The Hindu Business Line : You could turn poor with ‘get-rich-quick’ investing

How do you know for sure that you are in the midst of a raging bull market? Probably by the eagerness with which investors lap up every shred of positive information about a company or stock, while ignoring everything that is negative!

Bhushan Steel, Reliance Natural Resources, TVS Electronics, B.A.G Films… the stock markets, over the past couple of weeks, have been rife with stocks that have zoomed on the strength of rumours and speculation about “stake sales”, “land sales”, “buyouts” and a host of other actions that would purportedly bring windfall profits to the company in question.

Sample this. The TVS Electronics stock has surged from Rs 38 to Rs 50 in three weeks, on speculation about a land sale. A statement by the company to the exchanges on November 30 has clarified that the news of land sale, about six acres at a location in Chennai, does not really concern TVS Electronics, as it does not even own the said property. That has prompted a marginal cooling off in the stock price on the last day of the week; more is probably to follow.

The stock of Gateway Distriparks, a logistics company, was similarly drummed from Rs 126 to Rs 146 levels, on speculation about a possible stake sale by the company’s promoters. The company clarified that “these reports are not based on facts and are speculative in nature” and the stock has promptly shed 7 per cent on that news.

Fraught with risk

Investors, especially those on the retail side, routinely believe that the “inside” information floating around in the markets contains the key to stock market riches. Poring through a company’s financials, or going by “buy” calls based on projected earnings is hardly as exciting as the prospect of a quick windfall on a stock, as it spirals upwards after a “stake sale” or “land sale” that is whispered about in the markets.

However, selecting stocks for your portfolio based purely on such speculation is fraught with risk for two reasons.

Low ‘hit’ rate

One, where the stock prices have been drummed up purely on the strength of speculative news, a denial of such news can lead to an equally sharp meltdown. Exiting a stock which is on a rapid downward spiral can be quite a nightmare, especially if it is in the small-cap league. Second, even if the windfall gain through a stake sale or land sale does materialise for the company, there are still negative scenarios that can play out.

The sale consideration can be much less than that speculated by the market. More important, unless the company uses this cash to declare a big dividend or deploys it to retire debt and thus bolster earnings, shareholders in the company may experience no direct benefits from the company’s windfall!

The stock markets have provided a good number of instances in the past, where news of a merger, takeover or windfall gains to a company has filtered down to stock prices much before the actual fact was in the public domain.

Investors who were in early on the news would have no doubt made a pretty packet. But those who accumulate stocks solely on this basis would certainly know that the “hit rate” for such speculative news is not very high. For every rumour that proves right, there are probably several that don’t pan out at all, leaving investors with huge chunks of a company that they neither desire nor understand.

Remember, in the present day scenario, ‘news’ can be disseminated within minutes through blogs, chats and SMS’, by any investor keen to offload a dud stock from his portfolio. This should make investors all the more cautious about acting on news from unverified sources.

Material disclosures

Thankfully, the stock exchanges now insist upon fairly stringent disclosure norms from companies listed with them, when it comes to material actions or developments that impact prices. They are often quick to write to companies that are the subject matter of speculation, asking them to confirm or deny the said news.

If you are a keen trader, checking in frequently at the “latest announcements” section on the BSE and NSE Web sites may help you act quickly, when a bit of “news” proves wrong. The Web site: www.corpfiling.co.in , is also a good location to check out corporate filings from the BSE, the NSE and the SEBI, with all these sources collated at one place.

More Stories on : Stock Markets | Investments | Young Investor

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Power stocks: Caution, high voltage

Index Outlook

You could turn poor with ‘get-rich-quick’ investing