In a bull market, the lure of making quick money makes people get trapped into “Stock Market Scams”
Lately, newspapers have been flooded with news of various scams, auditor resignation etc.
I am sure many investors are stuck holding those stocks and have witnessed their stock falling on a daily basis. Some of these stocks are Manpasasand beverages, Vakrangee, PC Jewellers, Gitanjali Gems, Atlanta etc.
Manpasand fell from ₹434 in 22nd May ’18 to ₹165 on 7th June’18.
Vakrangee fell from ₹500 in 25th April’18 to ₹32 on 7th June’18 wiping off a market capitalization of more than 45,000 cr
Although we can try to avoid penny stocks, stock tips etc. but the names such as Vakrangee, Manpasand beverages etc are very reputed names having already owned a large number of awards. Any naive investor can fall into such a trap.
Although stock market is the only place you can maximize the returns as well as it also acts as the same place where your entire money can be wiped off.
The idea of an investment should be that you dont lose your initial capital.
How to avoid such Stock Market Scams?
Based on my experience, I would recommend following certain pointers that need to be checked before deciding on investing in any company:
- First and foremost, avoid making a decision on Stock Tips(Nobody has made any money following stock tips)
- Prepare an investment checklist of items to be ticked before you invest: Create an investment checklist of items that need to be ticked before you invest in any company
- Avoid companies with huge debt: If the company has a lot of debt and even then the share price is soaring, I would stay away from it. In case any problem comes up, these stocks will be the one that falls the maximum. Also, with huge debt, there are various avenues to forge the numbers.
- Avoid companies where there has been a similar instance in the past: I somewhere had read Mr. Vijay Kedia’s quote which was something like this “Avoid Mischief rather than a mistake“. If the management has some history of stock manipulation in the past, it’s likely they will repeat it in the future.
- If something looks illogical or doesn’t feel right or make sense, avoid them at any cost: For example for Manpasand Beverages witnessing such wonderful growth numbers without we seeing its products anywhere around us is a sure sign of something not being right.
- Mail company in case of any doubt: Most of the publicly listed company has an investor relations person whose email given on the website. Most often you would require to do a couple of follow ups to get a reply.
- Try to gauge management quality: Listen to conference calls, watch management interviews on YouTube. There is an app called as Researchbytes , you need to signup for that. You can listen to the calls that the company’s top management takes with the analysts on the go. If the management has been forthcoming & humble & honest, that would apply in the business dealings as well.
- Read about what similar companies did in the past.
- If you are working in a certain company & expect great prospect for them, then what best to purchase that particular company(In case its listed)
In the stock market whatever applies for human being applies for the market as well.
There are people who will spread lies against the company & there are people who will spread positive bias for the company. Listen to everyone but use your own judgment.
The reason behind such propaganda is self satisfying. You are in this world for yourself and nobody bothers about others. I will give an example of such instance.
A couple of IIT educated PMS guys were spreading rumors in one of the company where I had invested after very thorough research(Bhansali Engg Polymers/BEPL).
Their claim was:
1. The company is taking debt to buy shares from the market. Therefore the shares are pledged.
2. There is a case against the company manipulating its share prices in the past.
Every now & then you would come across such people, but need to be careful that such baseless claims would not affect you:
1. I check with the company on the reason of the pledged shares. And the company was forthcoming in sharing information that shares are pledged because of a loan earlier & later on the company repaid the entire loan from the profits and freed the pledged shares.
The purchase of shares from the market was from their own money.
So, whatever the allegation was made was totally baseless.
Scuttlebutt also helps. If you can get hold of someone from the company to understand the business and the future potential, it helps to hold on the conviction in such cases.
2. The second claim was that there is stock manipulation but when I inquired about it, it was one of the shareholders. The company mailed back sharing the letter from the high court. Got to know that the person/company who filed the case had the intention of maligning BEPL to get the shares at a cheaper rate. The court even put an exemplary fine on the complainant for falsifying information.
Again the allegations made by these guys were cooked.
One more point, when such stocks start falling and people find them at a much lower price, they plunge to buy them. This should not be the case.
You should understand the reason for the fall of stock & create your own opinion.
It’s always a better strategy to buy a company on good news than on bad news. Bad news usually gets worse.