I just wanted to introduce myself here as this seemed the most pertinent thread. I manage a portfolio of 5 million USD + and it operates as a long short fund for some UHNI investors. I invest globally based on absolute return strategies with most of my asset allocation being outside India.I currently deploy about 20% of my AUM to India.
I have been around the block many times and I don’t know how many of you trade actively or what is your exposure to capital markets.But please take this advise as a friendly warning.
Ultra Small, Small and Mid-Small caps are rife with price rigging. There is ample circular trading between merchant banks that occurs. Circular trading for those who don’t know is a game of musical chairs where each party sells to the other at a higher price. Promoters are dodgy and books are often rigged. If you are investing in these businesses for a period beyond one quarter nothing short of a company visit should convince you to invest in them.
On the other hand if you are just speculating please go ahead and do so, it is fun, the gains are nice when you pull it off and and alpha is higher. But as with any speculation, go in with that amount of money that you put in should be the amount you are willing to loose entirely without any pain.
I have been burned many a times now and have made stellar gains as well, I have visited plenty of these hidden gems and seen why they are hidden (there is sometimes a good reason). Don’t forget the volumes in these stocks are so low that as in a poker hand I can tell if there is one party doing steady buying or selling. All you need to do is monitor the price.
Thanks for the warning. I strongly feel that financial results are manipulated (window dressed or down-right fibbed) for a lot of companies (both Indian and global). So, I also tend to take published financial statements with a spoonful of salt. (In a world which is inherently corrupt, it is irrational to expect companies to provide honest numbers all the time. e.g. I am personally aware of one of the “best” managed Indian giant cap IT companies to “creatively” produce their attrition numbers when they are very high. If they are doing it with one set of numbers, I cannot trust them to not do it with their financial results.)
Where I disagree with you in this case is if the investment horizon is long enough (meaning 4/5 + years), then the impact of circular trading and price rigging reduces dramatically and fundamentals take over. What I personally do is, I buy buy stocks in small lots over a period of time (sort of stock SIPping). That adds the time element to taking a stock exposure for me and if I see the prices running up too fast for my comfort,I take my chips off the table.
I am a student of the markets and any insights you share from your experience would be invaluable in the learning process.
Now in Forensic accounting there is something called Benfords Law. What it states is that the in numbers, the leading digit one will occur approximately 30% of the times and the number 9 approximately 4.6% of the time.
This simple test test would indicate that a lot of firms are manipulating their numbers.
Thanks Shivank for the warning. It always pays to be skeptical.I also take it that your warning was generic in nature and not specific to any of the stocks discussed in this forum. if there is a specific stock, I am sure you may not mind mentioning it upfront on that stock’s thread - we all can gain from your active experience in markets.
Want to bring to your attention that many stocks that have a thread here, have been actively followed by the guys owning the thread/stock story. e.g. Manjushree is regularly visited by Donald, Mayur Uniquoters visited by Nagabrahma, Opto by Donald, Suprajit by donald, Pondy oxides was a recent one he is sold on after a visit. Also Gujarart Reclaim, Riddhi Siddhi, Balaji Amines are being visited this month by Ayush and Nagabrahma. The one common theme of these stocks is that the businesses dominate their niche, and have been dominiating for a few years.
Much of the time we have the reverse problem of what you mention:) the stocks don’t move for a very long time.e.g Manjushree, and now Vinati has started showing some signs of upmove; but hey Sunflag iron & Steel sits pretty and refuses to budge:)
Lol thats because Indian capital markets are still not efficient in price discovery. That is why, ironically, arbitrage is the easiest here.
One of the easiest to look at is the mis-pricing between US gold and India Gold futures and spot Markets
It is a pleasure to see your warning. I am a investor in India and mostly managing money for myself and relatives. Philosophy is a mix of value and GARP.
What I would like from you is some more insight on how rigging is done in small and midcaps by unscruplous alliance of traders and promoters.
Although I have read and practised a lot from Lynch, Fisher, Buffet, Klarman, adam smith etc I would be an avid reader to what you have to say.
There appears to be confusion between “books of account” rigging and “stock price rigging”. Both the things are different with different consequences.
As far as stock price rigging goes, people following fundamentals must not bother much. They are interested in buying stocks at much cheaper price, and if the stock prices are rigged upward, they will very well use the price to book profit. If it is rigged downward, it creates a buying opportunity. In fact stock prices are always rigged… rigged by unconscious emotions of market participants. As far as planned rigging is concerned, occassionally promoters may also be interested in stock price rigging- but it will result in one of the two things- raising additional equity or insider selling. A fundamental analysis must take care of both. Off course, such stock price rigging can catch technical analysts, but I sincerely doubt any investor uses technical analysis in such micro cap stocks.
As far as account rigging goes, it is much more pernicious and harmful. But a few criteria cal help. I wish the company to pay 30% Income tax on reported profit. Further I wish the company to pay some dividends too, may be 2-3% of dividend yield. Further look at excise duty figure on gross sales. Cash flow analysis can also be helpful. Existence of these things will make account rigging a loosing proposition for the promoters. Further if a company is not raising additional debt/equity; rigging is not going to help.
Even after taking all these things into consideration, one will find a few rigged stocks in a portfolio. It is part of a game. Further, even very large company accounts can also be rigged. Thus merely for fear of rigging, investing in small/micro stocks cannot be dubbed as speculation. In fact this is the only way an individual can earn above average return. The next best thing is index investing. I can sit to analyse a state bank or reliance, but I dont think I can find something valuable there, which thousands of highly talented full time analyst could not locate will all their institutional resources.
The path we are taking is a bit more risky, but may be far more rewarding. Although Mattew Schifrin didnt mentioned any of us in “The Warren Buffets Next Door” (http://www.amazon.com/Warren-Buffetts-Next-Door-Investors/dp/0470573783), but we can try.