2011-11 of 2011-06-03 (3rd June, 2011)

In financial markets, the people are never afraid of heights, but always worried
of lows. Almost all hyper activities are taking place at the height of the market,
which is determined by fast and hectic rising of the almost all equities.

In Goonda Raj, the bad news pervade from one gang to another easily. The gang
leader knows in matter of days how the other gangster made so much of money in
so little time. They adopt same methods to succeed, and they often do.

Greed and Fear are inseparable parts of any market. Money makes everyone
corrupt. Almost everyone wants to become a millionaire or billionaire in matter of
days. When the bureaucrats and Ministers see the businessmen making money so
easily, they come in like “mafias” and start seeking their cuts, fees, haftas
(installments) or whatever christen names you may want to assign to such
activities.

When the market has risen from one peak to another in rapid succession, a time
comes when it begins to either crash or climb down slowly, surely and steadily.
There is no more upside, so the best thing that can happen at the peak is to come
down due to its sheer gravity.

So it applies to corruption as well. Scam and Scandals begin to emerge when the
market is jumping from one peak to another. The ignominious methods adopted by
one minister becomes example to pursue by another minister. When one is caught,
the entire range of gang operators come within the net.
 2
Anil Selarka Scam, Scandal and Stock Market
Media like vultures pounce on such stories and sell their newspaper or magazines
at maximum rate by publishing juicy stories. They call it “investigative journalism”.

No one wants to become Lord Rama, a higher rated moral God with “ek patni vrat”
(believer in only one wife). However, everyone wants to become Lord Krishna who
was darling of many girlfriends or dasis or sakhis (Companions). Similarly, in
financial market everyone wants to become Warren Buffett, but they do not adopt
his strategy. They worship Madoff, Stanford, Harshad Mehta, Ketan Parekh etc etc.
to become instant billionaire like instant coffee.

Of late lot of money has flowed into South India. Initially, lot of Keralites went to
Gulf and became richer. They sent lot of money home in their home state, so the
prosperity flowed there. However, they were low level workers who earned by
hard physical work. They could not engage themselves into corruption. South
Indians in north of Kerala were good mathematicians for a long time. They got hold
of Software or computer technology. This was instant hit. So Software exports
generated billions of dollars or thousands of crores in South India. Hyderabad,
Bangalore and Chennai became the focal point of interest.

Such flow of enormous money attracted crooks and scoundrels in the industry and
scams and scandals started erupting like volcano in government circle. While
License Raj has ended long time ago, the government officials and ministers started
reformed “Spectrum Raj” to capitalize on telecom revolution.

In state of Maharashtra, a new Raj called “TDR” started which means Transfer of
Development Rights in real estate business. Here the official or minister allows
higher FSI (Floor Space Index) against the rule by permitting the developer to
transfer his right in one development to another development obviously for a
hidden fee. Like Mafias, the ministers and officials at the top started charging fees
to the developers and builders. In short, paper derivatives like operations started
in “Spectrum Raj” and “TDR Raj”. Everything was up for sale, including IPL.

The scams and Scandals follow same pattern of stock market. When they
come out with increasing frequency, they denote the first sign of “cleansing
up” . The scams and scandals have no where to go up now, but only down. It is
a self healing process.

A few years or decades back, Bihar, Uttar Pradesh, Haryana and Madhya pradesh
were considered the most corrupt places in India. Our famous Lalu Prasad Yadav
and his bibi Rabdi Devi became the household name. Their fodder fraud of Rs 700
crores look minuscule by today’s standard. In fact, Lalu compensated the country
 3
Anil Selarka Scam, Scandal and Stock Market
by turning Indian Railways into highly profitable public enterprise earning
thousands of crores in revenue and made it a shining example. Phoolan Devi was
forgotten and replaced by Maa Rabdi Devi his wife. They are no longer counted
because after many scandals in Bihar and Uttar Pradesh, a correction set in and
now they are nearly out.

The slack was taken over by the South India where the prosperity flowed due to
rise in software exports that brought in thousands of crores of money.

A honey bee goes where the flower blossoms. The honey bees in this case were
corrupt politicians and their bureaucrat secretaries. Flower pots or money were in
South India. Hyderabad, Bangalore, and Chennai were the places where the crooks
and criminals arrived and mushroomed. Andhra Pradesh fired the first salvo when
Rajus and Reddys took over the reins.

Satyam Computer’s Chairman B Ramalinga Raju became the first billion dollar
fraudster of India. If Guinne Book of Records recognizes the corruption as
outstanding achievment, Raju of Satyam will enter the roster of “Fame of Records”.
Once tamed Andhra Pradeshi became famed “fraudsters”. 3R - that is - Rajus,
Reddys and Rajas started as roosters. GTB or Global Trust Bank where thousands
of crores of frauds took place also originated from Andhra Pradesh and RBI’s Reddy
took the reins indirectly behind the curtains.

When the storm or tornado arrives, it changes the directions by turning a few
degrees all of a sudden. The corruption started traveling from Andhra Pradesh to
Karnataka (Bangalore) and to Chennai where Maharani Jay Lalita ruled over the
state with thousands of saris and sandals in her closet.

Now that we know the natural process of creation of scams and scandals and their
self destructions, let us see whether they help us in making good investment
decisions. The dilemma facing the innocent nationalistic investor is whether
 4
Anil Selarka Scam, Scandal and Stock Market
he should sell and get out of the market or use the correction as outstanding
buying opportunities?

Our experience opts for latter - that is - outstanding buying opportunities to buy
the tainted yet high growth and potential stocks. The stocks are some of the
simplest, finest and efficient financial instruments. They are extremely volatile
because very few understand them. The stocks make money when they are bought
at lowest and sold at the highest. However, in order to buy high end growth stocks,
we need the help from fraudsters, scam artists and scandals at the top. They cause
the stock prices to crash to the lowest to afford the intelligent and smart investors
extra ordinary opportunities. Otherwise, how could one buy the stock at the
cheapest?

Look at the Satyam which was taken over by Mahindra group to rebrand it as
“Mahindra Satyam”. In spite of accounting fraud, the company was in one of the
best health by all counts. Debt free large balance sheet, huge cash chest of Rs 1600
crores, high end growth, acceptability by high end customers such as Pharma
industry leaders, well trained and qualified software engineers, erstwhile good
reputation in its real field, sufficient margin and rising too, and competent
management.
 5
Anil Selarka Scam, Scandal and Stock Market

Almost all the bad things that were to happen to Satyam had happened and the
company has written off all past losses of settlement of all law suits. It starts with
the clean slate now, and the stock which we recommended strongly at near 60s has
risen to Rs 89 today, a gain of 50% in just under 8 months. We have set the target of
Rs 160 in less than 10 months or gain of about Rs 100 or 170% .

Political events, as different from financial event, provide the high quality
opportunities. A stock makes money for the investors if the underlying company
makes profits consistently which is a financial event or cause. The stock price
therefore goes up. However, a non financial event such as scams or scandals
involving promoters or their blood relations provide the outstanding opportunities
to the real gem investors.
 6
Anil Selarka Scam, Scandal and Stock Market
Such scams or scandals give them “god send opportunities”. They understand the
risk and reward and go for it when the scandal dies down or getting reported on
inside pages of financial newspapers instead of on front page.

A case to the point is SUN TV and SPICEJET which is controlled by Kalanidhi Maran.
His brother Dayanidhi Maran, a former Telecom minister, is being investigated for
his role in showing favors in 2G telecom licensing, a spectrum matter. The stock of
SUN TV lost 27% in one day, and Spicejet by 17% which is holding most prospect
amongst the listed airline. These companies were in different industries and have
no vested interest in telco licenses. Their prices crashed due to poor sentiments
generated by the main promoter’s family blood relationship.

A question arises - when to buy such scrips? The answer differs from exchange to
exchange. In India, Bombay Stock Exchange sets the circuit limit which varies from
5% to 20%. Some stocks do not have any circuit rule attached. When the stock falls
to lower circuit, it means that buyers refrained from buying. It is possible that the
stock may go to lower circuit again on next day. It is also possible that the stock
may have hangover from the scandal for a few months. However, we follow the
following strategy not to miss the lower prices.

 See the intensity of the bad news and see whether the stock trades near the
lowest circuit all through the day on heavy volume.
 Start buying from third day if the intensity of news is very high
 If the company or its promoters were not involved in seemingly bad news, ignore
the news and start buying on 1-2-3 basis as under:
1. Buy small to test the water. Say you bought 1000 shares at CMP or Current
Market Price
2. If the publicity of news is very bad, buy on alternate days. That is, after
buying 1000 on first day, leave second day and buy more on third day. Say
you bought 2000 shares now.
3. Leave again for one more day and on fifth day from the news, buy small
portion, that is, you buy 1000 more if the price is lower than previous
purchases.
4. Then stop. Now allow the stock prices to recover. If you have enough stock,
ignore the urge to add more.
5. If the stock recovers strongly, start selling from last purchase. Say your last
purchase was 1000 shares, so begin to sell it.
6. Sell more (say 2000 shares you bought under Stage 2 above) if the stock
continues to surge. Here again sell on alternate days or if the stock trades
at upper circuit or up by 15%
 7
Anil Selarka Scam, Scandal and Stock Market
7. Allow one more day to pass, and then sell the last lot under Stage 1 (1000
shares)
8. Do not worry by selling if the stock goes higher. You made your money. If
the stock goes higher, you already have old stock which was averaged
down. Sell only later as per your convictions.

Allied Digital Services Ltd was hammered down due to Income Tax Raids alleging
tax evasion. Good part of interpretation was that the company was making good
money which was the reason to save taxes. However, the news here is bad because
the company’s management is directly involved. Not so in SUN TV and Spicejet.

Buying and Selling stocks is a imperfect science. It is at the most an Art. Use your
common sense, and listen to only yourself. Do not be guided by media news
analysis except to know the bare facts. Trust the company’s news release as
provided to NSE or BSE under Corporate announcements. Do not act on impulse
and sit in quiet corner to think over whatever happened and what could be the
reasonable truth. This is the best way to deal with the stock price crash of any
substantive stock.

Kalidas (Anil Selarka)

June 3, 2011
http://anilselarka.com

©Copyrights reserved by the Author Anil Selarka (Kalidas) 2011