*Spotting opportunity in scams *
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Is there any way you can benefit from the shenanigans in the financial
market?
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Anand Kalyanaraman
The latest season of “scams” has got viewers and readers in India hooked
aplenty. Bigger and more brazen than ever before, this all-weather spectacle
promises to dwarf into oblivion the shock factor of other lesser reality
shows.
The Big Bosses and Justice Rakhi Sawants can go, take a walk. For, the scams
quite literally seem to be coming out of the woodwork.
The CWG fiasco, the Adarsh housing muddle, the Bangalore ‘plots', the Radia
tapes and, of course, the mother of them all, the 2G telecom spectrum
imbroglio.
Even as, we, the people, tried not to be overwhelmed by the scam tsunami,
the financial market (never one to be found lagging) went ahead and added
its own to the ever-expanding tribe, last week.
A few top honchos of some leading public sector banks and financial
institutions found themselves in the dock in the ‘bribe-for-bank loan scam'.
So, now, that (sadly) scams seem to have become an integral part of the ‘new
normal' in the Indian context, is there any takeaway for you, dear
reader-investor?
Is there any way you too can benefit (legitimately, of course) from the
shenanigans in the financial market, instead of just feeling outraged at
those who get away with the loot, and sulking over how your contribution to
the national exchequer is being subject to plunder? Our considered view is
“probably, you can”. Here's how.
Investing opportunities
Come rain or shine, astute investors will always be on the prowl for good,
cheap buys in the market.
Scams, despite all the undeniable evils associated with them, sometimes
present compelling “value propositions”. Knee-jerk reactions, painting most
companies (even the straight ones) with the same broad-brush, and other
associated market anomalies sometimes throw up interesting investing
opportunities.
Quoting from the preamble of the 21 {+s} {+t} Century ArthaShastra “Where
there is money, there is greed. Where there is greed, there is scam. Where
there is scam, there is exaggeration. Where there is exaggeration, there is
overreaction. And where this is overreaction, *there probably is a
value-buy.”*
Take for instance, the recent ‘bribe-for-bank loan scam'. In double-quick
time, this was erroneously baptised by many financial media pundits as the
‘housing loan scam', adding to the panic.
Going by the simple facts of the case, it seemed to belong to the plain
vanilla bribery variety — money changing hands for sanctioning loans by some
bankers to a bunch of builders.
While rapid action to bring the bad guys to justice was imperative, the
alleged misdemeanours of a few did not seem to pose systemic risks either to
the concerned institutions, or to the banking and realty sector as a whole.
Disproportionate reaction
However, many in the Indian financial media, with their penchant for
exaggeration, went ballistic to make viewers and readers ‘feel the news'.
Consequence: The relatively ordinary rapidly metamorphosed into a crisis
situation, the high and the mighty made the mandatory right noises of
launching a thorough broad-based investigation, and the market's reaction to
the ‘breaking news' turned disproportionate.
While banks and companies allegedly linked with the scam were beaten to
pulp, even entities not remotely connected to the scam (but which had the
temporary misfortune of being in the same sector boat as the maligned ones)
were given the stick-treatment.
On the day the news of the scam broke, the stock of LIC Housing Finance, one
of the entities named by the investigators lost a whopping 18 per cent.
Others stocks in the banking sector which took the direct hit included Bank
of India, Punjab National Bank and Central Bank, which fell between 3 per
cent and 8 per cent that day. Even banks not named in the scam, such as
ICICI Bank, HDFC Bank, and SBI lost heavily that day.
Recovering ground
The bloodletting continued through the week, with the stocks in the thick of
the muck (LIC Housing Finance) losing as much as 28 per cent over the
previous week, while the BSE Bankex was down around 3 per cent.
Similar sharp falls were seen in realty sector stocks such as DB Realty
(down 41 per cent over the previous week). Overall, the BSE Realty Index
lost a massive 14 per cent.
But just a week later, many of these stocks have started recovering lost
ground. For instance, LIC Housing Finance is up more than 10 per cent from
last week's low, and DB Realty is up more than 20 per cent.
The recovery has also been strong in the case of the indirect losers such as
SBI (up 7 per cent). In hindsight, a disproportionate market reaction, which
discounted a little too much, provided a good entry point to the discerning
investor.
Similar market opportunities had also arisen in the case of other scams such
as the Satyam scandal of January 2009, the Demat scam of 2005, and the Ketan
Parekh scam in the early part of the decade.
Fear and greed
In most such cases, fear rapidly becomes the operative word in the market.
In such situations, however, it may be worthwhile to recall that sage advice
of the Oracle of Omaha — “Be greedy when others are fearful and fearful when
others are greedy”.
Do try to make an informed, cool-headed assessment of the situation, taking
into account the facts of the matter, and the possible impact of the same on
the concerned stocks.
If companies which are otherwise fundamentally good trade below their
intrinsic value due to market overreactions, it may present a good buying
opportunity for the bargain hunters.
To be sure, while making such contrarian bets, don't be foolhardy and
dogmatic.
Make sure to set your stop-loss limits, and adhere to them strictly, if your
bets go seriously awry. Along with thinking-out-of-the-box, *humility too is
a desirable virtue for long-term investing success*.
http://www.thehindubusinessline.com/iw/2010/12/05/stories/2010120551401400.htm
adbuth
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