Learn From Masters, Avoid 'Falling Knives'
Outlook Money|August 2020
Learn From Masters, Avoid 'Falling Knives'
Institutional investors have money, expertise, and information to influence stock prices. Watch them closely to boost your profits
Yagnesh Kansara

In 84 days during the height of the COVID-19 scare, when the global stock markets had tumbled and remained volatile, one company raised a stupendous ₹152,000 crore. India’s largest private sector company, Reliance Industries, sold almost a third stake in its mobile-Internet venture, Jio Platforms, to 13 institutional investors. These included two strategic partners (Google and Facebook), three sovereign wealth funds of Abu Dhabi, UAE and Saudi Arabia, and eight financial investors.

At the same time, some retail investors tried to chase a category of stocks dubbed as ‘Falling Knife’, which include shares that decline alarmingly in relatively short periods, especially during crises. The rationale to do so is that investors feel that they are hammered way below their intrinsic values and, hence, will bounce back to higher levels in the near future. What such unsuspecting investors don’t realise is that these are exactly the shares that are possibly offloaded by the institutions.

Both examples exemplify the power of the large influential investors to make or break stocks. In the first case, it showed how they honed in on a company, which wasn’t even listed, because they figured out its hidden value before the others did. In the second, they sold in hordes, and left the ailing babies in the hands of the small investors. Clearly, there are lessons that we can learn by studying the ways and investment patterns of the smart and intelligent institutional investors. Hence, it makes sense for the retail investors and individual day traders to keep a close watch on their larger counterparts, and closely monitor the latter’s investments. This data is published regularly, and provides a fair picture about the mood of the institutional investors. In addition, such information allows the range of market participants, including us, to gauge the changing sentiments in the stock market. Generally, the swings and sways of the indices and individual stocks are dictated by them.

At a global level, says Venkatraghavan S, MD & Head ECM), Equirus Capital, the decisions of the large investors give a direction to the flow of money to specific geographies (like emerging markets), industries, and companies. At the local levels, they can nudge the broad trends in the national stock indices. “Stock markets (in India and elsewhere) are primarily driven by institutional money,” admits Devang Mehta, Head (Equity Advisory), Centrum Wealth Management.

The foreign investors have, historically, had a greater influence in India. This has changed over the past three decades. Consider what happened in the market in the first three week of July. Between July 1 and 19, the foreigners withdrew more than ₹9,000 crore from equities and debt markets. The BSE Sensex and Nifty still went up due to the sustained inflows from the domestic investors. During the abovementioned period, the Sensex climbed by more than 2,500 points.

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August 2020