Digging the grave
Accidents do occur routinely. Stock markets are no exception. Here accidents happen daily. By nature, stocks are volatile. They swing from one end to the other every second. People profit from those pendulum swings. To make money, it is natural for some evil minds to inject poison into the system. They float wild rumors. They accuse the promoters. They create smoke around a stock. Often such claims are buttressed by sponsored research reports. To bring in credibility, they seek help from foreign brokerages. Carefully designed media leaks happen, citing some kind of siphoning of funds in a company. Independent directors, auditors, and other related parties are influenced to put in papers. You would see a flood of reports citing fraudulent practices in a targeted company. Reputed analysts are hired to plant doubts in the minds of the gullible public through popular media. Rating agencies begin to downgrade the stock almost simultaneously. In short, every attempt is made to create panic and kill the stock.
Fund managers begin to flee at the first sign of trouble. Looking at the noise levels, they try to wash off their hands by putting the stock in flames. Huge bulk sell orders appear on the screen—mostly carried out by hedge funds. Shorts get created in numbers that would numb the senses of any sensible investor. Analysts rush to prepare negative reports and begin to release them daily—highlighting the alleged fraudulent practices inside the company. It would look like the best on-the-spot report—a kind of financial health report-- of what’s happening at the company headquarters. Interviews with disgruntled employees would see the light of day suddenly. By any chance, if the company fails to make interest payments on time, that would grab the attention of the whole world. The opposition would begin to blame the Government in power and demand stern action Professors (who never made a penny in the stock markets by the way) financial journalists and self-declared experts would pronounce judgment on the stock and reduce its price by a minimum of 50 percent. (Foreign professors are the preferred lot here because we tend to believe the foreign-origin product has good quality—for reasons not known to me)
The falling knife
Now is the time for the bulldozer to decimate the stock. Everyone is rushing to the exit door. No one wants to buy. The heavy downpour of sell orders sinks the stock to its lowest levels. Fresh 52-week lows happen almost every day. The stock volumes would touch sky-high levels. The weak hands would run for cover. The stronger ones would wait for some positive news to come. In the interim, technical analysts would cry from the rooftop (after creating huge short positions in the stock) advising investors to stay away from the stock. ‘It’s a falling knife, so do not ever dare to touch it’ is the standard phrase that gains circulation. They see to it that there is no demand created for the stock by badmouthing the stock in every news channel throughout the day (of course to safeguard their short positions that would yield juicy profits only when the demand disappears completely). True to their predictions, the stock would sink further and further. The promoter in the interim is dragged to the street and is made to answer embarrassing, prohibitive, nauseating questions of all kinds. Fear, anxiety, and financial loss would compel the Promoter to brief the Media with all kinds of presentations made in a hurry. The scene gets murkier and murkier as Analysts dig deep into the presented data and uncover earth-shaking revelations of all kinds. The stock would now become a bottomless pit, having lost its sheen and value beyond recognition. The once-upon-a-time stock market darling would now turn into an ugly duckling that the Promoter himself would be scared to touch.
Stock on the stretcher
One fine morning the RBL stock started falling in a big way. The stock fell to its lowest level of Rs 85. Everyone said it is another Yes Bank. The reasons cited looked quite convincing (at that time) and the Market believed it. Mr.Ahuja the erstwhile MD was asked to go on long leave suddenly by the Reserve Bank. A similar move was made in the case of Yes Bank too. There was a sudden flurry of activity questioning the credentials of the bank. Analysts started questioning the asset quality, the inadequate provisions being made, and the poor net interest margin growth. The Market began to take an X-ray of the reduced holdings (though a minuscule change) of both the DIIs and FIIs in the most recent quarter. Suddenly the armchair professors found loopholes in the return ratios of the Bank. The stock started touching new lows with each passing day. Mr. Ahuja tried to salvage the situation by giving a series of interviews with the news channels. The experts now took the root of psychology to pronounce the sudden and premature death of the stock—saying that the body language of Mr. Ahuja was nervous and shaky, implying that he was trying to hide more than what the market wanted to know.
The new CEO picked up by the RBI (by a strange coincidence he was the administrator for Yes Bank previously—and hence the Market issued the judgment order even before he started his innings) who took over the reins from the Promoter had the PSU background—thereby meaning that the knowledge and experience of the incumbent not at all suitable for running a private sector bank. The Market was reading all these signals in a negative way compelling the stock to sink to its lowest level in over a decade—falling from Rs 165 (52-week high was 265) to Rs 85 in a short span of time (30 days).
Catch the falling knife?
You need muscles of iron and nerves of steel to catch a falling knife during all this controversy. The weak hands exited quickly. Technical experts enjoyed the enormous juice from the shorts daily. They tried every trick in the book to spell doom for the stock. Asset quality is poor; promoter is fraudulent books are cooked up; SEBI has gone into a deep slumber, RBI is looking the other way etc. Fund managers waited for the right moment to make their grand entry. FIIs also waited in the wings to pounce on the stock after it sank without a trace. Within a month the dust settled down. Reports came out saying that the books were not cooked. The return ratios are comparable to any other mid-sized bank. The new CEO is very capable and will be able to turn it around. Within 45 days, the stock regained its lost glory.
If you are patient enough to keep away from the noise levels created by the Market during a 3-month period where all the drama happened, you would have not lost anything. In fact, you would have made a decent return on your original investment. It is true that the journey from 169 to 85 and back to 170 levels is quite scary for faint-hearted souls. But a seasoned investor should learn how to cope with the excesses created by market participants for personal gains. You need to keep your ears and eyes wide open in order to read between the lines carefully and make prudent moves. A Falling knife would yield fantastic returns, if you are able to pick it from reasonably low levels in small quantities (as a thumb rule never buy a falling knife till it loses a minimum of 50 percent) and keep on increasing the load with every subsequent fall—and hold it till the time the rebound happens. RBL is not an exception; there are many other strong cases to cite in favor of falling knives. For example, software stocks have been beaten out of shape till recently. Everyone turned negative and most of the stocks have hit bottom levels for nearly 6 to 9 months. Persistent Systems touched 3200 and bounced back to the 5000 level; LTI Mindtree went below 4000 and bounced back to the 4900 level and the list is endless. Whenever the noise levels around a stock or a sector reach a high decibel level, remember, it is time for you to take notice and begin to load your portfolio (in small lots in a staggered manner) for a possible rebound sooner than expected.