How to win the Dalal Street money game

Big stock market players, who believe that they can slaughter small investors for an easy meal of healthy profit, often derisively call individual investors 'pigs.'

Indeed, individual investors need a clearly thought winning strategy if they are to outwit the raw money power and, sometimes, unscrupulous games which the big bulls and bears play. . .

Dalal Street is a fascinating world created by Mammon. The denizens of Dalal Street can apparently survive without food and water. All they need is money to eat, drink, sleep and dream.

The bulls, bears, and investors are the kingpins of the money game on Dalal Street.

The Bulls

An ordinary bull on an ordinary Indian street may look fairly morose, but not the bull on Dalal Street.

The bulls, whether investors or brokers, have an optimistic view of the market.

A half-empty glass always looks half-filled to the bulls. They expect stock prices to rise.

A strong and rising market is known as a bull market. When bulls swing into action, prices tend to rise. The bulls buy shares hoping to sell them soon afterwards at higher prices.

The Bears

An ordinary bear in the zoo may look very fierce, but not the bear on Dalal Street.

The bears, whether investors or brokers, hold a pessimistic view of the market.

A half-full glass always looks half-empty to the bears. They expect stock prices to decline.

A weak and declining market is known as a bear market. When bears are active, stock prices tend to decline. The bears sell shares hoping to buy them later at lower prices.

Dalal Street is a mute witness to the actions of bulls and bears. For the uninitiated, their combined behaviour can appear downright perplexing, even a trifle chaotic.

The stock prices on Dalal Street fluctuate due to brisk buying and selling by bulls and bears, the optimists and the pessimists. When the bulls are on a rampage, the bears run for cover. When the markets are in a bear hug, it is the bulls that huddle into their bunkers.

The investment adventurers have all been heading for Dalal Street since the mid-1980s. What used to be an exclusive investment club of a few brokers and elite investors has now been transformed into a gigantic non-stop money machine weaving rosy dreams.

Every generation produces its own heroes on Dalal Street. They inspire investors and move the market. H.T. Parekh and Hari Kisson Das were the heroes of the 1950s and 1960s. Pradip Dalal and Mahendra Kampani were the stars of the 1970s. In the 1980s you had Nimesh Kampani, Bhupen Dalal and Hemendra Kothari. The reigning stud bulls are the FIIs. The market is overawed by their raw money power and intrigued by their swift, shrewd moves.

During the last thirty years, the Indian stock market has seen several bullish and bearish phases.

Both bulls and bears are essential to make the stock market what it is — uncertain, and therefore all the more challenging. Without them there would be no difference between the Bombay Stock Exchange and Bharat Bank.

Where do individual investors figure between these bulls and bears? Well, they are to bulls and bears what rice bran is to chicken and cattle; plain feed. Or, so they bulls and bears would like to think.

The fable of Mr Nuksanwala and Mr Jhootelal

Our typical investor, Mr Nuksanwala, observed that Videocon International shares had been stagnant for a long time. The share was quoting at Rs 29 during February 1998.

Suddenly in March 1998, he found the Videocon scrip rising. He thought that insiders were pushing up the price because the company would declare good results. The scrip rose to Rs 40 on 9 March, Rs 47 on 16 March, Rs 55 on 2 April, and Rs 70 on 10 April.

Nuksanwala seriously pondered about buying the shares but decided to wait till the results were actually out. Meanwhile, the scrip touched Rs 100 on 22 April, Rs 114 on 8 May, and Rs 136 on 20 May. By now Mr Nuksanwala could hardly control his enthusiasm. He was worried about missing the boat and decided to enter the game.

It took him a couple of days to decide the quantity he should buy and finally settled for 1,000 shares. He checked his bank balance and also consulted his broker, Jhootelal, about the scrip.

Jhootelal informed him that the market grapevine felt the scrip would touch Rs 500 by August-end. Everything now seemed in place and so our friend Nuksanwala asked his broker to immediately pick up 1,000 Videocon shares.

The broker confirmed that evening over the phone that the deal was struck at Rs 160. Jhootelal charged a "nominal" brokerage of 1% (Rs. 1,600) for the transaction. All in all, Mr Nuksanwala had spent Rs 1,61,600 for taking a long position of 1,000 shares.

Strangely, from the very next day the share price seemed to lose its buoyancy and began stagnating around Rs 160. The scrip barely rose to Rs 165 by 4 June, i.e. one week after the buying.

Nuksanwala grew a bit worried but did not lose heart and was confident of the scrip touching Rs 500 by August-end. He decided that he would present a Maruti Zen to his wife on her birthday in October, from the anticipated profit of Rs 3,40,000 on this share. Their family would thus have a second car "absolutely free of cost".

However, a terrible thing happened on 5 June. The Videocon scrip fell by Rs 17 to Rs 148. The rapid decline continued and by 9 June the scrip was quoting at Rs 120.

Mr Nuksanwala rang up Jhootelal to find out what was happening. Jhootelal reassured him that there was nothing to worry and cited a leading FII's research report which had recommended 'strong buy' at Rs 155.

He explained to Nuksanwala that the fall was temporary and due to "badla dealings" on the scrip in Mumbai. He then suggested that Nuksanwala buy another 1,000 shares at the current price of Rs 100.

He mentioned that this was called 'averaging strategy,' and would reduce his average cost of acquisition from Rs 160 to Rs 130. Though confused, Mr Nuksanwala decided to abide by Jhootelal's advice, and placed a buy order for another 1,000 shares.

Jhootelal again earned a brokerage of Rs 1,000 (1%) on this transaction. The total cash outflow of Mr Nuksanwala was by now Rs 2,62,600.

Catastrophe seemed to be truly striking as the shares of Videocon then went into a free fall. The scrip dropped rapidly to Rs 83 on 19 June and further to Rs 62 on 24 June. By 30 June, it had touched Rs 50. Mr Nuksanwala was devastated.

He rang Jhootelal only to be informed that some 'notorious bear cartel had attacked the scrip.' When pressed further, Jhootelal mentioned that nothing could now be predicted as the 'big boys' on the Dalal Street were involved. He then casually asked whether Nuksanwala wanted to sell the shares.

Bravely, Nuksanwala decided to wait further. He reminded himself that a leading FII had made a "strong buy" recommendation at Rs 155; surely, with its global experience the FII could not be wrong. However, the scrip showed no signs of rising in July and the first half of August.

Mr Nuksanwala was in two minds whether to exit and book a huge loss or whether to hold on. He thought about it for a week and, finally, cursing his fate, decided to sell the scrip. By now the price was Rs 42. He received a sum of Rs 83,160 (Rs 84,000 less Rs 840 brokerage of Jhootelal).

Mr Nuksanwala decided that stock market was not meant for an "unlucky" person like him and swore that he would never enter Dalal Street again.

Mr Nuksanwala had learnt his lesson. The cost: Rs 1,79,440  (Rs. 2,62,600 less Rs 83,160).

The moral: If you do not know the rules of the game, Dalal Street can be an expensive place to learn them.

Investors and their investment strategies

Fortunately, all equity investors are not like Mr Nuksanwala. Though they are all driven by the same ambition of making as much money as possible, they differ in their time perspectives. Just look at the following alternatives:

• Praveen Shroff invested in 100 shares of Bharti Airtel at a price of Rs 44 in February 2000 on its listing. The scrip was quoting at Rs 411 in August 2006. Thus, an investment of Rs 4,400 grew to Rs 41,100. That is an appreciation of 900% in just 4 years! The Scripture assures us: 'He that shall endure into the end, the same shall be saved.'
• Sanjay Dalal invested in 100 Maruti Udyog shares at Rs 163 per share on its listing in July 2003 and sold them in February 2004 at Rs 448 per share. Dalal made a profit of Rs 28,500. A gain of 175% in 7 months. He believes in Franklin's advice: 'Little boats should keep near the shore.'
• Homi Mehta invested in 1,000 Suzlon Energy shares at Rs 693 when it listed on 19 October 2005. Within 20 days he sold them at Rs 762. Mehta made a profit of Rs 69,000. Mehta is a wise man, who 'will make more opportunities than he finds.'

These examples highlight three different investors and their approaches (See table, below).

• Praveen Shroff is a cautious and long term investor. He invests in established blue chips and follows a buy and hold strategy for a long time. He endures.
• Sanjay Dalal is an aggressive investor with a medium term perspective. He buys growth stocks at an early stage and sells them after a few months. His little boat is always kept near the shore.
• Homi Mehta is a speculator in search of quick money opportunities with a very short-term perspective. He buys on margins and quits quickly.

Remember, that we only hear about brilliant success stories. But in reality, for every one success story there are at least ten with unhappy endings. The difference is that no one admits his or her failures.

Thus do Dalal Street's bulls, bears and investors play the money game day after day. It's a high-stakes game, which if played well can yield whopping profits; otherwise, one can just as easily be burnt and scarred for life.

[Excerpt from the book, Stock Market Investing by N. J. Yasaswy, published by Vision Books.]

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