Your Broker As A Cheat (Part 15)

The Simpson's invited their new neighbors the Parkers over to dinner. During dinner Mr Simpson asked Mr Parker what he did for a living.4 year old Billy Parker jumped in and said“Daddy is a fisherman!"To which Mrs Parker replied" Billy why do say that? Your daddy is a stock broker not a fisherman.""No Mom. Every time we visit dad at work and he hangs up the phone he laughs, rubs his hands together and says I just caught another fish.

Your primary task as an investor is to inquire whether your brokers’ office is a branch office or a franchisee.  If you are a customer at a branch office, you could be in serious trouble.

Most nationwide brokers open a branch office in cities and appoint a branch manager along with certain staff, equipment etc.  The fixed costs are loaded now and it is you the customer who will now how to ensure that all this paraphernalia is paid off.

The Branch manager has daily targets. Daily targets.  There is no exception, to my knowledge

Below are the responsibilities of the Branch manager which does not include the obvious ones of managing the branch etc

Reach daily brokerage targets

Ensure that specific shares are bought by customers

I will explain point 2 first.  A brokerage house does own certain shares in companies where they have taken a stake.  This is typically done to increase the stock price and help the company look good on the bourses.  The stock price soon reaches a level where the promoters are ready to sell and make a killing.  The promoters first sell their shares off in the accounts of all the dubious people they have arranged for themselves.  This happens while the stock is still rising in price.

The next stage is set and this is when the brokerage house directs all their branch managers that all the customers must own this script.  This dictate actually comes in the form of “advice” from Vice Presidents.  The branch manager will ask you to buy some small qty.  The customer soon observes that the price has increased by 5% or so.  This is when the customer feels like a typical idiot and rushes in to buy more of the stock.

The brokerage house then sets targets for each branch and is actually now offloading its own stock.  The price soon recedes and all interest is lost in this wonderful (sic) stock.  The customer is now left with shares and no money and will probably wait for a decade till the stock regains its past glory.

Point one is fairly simple. Daily brokerage must exceed daily expenses.  Here the branch manager will ensure daily trades, future and options transactions, short term trading, hourly calls, investment ideas and what not.

Do inquire if your account is at a branch office.  If so, do be suspicious of the calls you get !

© Nitesh Kotecha

SEBI in India – It is right to be wrong

Thomas Hobbes' theory of justice depends on certain observations on human nature – doubting our ability to come to some agreement about what is just.  I agree.  Indians must give up the search for the Summum Bonum – Cicero’s concept of the highest political good or perfect justice.

An Indian company, DLF Ltd, was found guilty on Oct 13 2014, of not disclosing complete information in its Initial Public Offering (IPO) of 2007. Great. It takes Securities and Exchange Board of India (SEBI) seven years to figure this.  Let us now look at the punishment meted out to the company – The Company and some of the key staff are barred from accessing capital markets for three years.

In other words, a person walks down to the bank and fraudulently withdraws money from an account.  The punishment for this person is that he must not enter a bank for three years!  Is this not great?  I mean wow!  What a relief!!

The stock lost 30% the next day.  Essentially SEBI punished the investors and not the company.  What kind of a twisted justice is this?

The above incident clearly shows the lacuna in the concept of justice in India.  Organizations and institutions are more happy to be seen to be delivering justice THAN ACTUALLY DELIVERING JUSTICE.

The Law commission is currently in the process of repealing some 300+ antique laws in India.  Come On!  Is this the best that one can do with his / her time? There is no dearth of laws in India - what we need is modern laws and their implementation. Let us say all these 350+ laws are repealed – will it make an iota of difference in our lives?  The average citizen becomes aware of these laws only when the media reports that they will be repealed!

In the concept of Justice as a natural law, Justice is similar to the laws of physics - Newton's law of Motion requires that for every action, there must be an equal and opposite reaction.  Well justice too requires that defaulting individuals / groups to get what they actually deserve.

Theories of retributive justice are concerned with punishment for wrongdoing, and need to answer three questions:

Why should we punish?

Punishment is the infliction of an unpleasant but appropriate penalty upon an individual or a group by law enforcement agencies in response to behavior that an authority found to be in violation of existing laws.

Who should be punished?

The answer here is clear – we punish the company, the lead managers, and all those associated with concealing the material information

What punishment should they receive?

Ah! Here lies the rub!  The answer here lies in the concept of restorative justice.  Restorative justice focuses on the needs of victims and offenders, instead of satisfying the law.  Offenders are forced to take responsibility for their actions and this type of justice shows the highest rate of victim satisfaction.  This concept was eulogized in the 1972 Indian Film “Dushman”

Lady Justice depicts justice as equipped with three symbols: a sword symbolizing the court's coercive power; a human scale weighing competing claims in each hand; and a blindfold indicating impartiality.  Well, the coercive power it is, but the poisoned blade found its way to the wrong person - the investors.

Talking of poisoned blades reminds me of Hamlet and Shakespeare. “This above all: to thine own self be true.”   I wish India wakes up.  Is this what our freedom fighters dreamt of – A hypocritical India?

But, there are no fighters here now, are they? Do you know why?

“Conscience doth make cowards of us all.”

© Nitesh Kotecha

No One Killed the Indian Mutual Fund Industry

The Indian Mutual Fund Industry is in bad shape.  Is it really in trouble?  I would like to disagree.  This is one opportunistic industry which has always benefited from outsmarting investors by selling dreams instead of genuine products.  Here are some facts

The Association of the Indian Mutual Fund Industry has released data last week that the top 250+ distributors of this Industry have earned a total Rs 18600 million in the financial year 2011-2012 up from Rs 1770 million in the previous year.  The increase in profit has come despite the fund houses increasing their pay out commissions by 5%.

This is not an industry which is in trouble.  However, the MF industry is a cry baby and has Godfathers in the Government who have a vested interest in this industry.  Most Politicians route their illegal holdings through Mauritius and this money enters the MF Industry via the Foreign Institutional Investors route.

Readers of this blog are advised to look at expense ratios of each fund they opt for.  The MF industry has just received a go ahead from its regulator to increase its charges by 0.25%.  This is a net increase of 11%.

Stick to funds that charge minimum amounts as expense ratio.  Stay away from brokers who try to sell you the funds.  Be careful of every IPO that the fund house brings in.  A new IPO is allowed an expense of 6% as its initial costs.  These are nothing but the salary hikes that they need to pay their fund managers.   As an existing fund cannot charge in excess of 2.25% as expenses, the fund houses come out with IPOs to pay this money to their expensive fund managers.  The period between 2003 and 2007 saw this string of IPOs that were just rubbish.

Remember, any fund charging anything in excess of 1% as expenses, is expensive and you need no pay that kind of money for a mutual fund.  Stay away. Stick to funds with lower expense ratio.  If your broker is selling you this kind of junk, don’t buy and close your account with him.  You don’t need an expensive fund and neither do you need a greedy broker.

Happy Investing!

© Nitesh Kotecha

Your Broker As A Cheat (Part 2)

There are many reasons why your broker would recommend a stock to you.  

However, the reasons may not necessarily conclude that you are making a prudent long term or a short term investment.  In fact the recommendation may come to you only because you have an account with the broker and that you have cash – and that you are financially dense.

Your broker may have invested in the stock for his other clients, or for his family or for herself.  The stock may not be performing well.  The broker is now experiencing stress and cannot decide her current condition.  The stock is not performing and the broker’s reputation is on the line.  Our internal state of harmony is challenged if she is to conclude that it was a bad stock.

It is at this moment that you ask your broker about a good stock and pop!  She just names the stock that she is stuck in.  Your investment in this stock not only induces conformity in your behaviour – the broker also feels good that money is pouring into the stock.  She now does not have to think that she could be a certified dud.

Your broker could be hand in glove with the main broker at the exchange and there could be a mutual understanding between them to encourage retail participation in the stock thus allowing the company and its operators to offload the stock.

Now, depending on the stock, you may book your losses at some 30% to 40% loss.  This is the time the company and its operators pick up the stock again and look around for fresh idiots to fall prey to the game.

Some stocks in this category are Prakash Industries Ltd, Shree Precoated Steel Limited, Sturdy Industries, India Lease Dev, Shree Rayalseema, Anus Lab, Zyden, Arvind Remedies, Karuturi Global, Alok Ind, Assam Co  and similar certified junk.

Please note that such a game plan is first initiated by a good looking “Research” Report or some model portfolio gibberish.  Your broker will produce such a report before you in order to add authenticity to an otherwise junk proposal.  If you are greedy, you are game.

A giver is a person who gives, a donor is a person who donates and a broker is a person who gets you broke!

In dealing with brokers, it may pay to heed to the words of Alexander Pope:

Be wise,

Be discreet,

But mark that point,

Where sense and dullness meet.

Happy Investing !

Copyright – Nitesh Kotecha

The RBI does it again

The Reserve Bank of India has once again raised the interest rates. Yet another round of an increase in the lending rate for reasons not entirely attributable to money supply. 

The WSJ reports 

MUMBAI – India's central bank raised its key lending rate by 0.25 percentage point Tuesday, but hinted at an imminent end to its tightening cycle, saying it is unlikely to increase the rate again at its December meeting as inflation should be easing by then. 

"Notwithstanding current rates of inflation persisting till November, the likelihood of a rate action in the December mid-quarter review is relatively low," the Reserve Bank of India said in its mid-year monetary policy review after raising the repurchase rate to 8.50%. "Beyond that, if the inflation trajectory confirms to projections, further rate hikes may not be warranted." 

The RBI has raised rates 13 times in the past 19 months but has failed to take the sting out of inflation, which accelerated at 9.72% in September. A poll of 15 economists after the rate decision showed all of them now expect the RBI to hold steady until March. 

Based on the current economic scenario, Tuesday's rate move could be the last in the policy tightening cycle, RBI Deputy Governor Subir Gokarn said. 

The RBI's dovish comments come as growth in Asia's third-largest economy is showing clear signs of a slowdown, crimped by the aggressive monetary tightening and deepening economic troubles in advanced nations.

Still, the rate increase puts India at odds with the rest of Asia, where most central banks have stayed on hold during a period of renewed economic turbulence, while a few have even begun to ease policy.

This is supposedly the last round of increase. Well, it’s not surprising, considering that all macro-economic indicators are pointing towards a slow growth.

Food inflation has been the enemy of the year 2011. The government can do well by clearing the supply bottlenecks. The complete mismanagement of crops and their storage by the Government is brushed under the carpet. We now have a country where food shortage and food surplus go together. There are Indians who go hungry and there are Government storages where food is allowed to rot.

The Honorable Supreme Court of India directed the Government to give the grains for free to the poor. Our erudite and learned Prime Minister and his even more erudite and learned Agriculture and Food Minister objected to this suggestion by the Supreme Court.

The message to the Honorable Supreme Court by the Prime Minister was “Don’t try to run the Government” - a very assertive response from a Prime Minister who heads a Government with more scams than ever in India’s history.


Copyright - Nitesh Kotecha-