Pros and cons of following a tycoon in stock market

22 September 2017 10:59 am - 0     - {{hitsCtrl.values.hits}}

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The stock market is a university for any entrepreneur that wishes to build a business empire, which creates a large number of employments for the economy. Hence, it is important to have an understanding on the stock market, which is a market with a higher level of risk as well as different types of investors, whose investment purposes and amount of money poured into the market contribute towards the market growth differently, which has now become an indicator of the overall economic performance in the country. For a stock market to be strong and bullish, there should be a lot of institutional and individual investors who actively trade in the market.


Not only decisions taken by respective authorities but also decisions taken by net-worth investors can have an impact on the behaviour of relevant stocks and thereby market direction. It is despite the sophisticated theories and calculations that people in the game of picking stocks are foolishly misled by rumours about the market and footsteps of seasoned investors that strategically manipulate the market and make profits. Furthermore, irrational investors, equivalent to pigs in the market, buy the stocks being sold after taking profits. 

 


Blind followers 
Due to its risky and complicated nature in the stock market, the retail investors and traders try to take some gains as quickly as possible. For this purpose, they follow whoever that has got a name made for himself in the market as a visionary investor, disregarding the final outcome, which is likely to be a monetary loss in the future.


Even if certain rules and regulations are put in place, there is a limit to which they can control things. Hence, a tycoon can manipulate some stocks by making some news of it and creating an artificial demand for that, even when its net asset per share and profitability remain low with the blessings of the irrational investors, especially the ones who are new to the market. 


Even though a price of a stock could be higher than its net asset per share, because of its goodwill and profitability, particularly returns as dividends, the market price has to be matched with the real value of the company. However, it can be seen that during a bullish market, people buy stocks that a tycoon buys apparently, as they firmly believe that going after this kind of person famous for big deals can bring the fortune. 


It has to be always kept in mind that the price of a stock is also determined by the supply and demand. Spreading some positive stories of a company, giving higher dividends can artificially push the demand up, thereby the market price as well. 

 


Long-term investment
Only if we can know that a tycoon is genuinely buying or selling stocks, we can come to conclusions about those stocks. However, the problem is that there is low probability to know whether it’s genuine or not. On the other hand, an investment made by a tycoon is long term, then, his perspective has to be different from that of a trader or a retail investor, who may always see in short run. 


A seasoned investor can feel some ups and downs expected to happen in the long run, that is why, he buys or sells. What a rational investor does under such a circumstance is that having carefully considered quarterly and annual profits, the management of the business, economic policies in the country plus the behaviour of tycoons in the stock market with regard to the particular business, he decides whether to buy or sell. 

 


Trend 
Whatever said or done, the same demand and supply theory that we use to analyse other market scenarios cannot be ignored in this respect. It is other than a rights issue, bonus issue or any kind of new share issue that stock supply is limited for the number issued at the initial public offering (IPO). Hence, it is demand that always goes up and down, due to positive and negative factors relevant to the company. 


Few weeks ago, the stocks of companies in the plantation industry stayed active after a long time and were highly demanded by the investors, despite a bearish market situation. The reasons may be that some old investors that were waiting for the industry to make profits might have relinquished their stocks and reinvested their money in other stocks or due to the profit-making trend shown by certain companies in the plantation industry. 


It could be observed that many retail investors inspired by this trend bought stocks of plantation companies. However, even though the traders at the very outset gained profits, now prices are going down, making traders stuck in stocks or happening to incur losses. The most important is that those that have no proper understanding of these plantation companies, especially their financial position and cash flow trend have bought stocks by blindly following a tycoon, as mentioned earlier. 

 


Buffet 
Warren Buffet, a world renowned investment guru, has got a name made for himself, so that the others in the stock market follow him. What has happened is that people don’t hesitate to buy the stocks that Buffet is going to pick, because people firmly believe that the particular stock price will go up in the future, owing to Buffet’s involvement in that stock, backed by his financial philosophy and wealth. 


Let’s analyse what happened to Buffet’s followers who were going after him, when Buffet bought the IBM shares, a New York-based technology company. Buffett bought the IBM shares throughout the first few months of 2011, when the company appeared to be regaining. Buffet purchased the shares at an average price of US $ 170.43 each. 


However, the company incurred losses repeatedly, resulting in less demand for IBM stocks. Under these circumstances, the price reached US $ 215.90 per share in March 2013 and went down again. Buffett sold off about one-third of his stake in the company in May 2017. It was traded at US $ 152.90 in July 2017. It’s said that Buffet has taken a loss of about US $ 2 billion on his IBM investment over the years sans dividends. 


It is needless to say that if someone has followed Warren Buffet irrationally, that person also has to take a loss. This is the nature of the investment world. Risk is always there. Nevertheless, all you have can do to mitigate risk is to improve your knowledge and don’t depend on others’ advices. One must invest in a stock, only if he knows the business of that company. Never put your money at risk by blindly following tycoons just for the sake of their reputation because the history will not repeat again in the stock market. 
(Amila Muthukutti is an economist) 

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