How not to trade ;)

Bear Cartel - II

So as I'd written earlier, I went through the SEBI order on the sudden mid-cap stock crash and as is the case with most SEBI orders, I found it written up beautifully. You should really try reading some of these sometime.

I'll try to quickly summarize; my thoughts at the end.

• On July 26th, between 9.15 and 9.50 am, prices of Pipavav Defence (PDO), Parsvnath Developers (PVD) and Glodyne Technoserve (GDT) fell suddenly and without cause by 20% and that of Tulip Telecom (TLT) by 25%. The marke, and SEBI, went WTF?!?
• NSE and BSE both dug into the list of sellers and came up with the list of 19 entities which I'd posted here.
• The net sales by these entities in those four stocks ranged from 51% to 95% of the market on NSE and 31% to 58% of the market on BSE. They underbid on the stock by as much as 36% in some cases. They were acting in unison i.e. one after the other. One would place an order and after that got executed, someone else would place another order and so on. And as one or two were driving prices downward, other group entities were buying up the shares. 
• SEBI dug into these entities and came up with inter-linkages between them such as:
• Common phone numbers
• Common address
• Directorship in other entity
• Common CA (I found this brilliant)
• One of the guys, Ajit Kumar Jain, was found to have links with companies that had been banned in the past for price manipulation.
• A particularly neat touch was when SEBI pointed out that these guys don't really have the stated income to be trading in crores of rupees. Most of them were nil or upto 5 lakhs, with two or three above 25 L.
• These companies, since Jan. 2012 were totally into trading these four scrips and nothing else. 11 of them traded these 80% of the time or above.
• From the order, directly,

22. In my view, generally, a seller would rationally seek a higher price to sell his shares; however, in this case the clients were placing sale orders at prices lower than LTP, thereby bringing down the price of the scrips. More importantly, normally a seller would desist from revealing its entire sell quantity since that may cause the supply-demand balance to immediately become unfavourable to the seller. The data for the short period of time in each scrip indicates several instances of fully disclosed orders which were also a significant factor in causing the sharp decline of approximately 20% in price of each scrip.

23. One basic premise that underlies trading on the stock exchanges is that the clients conform to standards of transparency and ethical behavior prescribed in the various regulations and statutes, relevant in this regard and do not indulge in fraudulent , manipulative and unfair trade practices while dealing in securities. In this case, the above trading pattern of the clients’ prima-facie indicates that there was a concerted attempt to artificially manipulate/depress the prices of these scrips in a disorderly fashion thereby adversely affecting the integrity of the securities market.

• And then, BOOM, you're barred from the markets pending further investigation.

But seriously, what were these guys thinking? Did they really think they could get away with something as blatant as this? I am also thinking of the ways in which they could have pulled this off without alerting the regulator.

First of all, get different SIM cards. In today's day and age, that should seriously not be a concern. Register different addresses. I'm sure these guys have enough bogus addresses or shell companies listed anyway. So choose carefully. These two should be no-brainers, really. 

Now it should get interesting. They'll need different companies, obviously, operating out of the different premises and having different phone numbers, but they'll need different directors too, or else they are related parties. A public limited company needs seven minimum while a private limited needs two. That gives a minimum of four people, in two pairs, establishing a buyer and a seller. Because if they short a stock and someone else buys it up they’ll end up losing loads of money. The timing has to be co-ordinated. You need to establish a pattern of trading across various stocks before zeroing in on the two-three you want to short. Don’t concentrate 80% of your trading in those.

I’m still not convinced. If one set of companies does all the selling and another apparently unrelated group of companies does the buying, doesn’t it become obvious? Maybe the ‘operators’ should settle on less greed. If you end up causing 20% price-drop in 30 minutes, you are bound to raise eyebrows. Why not 5% across multiple scrips, snap ‘em up and sell them back at normal price? Given the crores in which they deal, even 5% would be a significant amount. But 20% is pushing it a bit too far, I think. Plus it gets you debarred.

Use different CA’s for the companies. That also should not be a problem, ideally.

Ideally, you’d have 5-6 different set of companies, 6-7 companies constituting a set, operating throughout India (think Golden Quadrilateral), co-ordinating via Skype (no telephone trails), selling and buying throughout a session (this would require some serious cash, but I think they might have that covered). Choose your timing, in the best case scenario, you should only trigger the selling and spook the market enough so that they start panicking and selling. That might be a tough nut to crack. Make sure the individuals and companies involved trade across a range of scrips before settling on the one you want to manipulate. Random distribution of profits would ensure everyone gains in the long-run, and collusion is difficult to prove. This is all a bit too simplistic, yes?

Establishing 30-40 private limited companies in India would not be a big issue for the concerned parties. An enquiry here would involve seizure of communication equipment and I don’t think SEBI is authorized to do that. SEBI’s the regulator, not the police. How do you prove collusion when there is (apparently) no contact between the parties? They might be best friends but in the absence of documentation, even friendship is hard to prove, no?

If you’re a party who knows how shit goes down and are laughing your guts out at me, let me know. I’d love to learn. (Not that I’d use it, of course, but knowledge and power and all that jazz...)

If you’re SEBI, what’s your workaround for this? Do you even need a workaround for this?

Again, putting it on paper is a gut-wrenching reminder of absolutely how much I have no idea.

Bear Cartels?

I'm such a noob in the stock markets that it hurts to even think about it.

This is what I came across today: Sebi bars 19 entities for involvement in mid-cap stock crash. Might be the first time I've noticed a 'bear cartel' in action.

I'll try to dig into it for more. In the meantime, if anyone has anything they want to share about these 19 entities, lemme know, yes?

1. 4a Financials Securities
2. A To Z Steels, 
3. Ajit Kumar Jain
4. Cheminare Trade Comm
5. G N Credits
6. Gajria Jayna Precision Industries
7. Kuvam Plast Pvt Ltd
8. Littlestar Vanijya Pvt Ltd
9. Manish Agarwal
10. Milestone Shares & Stock Broking Pvt Ltd.
11. Neelanchal Mercantile Pvt Ltd
12. North Eastern Publishing & Advertising Co.
13. Passions System Solution
14. Premium Hospitality Services
15. Ramkripa Securities
16. Umang Nemani
17. Venus Infosoft 
18. White Horse Trading Co.
19. Yashika Holding Pvt Ltd.

It seems there is quite a lot of cross-holding between these. SEBI's website is down right now, so not able to read the order. Will check it out soon and we'll see how that goes...

Things Analysts Say - I

A classic bit of analyst-speak from PL's Amisha Vora:

'Expect choppy mkt with sporadic rallies for next 2-3 qtrs'

Translation: Markets will go up, markets will go down. Translation 2: We really don't have a clue what the markets are going to do.

Wow. This is our industry folks...

Lunatic FDs!

Read this on Moneycontrol: Lunatic idea to invest in FDs instead of stocks: Damani

This is just wrong. Maybe his message is correct, but asking people to completely abandon FDs in favor or stocks has to be crazy. Let me put this succintly - If you consider yourself one of the average investors on the street, you WILL lose money. 

Let's run through this article in short, yes?

• Pick stocks rather than an index, something that you understand

• The problem is that people on the whole DO NOT UNDERSTAND what they are picking and why. I wager that at least 75-80% (and this is an understatement) people on the street pick up or dump stocks because they "heard" that it is going to go up or down, rather like what Mr. Ramesh Damani is telling them. I assume he has a good enough track record behind him, which is why he's on the show. But people, in general, have neither the time nor the discipline to go around researching stocks. That's why you buy index funds, mutual funds, etc. (not that they've been on a roll the past 3-4 years, but still) And more importantly, when do we exit? 

• Suggests investment in media stocks (I'm assuming he's long on them), don't buy indices
• The past 2-3 years would back him up, don't buy indices. But buy media stocks for the future because he tells you to. Let's see how they've performed over the past 4 years, yes? 
• CNX Media
• 12/05/2008 - 1827.71
• 12/05/2009 - 924.07
• 12/05/2010 - 1633.96
• 12/05/2011 - 1427.26
• 11/05/2012 - 1152.65

• Over the same time, the NIFTY has moved from.... just look at this:

• That's a return of -36.9% over the last five years as compared to a measly loss of -1.7% on the NIFTY. Put in 9-10% inflation and suddenly bank deposits look rather creamy, don't they? 

• Of course, comparing the past to what his prediction of what will happen in the future is a dirty trick, so let's look at his past, yes?  (To make it clear, I don't know the guy or of him, so this isn't a personal attack, I'm sure he's made a millionaire of himself and his customers, but people shouldn't be shouting down generalities...)

• Jan. 14, 2011 - Did not directly recommend, but said Tata Elxsi and Geometric Ltd. are "going to do well". Prices were Rs. 281.4 and Rs.75.4; current prices are Rs. 199.35 and Rs.62.60. Ouch. (Elxsi did pay a dividend of Rs.7 and Geometric of Rs. 1.2 that lessens the hurt a bit, but not nearly enough to keep on track with inflation, yes?)

• But the last year's been bad for everyone, so let's go back a bit more? In Jan. 2007, he recommended ICICI Bank, Bharti Airtel, Hitachi, HPCL and BPCL. He hedges a bit on Container Corp. and Bharat Electronics, so I'm not inculding them. Let's say I bought 10 stocks of each on reading that. How did it go for me? (To be fair, in that interview, he also says that all bull markets come down with a bang, and that there will be a very serious fall)

• 	Price Bought	Today's price	Profits	Dividends	Total
  ICICI	8974.5	8132.0	-842.5	580.0	-262.5
  Bharti Airtel	6343.5	6144.0	-199.5	30.0	-169.5
  Hitachi	1008.5	1316.5	308.0	30.0	338.0
  HPCL	2783.5	2994.0	210.5	442.5	653.0
  BPCL	3343.0	7003.0	3660.0	490.0	4150.0
  	22453.0	25589.5	3136.5	1572.5	4709.0

• So over a 5-year period I've made a total return of 21% (out of which almost 88% is from just ONE stock), which translates to 4.2% every year. Again, bank deposits anyone? 
• I'm assuming holding onto these stocks till now, because I couldn't find any interview/material where he tells people to sell the stock. If anyone comes across that, please let me know? 

• Dividend yields on equities often beat inflation - I guess we disproved that above, yes?
• Government inaction is hurting aviation and telecom stocks in the country (I'd say there's too much action on the telecom front, rather than inaction)
• Pessimistic about infrastructure

Forget about the rest, what I wanted to drive home is that do not listen to people who blindly say don't do this and don't do that. In the current scenario, where you get a risk-free return of 9% p.a. on your FD (9.5% until the recent RBI rate cut), do you not think that you should be allotting some percentage in them? If you have the time and energy to study the markets, then more power to you. If you don't, then listen to experts but please do some basic research before putting your money. Or else, I daresay bank FDs are the best place for you.

Hey Mr. D, this isn't an attack on you personally, but for some reason that statement just pissed me off. I've been earning only the past three years and you know how the market has been in that time... Makes me wish I'd put money some FDs, which I haven't. Just starting to now. In spite of all its faults, I'm in the market one way or another too. Let's see how that ends up! 

Also, read this: How can investors avoid fooling themselves? via WSJ

Why you should ideally not be investing

Or as this infographic says: The high cost of bad buy/sell decisions.

As it is, why not start off with why you shouldn't read this blog or any other blogs, but just invest in a normal index fund. Of course, returns may vary wildly depending on the precise moment that you began investing, but for now, let's go with this yes?

Infographic via Visual News: