Stock Market: Saving Me from Me

 This first appeared in the Heraldo dated 24 Feb 2023

This sounds a lot like the famous Swami Nityaanand, please save me from me who makes risky investments so me can get rich but me does not like it when the investments bombs and me loses money. The Supreme Court has also got into the act and asked the Government what it can do to protect the investor from himself.

 

There are two parts to any investment: individual, ME/investor and Government/ Regulator, that is agencies tasked to ensure that the markets are regulated, trades are free and fair.

 

INDIVIDUAL

First we must understand that the Share market is like a game of teen Patti. There is no creation on wealth, be sure, if someone wins Rs 100, others have lost Rs 100/-. Technically, called two person zero sum game.

 

Using the Adani fiasco as a background, we can analyse what each can do and if protection for individuals from a downside is possible. The prices of companies linked to Adani have jumped in value over the last two years, there was no explanation for this jump other than so called market forces, ie lot of money chasing few shares, few shares because close to 75% of the stock is owned by Adanis. The rest 25% is available but even there large bank and LIC held a big chunk.

 

An investor who studies the company, its progress, its future profitability would not put money down for what is technically a speculative buy, nothing wrong in betting a share will rise sharply and one can make a killing by buying low and selling high. However, what we learned once again is that what goes up can come down and even those who felt they brought low would have got burned when the price hit new lows.

 

Remember all this is happening and there is not an iota of difference to the actual performance of the company. Usually dividend paying companies are sort after especially for those retired, but here dividend was paid from borrowing. All red flags ignored by retail investors. They were going in for a share offering at a fancy premium. Retail investors who prefer to let others do their homework piggy backed on the fact that SBI or LIC were buying, when the prices kept falling, the market was assured that they would pick up their committed shares on the last day. A few highly qualified fund managers in HNI (High Net worth Individual) family offices also did the unthinkable, they applied for shares in the offering when in the open market they were available for a handsome discount. It is another matter that the issue was canceled.

 

What it shows us is that “ME” must do “MY” own homework, there are no free lunches. If you have money which if lost will not effect your lifestyle, go ahead and chase risky investments, but avoid a situation where your life saving is involved and  if the investment tanks, you are financially wiped out. We saw at the time of the crash due to the Harshad Mehta effect, many committed suicide as they lost everything when the market tanked.

 

As it stands, the only person who can save “ME” from financial losses is “ME”, by studying the fundamentals and investing in companies with a track record of performance. If you wish keep a small percentage, say 10% of your portfolio for speculative or risky investments. The Supreme Court cannot help “ME”

   

REGULATORY AGENCIES

The  focus now shifts to the regulatory agencies, SEBI (Securities and Exchange Board of India).  Did they do their job? It appears not. When the share price was rising, why did they not look into it, it was clear that the rise was not due to fundamentals. It was as everyone in the market knew, but Hindenburg said it, round tripping. Basically, a host of entities act together to give the impression that there is a lot of activity in a share and thus pushing the price up day after day. Did the Adani’s own more than 75%, through shell companies? This reduces the float and pushes prices up. The retail investor lost, and as is usually the case, it is the small guy who was left with the mess.

 

The biggest advantage for Adani with the surge was they were able to get more funds by pledging their share. All of a sudden they produced 1.1 bilion USD to pare their debt, from where? If they had these funds why were they raising money?

 

So who are  these companies that were pushing the price up, supposedly shell companies based in tax havens, why are they not being investigated? Where did they get their funds from? Forbes has just released a report, following up on Hindenberg. It is the job of local agencies.

 

It is all very well to hide behind the nationalistic fig leaf, Hindenberg is attacking India, well they wrote not so flattering reports on Chinese and American companies too, they are no doubt an investor who finds chinks in a company’s amour and then makes holes so as to make money. They are a messenger, point that regulators need to address is why did they not see the chinks or loophole earlier.

 

In the US or Singapore, the market is regulated, yes there are cases of mismanagement, insider trading etc. Once exposed or brought to light the regulator takes action and perpetrators see the inside of jail, very quickly, no matter who or how mighty they are. In India, we are yet to see this kind or quick reaction and this people are encouraged to try and beat the system as there is no fear of punishment.

 

This is what the Supreme Court should look at and plug the hopes in the regulatory framework so that the confidence in the market reaches a high level and “ME” can invest without fear of being scammed.