommending trading tips in our batch’s online group, “because” she is getting her price calls right!

Then, someone wrote to me yesterday “praising” how my “recommendations” like BHEL, Engineers India, Crompton, Voltas, HMVL and Tata Motors have finally been “successful” as they have risen sharply in prices.

This very person had written a hate mail to me last year when some of these stocks – or let me say, their prices – were down in the dumps. 😉

Such is the way we behave as investors.

Sensex @ 40,000 is Here!

“You’ve got to be careful if you don’t know where you’re going, ‘cause you might not get there.” ~ Yogi Berra

“The Golden Era Begins. Sensex target – 40000 by March 2017.”

This is not my prediction but one from a leading private sector bank’s investment advisory group. I received this report in my email yesterday, and haven’t stopped giggling reading the headline and the report’s conclusions again and again.

The author of the report states (emphasis mine)…

No no, we are not being very bullish, but are trying to value Sensex on the average multiple of 17x (which was seen in the previous bull run, the highest multiple being 25x 1 yr forward).

As per the Bloomberg consensus estimates the FY17 EPS stands at Rs 2000, we think that the FY18 earnings could grow at 20% for the larger companies if the GDP growth moves towards the 8%-9% mark. Hence, the FY18E EPS is projected at Rs.2400. At 17x FY18E EPS, we get a target of 40800 by March 2017, which we think could be a reasonable target to look for by the investors.

We think that the earnings growth would largely be led by the strong developmental focus of the new government and the multiple rerating would be primarily led by the under ownership of equities by the retail investors.

Sensex Nonsense is Back!
If you read Chapter 3 of Ben Graham’s The Intelligent Investor (which is one book you must read now, in these times of euphoria), the heart of Graham’s argument is that the intelligent investor must never forecast the future exclusively by extrapolating the past.

Forget IPL, Even EPL is Fixed!

“IPL is 100 percent fixed and I am only aware of one owner who is directly involved in betting (Vijay Mallya). Mallya is himself involved in betting, he earns 100-200 crores in IPL.”

These were the statements from actor Vindu Dara Singh who was caught in the 2013 IPL (Indian Premier League) spot-fixing scandal.

Singh’s comments aren’t something most of us don’t know of this cricket tournament (and others) that has been mired under betting and fixing controversies ever since its first edition in 2008.

But as die-hard cricket fans, we have come to take fixing as an integral part of the game.

“After all,” my friend, who loves watching these matches in stadium, tells me, “sport has been fixed through the ages – athletes dope, they cheat, they dive and try to fool the referee/umpire all the time… they try and eke out every little advantage they can. It is an undeniable truth.”

“Yeah, it’s an undeniable truth,” I say, “…and thus the cricket lover must beware that what he may be watching is not a game played on the field, but one that’s played in the room full of bettors and fixers.”

Now, if you are still reading this, you may be wondering why I am talking about the IPL and its fixing.

Well, I want to lead you to another kind of betting and fixing that’s going on in a different world that’s far from cricket and sports. And the person who pays a heavy fine for falling for this betting and fixing is…YOU.

Yes, you!

Stop Checking Your Stock Prices. You Can Get Sick!

I was travelling for the past few days with my family, and the last thing on my mind was how my stocks were doing.

In fact, when I am on a holiday with my family, if you ask me my view on the stock market, you would receive a blank stare. During such periods, not only I don’t check how the markets or my stocks are doing, I don’t even remember that I own stocks. 🙂

But things were different in around 2007. Then, I checked prices of my stocks every day, even when I was on a holiday.

I have never traded in and out of stocks in my life, but I still caught this habit of “just checking” what my stocks were doing each trading day…in fact, several times each day.

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Having my portfolio on an online tracker also helped matters, as I thought seeing stock prices jump up and down gave me control over them!

Investor Sentiment Survey 2014 Result: Mismatch Between Action and Expectation

To check what readers of Safal Niveshak are thinking and doing as far as their stock market investments are concerned, I recently conducted the first-ever Safal Niveshak Investor Sentiment Survey.

The responses I’ve received are interesting, though not surprising.

Before I move on to them, here are a couple of facts about investors from the Safal Niveshak tribe.

5 Rules of Investing in a Modi-fied India

India’s 2014 General Election results are almost out, and the Narendra Modi led BJP is all set to form the next government. There is euphoria in the air, and at no other place is it seen better than the stock market.

Amidst this, here are five quick rules I believe you can follow as you invest in a Modi-fied India that looks promising (at least on paper!). The broader idea to still tread with caution instead of throwing your sense and sensibility to the wind.

Here are those five quick rules…

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!
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.
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.
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.
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.

Finally, one bonus rule for today – Avoid watching election results on a business channel. 🙂