Shoeshine And Black Ink

The value of my stock portfolio has more than doubled in the last six months. One share I bought in July is in fact quoting today at three times what I paid for it. Another has doubled in the three months I have been holding it. So why then am I moving around with this constant vague feeling of dissatisfaction and chagrin, like an itch that I can’t reach, hoping for a second chance so I could really crack the stockmarkets?

Because I was from that usual bunch of idiots who study a company’s background and prospects carefully before they put their money on it. So I bought Infosys. Yes, I know, the investment’s grown handsomely, by 884 per cent in the last 12 months. But if only...if only I had not been influenced by all the Infosys hype and put my money in that little-known gem called Gamma Infoway Exalt (yes, I’m not making it up, that’s the name), my money would have grown 2,119 per cent, 21 times! Like every supercilious fool who thought he knew how stockmarkets work, I invested in HDFC Bank, and thought I’d made a killing. Till the geographically-challenged name-Southpole Securities-swam into my ken. Southpole’s share price has gone up 64 times in the last one year.

I’ve run the numbers. I’ve analysed the performance over the last one year of all the 2,874 regularly traded stocks on the Bombay Stock Exchange. Twelve months ago, 276 shares were trading at less than a rupee. If I had just bought these duds blindly in January 1999, instead of studying balance-sheets and economic indicators, my money would have appreciated 903 per cent-yes, that’s right, 903 per cent-by now! If I had been a bit less cavalier and bought randomly into the 1,306 shares that were quoting at less than Rs 5 in January 1999, my investment would grown 370 per cent! But no, I knew better. So I had to go waste enormous amounts of time trying to figure out a company’s business and environment and logically work out which share had good growth potential. As a result, I made far less money than if I had asked that roadside astrologer’s parrot to pick out some shares with its beak.

Just joking. But these statistics do clearly indicate that the Indian stockmarket is still a very irrational place in many ways, that mob psychology still moves markets and, ergo, that there are enough trapdoors around for suckers with little knowledge and much greed to fall through.

After all, what phenomenal feats could a company called Brawn Pharma (yes, Brawn) have performed that its share price rose 620 per cent in one year? Or Serene Industries (652 per cent)? Or Wilwayfort India (153 per cent) and E-wha Foam India (82 per cent)? Does anyone have a clue what Sunday Exports does on working days (320 per cent)?

Consider the Z Group, the official death row of shares. When a stock exchange places a share in the Z group, it is, for all practical purposes, telling people not to buy that share. On January 5, five of these shares were trading at 52-week highs and a dozen or so pretty close to 52-week highs. For all you know, these companies have closed down years ago! Last week, a friend’s broker recommended that he buy a particular share. When my friend pointed out that he had first-hand knowledge that this company did not even exist, the broker shrugged and asked how that mattered, as long as the share price was rising.

This is dangerous. Not for the brokers, not for the big investors but for the small guys like you and me, who don’t have enough information but are prone to getting carried away by insistent whispers about nearby El Dorados. After all, the oldest game on the stockmarkets (read, for example, Dickens’ Nicholas Nickleby) is to push a share price up, create some excitement around it, and then sack the stuff off to ill-informed but greedy small investors, leaving them holding the can as the price falls, as it inevitably has to.

I am not saying that the stockmarket surge we are seeing currently is a bubble, like the one that Harshad and Co created in the early 1990s. There are several aspects of our economy to cheer about right now, there are quite a few industries which are doing very well and there are many companies which have become leaner, meaner, more efficient. Go ahead, buy these shares; many of them are still cheap at their price. But buying into any company which you don’t know much about, buying a share simply because someone in the thick of the fray is recommending it, could lead to grief. Even if it’s a software company. All software companies are not Infosys; in fact, there are hordes of shady promoters making a killing right now because they had the foresight to name their firms to sound like Infosys. And some of these firms are not even in software.

Fortunately, the stockmarkets are today far better regulated, safer, more mature than they were in Harshad Mehta’s go-go days. The economy too is in far better shape. But the rosy light cast by euphoria can often make even the pug-ugly look handsome. And the con artists know that. Optimism is certainly the order of the day but selective optimism. This is also the best time to get rid of all the shares that you shouldn’t have bought and are trading at juicy prices. Get out of them, get into the good ones.

Someone once said-I think the legendary Mark Mobius of Templeton Emerging Markets-that when your shoeshine boy starts giving you stock tips, it’s time to sell. Last week, a colleague was asked by the boy who minds the car park outside our Mumbai office whether he worked in a share brokerage and if he had any hot tips to trade. Distinctly worrying, that.

(Research by the Intelligent Investor team)