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Published on : 04 - May - 2018

Tip Based Investing is killing you...STOP it NOW!

Tons of people lost their hard earned capital by investing in controversial stocks. Jet Airways, Yes Bank, DHFL, Sintex, Suzlon, Reliance Infrastructure, Reliance Power are few of the recent examples. And believe me; most of these were made on tips received by TV Anchors, Friends, Family & Relationship Managers.

In some instances, investors are convinced into thinking that if the stock has reduced to ten rupees, how low it can possibly go? The answer is a big ZERO!

But people fail to understand this. They make fresh investments thinking the stock has already fallen enough.

One of the recent examples show how tip based investing is dangerous.

Yes Bank

Alarming data started to hit Dalal street starting October 2017. The divergence being reported in Gross NPAs at the bank was humongous.

What is Divergence?

Taking a hypothetical example, Bank A reports its gross non-performing asset (GNPA) as Rs 100. Reserve Bank of India (RBI) on audit of Bank A’s book, finds its GNPA to be Rs 200. Hence, the divergence is to the tune of (200-100)=Rs 100. This divergence is nothing but under-reporting of bad loans.

Yes Bank Divergence was Mindboggling as Seen in the Table
Particulars (in crore) FY16 FY17
Gross NPAs reported by Yes Bank (A) 749 2019
Gross NPAs as Assessed by RBI (B) 4926 8374
Under-Reporting of NPAs (B-A) 4177 6355
Under-Reporting of Gross NPA (in % terms) 557.7% 314.8%
Source: Yes Bank Annual Report
So, the early red flags were visible in October 2017.

The nail in the coffin was when RBI did not allow Mr Rana Kapoor-the founder of the bank to continue as Chief Executive Officer (CEO). This happened in September 2018. Sacking of CEO and the huge divergences being reported were enough indicators that something was not right at the bank.

To add to this, related party transactions between Yes Bank and promoter entities such as Yes Capital, Morgan Credits and ART Capital raised corporate governance issues. All evidences available pointed to something fishy with the banks books.

Fund managers sensed that something is wrong and started exiting the stock or reduced its exposure as reflected in this chart:

Source: BSE Fillings

However, the data which will come now is going to shock you! Small shareholders holding almost tripled during this period.

Source: BSE Fillings

At every dip in the stock there were TV Analysts, neighbors, friends, relationship managers who advised that the stock had hit bottom. The golden words ‘the stock has hit bottom’ was heard at levels of 250, 200, 150, 100 and even now at 80. Retail shareholders went on accumulating and there was massive erosion in their wealth.

And such instances are seen time and again. Hence, we urge investors to stop tip based investing once and for all. It kills your wealth and more importantly your sleep.

So, if you stop tip based investing. Who will help you find good stocks?

We at Prudent Broking have launched a product named WiseBasket. Not only WiseBasket helps you to find stocks hand-picked by our research team, but also helps in making the correct allocation of these stocks in the overall portfolio. And the good part, it's absolutely FREE.

For more details, please do check out our website - www.wisebasket.com

Happy Investing!