The Hindu Business Line : What you pay for is not always what you get

When you look at equity markets, the simplest metric to fixate upon is the index number, quickly followed by individual share prices. It can be difficult to escape the dreaded ticker which is bound to give sweaty palms even to an investor with Buddha’s calm. It scrolls by, second after second, reminding the investor how much he has paid and lost or gained by the minute. Seldom are personal investments such as government bonds, property or even jewellery subject to such frequent and intense scrutiny.

This fixation has also made the share price an easy target for manipulation by fly-by-night operators. Their motto is: Why bother building a business, when one can sucker the crowds into paying ever increasing prices for one which does not exist? It’s a valid question which investors are yet to answer, evidenced by the frequency with which they get dragged into hare-brained manias and schemes.

Unappetising recipe

The recipe for rigging a stock’s price is quite simple. Take two or three like-minded operators and a company whose stock is listed on an exchange. It helps to have the company from a ‘hot’ or emerging sector to bolster the buzz around the ‘operated’ company. Companies such as Zee (broadcast) and Himachal Futuristic (telecom) lent credibility to the supposed rationale for their prices by virtue of opportunities in the sector. Then have the operators play passing-the-parcel with the stock within their little circle with prices for trades rising with every round.

To unsuspecting investors, this leads to the illusion of activity or momentum in the stock, luring them into this little circle. Keep passing the stock a.k.a parcel with more ‘innocent’ investors joining the loop at increasingly higher prices.

The two-three operators then leave the hapless investors holding the stock and walk away with the spoils, leaving the victim with an overpriced stock and nothing to hold the price up.

To the credit of the exponents of this scheme, it is possibly one of the more complicated ‘simple’ hoaxes, with exponents having to put together a convincing business argument and display teamwork in addition to showmanship to pull it off.

The person pulling of this scheme always stands the risk of other operators with bigger cheque-books taking positions directly opposing their own, collapsing the pack of cards!

Ketan Parekh is one of India’s more famous exponents of the above scheme. He went about rigging share prices through a network of crony brokers and funds lent by banks such as Global Trust Bank and Madhavpura Mercantile Co-operative Bank.

Through his broker “network” and armed with easy money, he went on to drive up the prices of several scrips, of which ten prominently featured as his favourites (later called the K-10 stocks) Global Telesystems, Himachal Futuristic, Zee, Digital Global, Satyam (the now juicy irony of rigging the rigger), Global Trust Bank (surprise, surprise!) among others. His scheme went bust when several traders found it fit to ‘short’ his favourites and deplete the price of his holdings to a fraction of what he paid for them, causing him to default on the loans to banks. These banks ultimately collapsed as a result of their lending.

LESSONS FOR INVESTORS

The K-10 scam teaches us about how leverage can amplify the loss of capital in a stock market trade gone bad. The staying power provided by a pure cash position allows one to behave with more conviction in the equity market.

The famous line by Cassius from Shakspeare’s Caeser finds good use here, “The fault, dear Brutus, is not in our stars, but in ourselves...” While the theme of greed can get boring to read and write about, in practice it is quite tireless and seldom lucrative.

The investor would do themselves good by asking a few simple questions before clicking on the BUY button. To borrow Warren Buffett’s reasoning, ask yourself “I am buying Infosys because…’” Mind you, it does not count to rationalise investments with reasons such as tips from rich uncles, the presence of the stock in some prominent investor’s portfolio or a rising stock price. While there are no ‘right’ answers, there are sound answers.

Could you ever imagine walking into your prospective house whose price has just soared by 200 per cent and picking it up simply because your neighbours have one just like it?

Leaky pipes, a bad paint job, noisy surroundings could easily drive you away. Buying a stock because the price is going up is akin to buying a single bedroom house for a family of five because the view is nice.

Why can’t similar rules apply to your stock portfolio? While the ultimate metric for investing is returns, those returns will remain elusive as long you pick an architect or plumber like Parekh.

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