The Hindu Business Line : Fingerprints on the charts

Since most of the punters loved punting in low-priced stocks, the weekend report that a government owned financial institution was looking to divest a substantial stake to a strategic investor had got them excited.

Punty: Do you think getting in a strategic investor will help the company to stage a turnaround?

Chorus: Yes, it will open up new business opportunities for the company.

Sage: Like what?

(confused silence)

Know All: You see, the company has accumulated losses of Rs 4,300 crore. Once the new partner is in, the losses will be wiped out and the company will come back into the black.

Sage: Who is the new strategic investor?

Know All: They are evaluating different proposals from the bidders

Sage: Can you quantify the value they will bring to the table?

Sheepish: The company will divest its entire stake in different companies in which it has invested. You see, a few months back, they sold a substantial part of their holding in one of the premier stock exchanges to a foreign investor.

Sage: So?

Eternal Bull: The market value of its quoted investments is believed to be over Rs 3,000 crore and it has invested over Rs 2,300 crore in unquoted stocks.

Sage: So?

Sheepish: When the company completes divesting its holdings in these companies, it will wipe out its accumulated losses and come back to the black.

Sage: So, what is going to be your strategy?

Chorus: I am going to put out orders for buying the stock.

Sage: And when will you get out?

(Silence)

Sage: Suppose the deal does not come through? Have you forgotten that in the last few years, there have been "confirmed" news of a merger with a bank, takeover by another financial institution etc?

Sheepish: Then what should I do?

Sage: First of all, you need to understand the risk associated with an investment. Most of the who invest in the market have no idea of their own but borrow ideas, which are freely made available by people having different vested interests.

Punty: But how do I do that?

Sage: You need to make a realistic analysis of where the stock is likely to go if your hypothesis is correct and where it would go if it is wrong.

(Uneasy Silence)

Sage: Have you heard of Martha Stewart?

Sceptical: The Martha who owns a vineyard?

Sage: No. This one got into trouble a few years back when she tried to act a bit too smart. You see, she had a friend Sam Waksal whose company ImClone's shares she was holding. When the Food and Drug Administration rejected ImClone's cancer drug, Sam gave her the information before the news came to the public domain. Martha escaped the bear massacre on the stock by disposing of her holding before the news was publicly announced.

Eternal Bull: Is that illegal?

Sage: Of course, it is a serious offence. The share market jargon for that is called `insider trading'. No person who is privy to sensitive information can act to financially benefit out of it.

Know All: What about the tycoons?

Sage: It is not tycoons — it was Tyco. You can say it created a number of tycoons though. Around the same time as the ImClone problem, it was found that the CEO, CFO and the Chief Legal Officer of the company had illegally withdrawn over $170 million in loans from Tyco without the necessary approvals from Tyco's compensation committee and notifying the shareholders. They were subsequently indicted.

Eternal Bull: What are you trying to tell us?

Sage: Do not buy into a stock just because of hearsay or because it is perceived as a "blue-chip". In a bull market, rhyme and reason are thrown to the wind.

There are plenty of other examples like Enron, WorldCom etc which were once darlings of the investors but eventually led to their financial ruin — simply because they were completely unconscious of the risk element.

Sheepish: So how do we protect ourselves?

Sage: Well, let us take the case of this financial institution itself. If you look into its chart, you will find that the stock started attracting buying interest in October 2006 itself. That is when it was trading under Rs 10.

Sheepish: Is that so?

Sage: Yes. That is when I started paying attention to the stock — along with the professionals. Possibly some people, who knew something was brewing, were buying into the stock.

Chorus: Wow!

Sage: Yes. You see, anyone who acts in a big way cannot hide his or her fingerprints on the chart. Once I see that, I just swing into action to see how much I can lose in case the alarm was wrong. The advantage is that if you get in early enough, the risk is the least.

Eternal Bull: Then?

Sage: Well, a couple of months later, the company appointed a

management consultant to look for a strategic investor. That is when I knew that I had laid my hands on a good thing and the stock, needless to say went through the roof.

Bore: What about the correction, which we witnessed earlier this year?

Sage: One of the stock market stories which has always fascinated me is that of the American trader of yore — Jesse Livermore. I would strongly recommend reading his biography to anyone who aspires to succeed in the market. When the stock started its correction, I could immediately co-relate Jesse Livermore's description of how the stock market operates to the current scenario.

Chorus: So what do you advise now?

Sage: The stock has already given people like me a three-fold return in a few months. Obviously, people who got in early would be looking to take their money out. I am personally, watching the stock closely. I have my trading plan constantly updated, which tells me how to react to any given situation in the stock.

You need to prepare one for yourself.

(The author is Country Manager - India, Safety in the Market www.sitm.com.au)

Racy@TheHindu.co.in

http://Racycases.blogspot.com

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