Are small investors influenced by the ‘IPL Syndrome’?

There is little doubt that the IPL matches have become one of the most successful entertainment shows over the past few years. It has captured the imagination of young and old, men and women, rich and poor, those who have played and understand the game of cricket and those who have never put bat to ball and couldn’t care less.

It provides three hours of action, music, thrills, dancing girls – in fact all the ingredients of a typical Indian movie, with the added attraction of audience participation. The paying public can cheer, jeer, shout, sing, dance, wear fancy costumes and generally have a good time regardless of what is happening out on the field.

Tickets for the matches are not cheap by any means. They can’t be – considering the astronomical sums of money paid to the players for just a couple of months of ‘work’. Yet, most matches have packed stadiums even though the matches are covered live on television. So, what is the great attraction for watching these matches in the searing heat of summer?

May be I’m just too old-fashioned and conservative to understand or appreciate the ‘tamasha’ that goes on in the name of cricket. The first live cricket match I had the privilege of attending was in Jan-Feb 1964 at the Eden Gardens, Calcutta. It was a 5-day test match between Mike Smith’s MCC and India. It ended in a boring draw, but remains memorable because of the century scored by Colin Cowdrey.

Scoring runs in test cricket is all about patience, discipline and technique. Only an experienced test batsman knows which balls to leave, which balls to play defensively, which balls to turn around the corner for a single or two, and which balls to hit for a boundary. Cowdrey’s innings – unexciting and sometimes boring - was a lesson for cricket enthusiasts about how to go about accumulating runs.

One can learn a lot about accumulating wealth through investments by watching and observing a technically sound test batsman (like Cowdrey or Gavaskar or Dravid). The knowledge of which stocks to avoid, which to buy and hold for the long-term, and which stocks to acquire for some quick gains comes from experience gained by spending long, boring hours at the ‘crease’.

In contrast, the IPL batsmen show little patience, less discipline and almost a complete absence of technique. The entire emphasis is on scoring runs as fast as possible by hitting many balls in the air (the ‘IPL Syndrome’) – an exciting but sure strategy for getting out quickly. Entertaining? Perhaps. But is it the best way to play cricket?

Most small investors enter the stock market with zero experience, little knowledge, but with great enthusiasm to make a lot of money quickly.  So, they run after stock tips and cheap stocks - failing to distinguish between ‘dud’ stocks, stocks that are only good for short-term gain and the real wealth-builders.

The ‘cheap’ stocks are cheap for a reason. The blue-chip wealth-builder stocks are always ‘expensive’. It is up to investors to decide if they want to be influenced by the ‘IPL Syndrome’  and lose money quickly, or make the effort to learn and be patient and disciplined to acquire wealth over the long-term.

Sensex Chart Pattern - Week ending Apr 10, 2009

Before discussing the Sensex chart pattern for this week, I seek the indulgence of this blog's readers in a little trumpet-blowing. A leading Indian pink-sheet quoted some of the comments I made in last week's Sensex chart pattern discussion in a recent article. Interested readers may want to click on the link below:-

http://economictimes.indiatimes.com/Markets/Analysis/Market-bull-run-Technicals-indicate-otherwise/articleshow/4380215.cms

I emailed my friends, assuring them that now that I'm 'famous', I promise never to forget them. While most of them sent congratulatory messages, one had a question: "You may have fame, but do you have fortune?"

Not realising that this was an outswinger pitched outside the off-stump and should be left well alone, I poked at it and asked him what he meant. Pat came a pithy comment: "There are two kinds of people in this world - those who think fortune follows fame, and those who know fame can be bought with fortune."

Ouch!! I was out - caught first ball. Guess my two minutes of 'fame' wasn't even worth the paper it was printed on! Since fortune is supposed to favour the brave, I will bravely move on to discuss the 6 months bar chart pattern of the Sensex.

(Please right-click on the image above and open it in a new tab or window for a better view.)

In a truncated week with only 3 days of trading, the Sensex continued its relentless upward rally that began a month ago, and hit 10929 in intraday trade on Apr 9, '09. A whopping 36% rise from the Mar 6, '09 intraday low of 8047.

The slow stochastics is firmly in the overbought zone. MACD and ROC are both positive. The RSI is also positive and just about entering the overbought zone. The Jan '09 high was crossed in style. As per a few US market analysts, a 20% plus rise from a recent bottom is supposed to indicate a bull market.

Some how, in spite of all the positives, I'm still not convinced that this rally is the first leg of a new bull market. I may be in a minority of one, but a few technical and fundamental hurdles remain on the way.

1. The volumes are nothing worth writing home about. Barely higher in Mar '09 over Feb '09, and marginally higher in April '09 so far. A new bull market should have significantly higher volumes.

2. The 20 day EMA is above the 50 day EMA and both have started to rise. This is a bullish sign. The Sensex is above both these EMAs. Also bullish. But so far, all three have remained below the 200 day EMA, so technically we remain in a long term bear market.

3. The past one month's rally has not seen any significant correction, except the big fall on Monday, Mar 30, '09. This is an anomaly. An index can't go on rising without proper correction from time to time - unless some one is manipulating it. Who? The insurance companies, more particularly, LIC. Why? Probably under the dictats of the wily Finance Minister, to give voters a feel good factor before the impending general elections.

4. The corporate results for the financial year Apr '08 to Mar '09 will start hitting the markets from next week. They are not expected to be good. Anecdotal evidence suggests that the results for the next two quarters aren't going to be great either. Weak fundamentals can't prop up the market for long.

Now we come to an interesting fork on the road. (As the New York Yankees baseball coach Yogi Berra had famously said: "When you come to a fork on the road, take it!") This is what makes technical analysis so much fun.

The intraday high of 10929 is nearly the same as the intraday high of 10945 made on Nov 5, '08. After touching it, the Sensex dropped down more than 125 points on Apr 9, '09.

Please remember that the level of 10945 has defined the upper limit of the sideways rectangular Sensex chart pattern formed over more than 5 months. Since the Sensex is also tantalisingly below the 200 day EMA, bears may try to take control. That means the Sensex will remain within the rectangular chart pattern and the long term bear market will continue.

However, if the buying momentum continues for a few more days, and the possible resistances at 10945 and the 200 day EMA at 11200 are overcome, the Sensex may go all the way up to the 12000-12500 long term resistance zone. That may be a tough resistance to cross.

Bottomline? Keep your eyes glued to the Sensex chart over the next couple of weeks. If the bears take control and there is a sharp sell-off, one can start buying in small quantities again. If the Sensex goes up above 11500, start getting rid of some of the second and third rung stocks remaining in your portfolio.

What are your future options?

A British schoolboy cricketer had once approached Sir Geoff Boycott to learn how to play the hook shot, because he was frequently getting out trying to hit a hook. Boycott told him that the best way to play the hook shot was not to play it! "But how do I score runs?", the boy had asked. Boycott's response was typical: "Don't get out! The runs will come."

Futures and options trading by small investors is akin to a school boy playing the hook shot. The chances of losing money overshadows the probability of scoring big. It is far better to buy quality stocks and wait for your wealth to grow.

Nowadays the lot sizes for F&O trading have been reduced, but the risks have not. Such trading is better left to professional and institutional investors who play for much bigger stakes and usually buy or sell in the cash market and hedge in the futures.

There is no harm in being aware of what F&O trading is all about, and some smart investors can get clues about the market from the difference in spot and future prices and volumes. But I get  confused when I hear talk about 'covered calls',  'strangles' and 'naked futures' and have stayed far away from F&O trading.

Seems like I'm not in a minority of one. The legendary Peter Lynch has made the following comments in his book 'One Up on Wall Street':

"I've never bought a future nor an option in my entire investing career.... Reports out of Chicago and New York, the twin capitals of futures and options, suggest that between 80 and 95% of the amateur players lose. Those odds are worse than the worst odds at the casino or at the race track, and yet the fiction persists that these are 'sensible investment alternatives'.... I know that the large potential return is attractive to small investors who are dissatisfied with getting rich slow. Instead they opt for getting poor quick .... Warren Buffet thinks that stock futures and options ought to be outlawed, and I agree with him."

Now, learn stock portfolio selection from a tall ex-cricketer

During his playing days, former England & Sussex skipper Tony Greig literally towered over his opposition. His medium pace and offspin bowling and aggressive batting earned him the 'best England all-rounder' title till Ian Botham took over his mantle.

But he is best known for his controversial comments - used to intimidate and provoke the opposition. Many may remember his "I'll make them grovel" statement about the West Indies team that really stirred up a hornet's nest.

The comment I remember best is about which players to choose if he was the captain of a World XI. In typical Greig-like fashion he said that he would prefer to have a Geoff Boycott in his team over a Gary Sobers.

Now anyone who knows anything about cricket knows that Gary Sobers is the greatest all-rounder in the history of the game. Boycott is best known for his long, strokeless stints at the crease that frustrated opposition bowlers.

Greig's logic was simple - Sobers could, and often did, win a match single-handed with his flashy stroke play. But he was equally likely to score a zero. Boycott however could be relied upon to grind out scores of 30s and 40s in game after game.

That brings us to the biggest lesson in stock selection. Stock market success is all about staying power over the long haul. So you need stocks in your portfolio that have performed well - but may not be spectacularly - year after year after year, through bull and bear markets. Not only in terms of capital appreciation (often through attractive rights and bonus offers) but also regular income through steady or increasing dividends.

The Boycotts of the stock market are Hind Lever, ITC, Colgate, Reliance, Tata Steel, Tata Motors, Mahindra and Mahindra, Sesa Goa (you get the gist - this list is not meant to be exhaustive). The Rico Autos, Prajay Engineers, IVRCLs, Gujarat NRE Cokes shine for a year or two and then fade away.

Does it mean that your portfolio should only contain 'boring' stalwarts? Not really. But the high-fliers of the day should form only a small part. The formula that works for me is 8 to 10 stalwarts that form 90% of my 'core' stock portfolio. (And the best time to build such a 'core' portfolio is when the stock market is in a bear grip - like now!)

The balance 10% of my portfolio is made up of 6 to 8 mid-caps and small-caps with a potential to hit the big time. I'm mentally prepared to lose all the money allocated to this 10% 'speculative' part of my portfolio. You have to choose the percentage allocation that suits your risk profile. But a word of advice - don't let the 'speculative' part exceed 25% of your portfolio. If it does - and that is likely to happen near a market top - reallocate by booking partial profits.

If you prefer to invest in mutual funds - and most investors should, unless they have the time and interest to pursue the solid amount of research required to maintain a good stock portfolio - then the Boycott's are HDFC Equity, DSPML Equity, HSBC Equity, Magnum Contra, HDFC Prudence, Magnum Tax Gain (once again this list is not meant to be exhaustive). The 'speculative' portfolio can contain the ICICI Pru Infrastructures, Reliance Visions, DSPML T.I.G.E.R.s.