A successful self trader – Rule # 9
Before getting into any trading or investment position, it makes sense to check out what the men in the know are doing. Try to check out what the directors and promoters of the company are buying. Also check if global institutions and mutual funds are trying to go aggressive on either side. Track the bulk deal and block deal patterns and the ownership changes to pick up useful signals before investing.
What are informed investors doing?
Informed traders give you the best clues about any stock. Back in 2009, before Satyam owned up to its massive accounting fraud, a group of very large institutions had been silently offloading their long positions in the stock. Not only some of the men in the know exited the stock, but many also made a fortune by short selling the stock just before its disastrous fall from grace.
Satyam may have been the most egregious case, but it is hardly an isolated case. In fact it has happened in other large companies too. For example shortly before Crompton Greaves had announced its disastrous quarterly results about 3 years ago, the data showed offloading by directors of the company. Even in case of L&T the selling by informed sources was visible ahead of the 50% crash in 2011.
Believe me; all that it takes is a little bit of effort on the part of the investor. There are some key data points that investors need to track. Track the pattern of bulk deals and check if the strong hands are exiting or entering. Promoters buying and selling has to be reported as per SEBI requirements. Also, check the ownership shifts on a monthly basis. It clearly indicates which way the wind is blowing!
3 CLASSES OF INVESTORS YOU NEED TO TRACK
The promoters and directors hold the key…
Yes, after all, they know more about the prospects of the business than all of us put together. If you see visible buying or selling from them, it is probably time to just delve a little deeper and understand the logic behind their actions.
Catch the drift of the institutions…
Mutual funds and FIIs surely know a thing or two. They have access to top management, regulators, dealers, auditors and solicitors. If you see a herd instinct among institutions, you surely ought to take that seriously!
Check the signals coming from the F&O market…
This is slightly tricky, but the indications cannot be missed. Many insiders would prefer to adopt the F&O route to avoid too many questions. Are futures getting accumulated? Are OTM call or put options being bought? Lot of wisdom there!
“Buying stocks in the market, not as an insider, is like a man buying cows in the moonlight” – Daniel Drew
6 WAYS THE CHIEFS CAN HELP YOU IN YOUR DECISION…
- Compare the buying and the price. The bulk deals are available on the websites of BSE and NSE. Go a step further. Check out the insider buying in the last 6 months and also evaluate if it has led to spurts in market price. This indicator is normally unmistakable and is the first indicator of build-up!
- Are the bulk trades coming from a handful of body corporates. Check out through the web and the MCA about the background of these companies. Either the address or the directors can give you an indication if these body corporates are groups friendly to the promoters. Take their actions seriously.
- Do you see broker proprietary book accumulating certain stocks. Most likely these are being accumulated at the behest of the promoter groups. Watch out for this accumulation carefully. Remember, when brokers accumulate on behalf of promoters, the price imapct takes time to manifest.
- Do you see institutional interest suddenly cropping up in the stock. For example is an equity fund manager consistently picking up the stock from the market? Are FII beginning to evince interest in buying a particular stock in the market? These signals should urge you to delve deeper into the stock.
- What are the ESOP guys doing. In most companies, ESOPs are granted to middle and senior management. They are normally privy to a lot of functional and organizational aspects, which investors may not be familiar with. If you see a trend of ESOP holders selling, it is a sign that all is not too well.
- And finally, look at the derivatives data. Is there is sudden build-up in open interest in the stock? Are out of the money calls or out of the money puts attracting sudden attention? Are far month contracts eliciting interest among certain sections. These are hints of a major news breakout in the stock.
WATCHING THE CHIEFS IS ALL ABOUT BEING SMART
If I can identify a good stock why should I watch the insiders, is the standard refrain of investors. Remember, watching the chiefs is all about being street smart. Take the case of L&T. After the directors were selling the stock in 2011, the stock went into a 2 year downward spiral where it lost close to 55% of its peak value. By being smart and watching the insiders, you avoid entering or exiting at the wrong price. That is just one part of the story.
Insiders and people in the know can be lead indicators of a more serious problem cropping in the months ahead. In the case of Satyam, several institutions had already started rushing for the exits well before the scam broke out. Same was the case with a Kingfisher or Deccan Chronicle. The most egregious case was of the promoters of HFCL reducing their stake in the company even as the company was sinking deeper into a crisis. Research and analysis works upto a point. Knowing the real story is vital!
TAKEAWAYS FROM THE “WATCH THE INSIDERS” DEBATE…
The beauty about watching the insiders is that it is smart and perfectly legitimate. You are just taking adequate care to protect your interests so that another insider, who is better informed than you, cannot cock a snook at you. Remember, watching the insiders is done entirely with publicly available information and the various filings that are required by law. It just takes that little extra effort on your part. The truth is that it can make a substantial difference to your investment performance.
The beauty of watching the insiders is that despite the availability of a mountain of public information, there is hardly much effort to decipher its true meaning. The solicitor knows about a legal battle the company is going to win. The auditor knows about a qualified audit report that is going to be issued. The employees know about functional and organizational issues. The promoters know what is next. The institutions have the best ringside view. There is no harm if all this benefits you!