Knowledgeable Buying/Selling ....

Adding Zeros

The lessons from a low-profile second-generation stockbroker who adds zeros after his clients wealth, not put them through a zero-sum game

I am amazed when people get excited that a big institutional investor is buying some stock in a big way. I have seen it in bond markets too. The dealer will come in and say, Citi is buying, implying that if Citi is a buyer, there has to be something to it. Nobody will say who the seller is. Obviously, you cannot buy unless there is a seller. If stocks are worth buying and everyone thinks so, then why is somebody selling, when all research analysts think that it is good to buy? We always hear one side of the story.

We never get to know the other side at all. Maybe it is the domestic trader who keeps buying and warehousing when the prices are low and, as demand picks up, he dumps it on an institutional buyer who, in turn, will dump it on the retail buyer at some point. And the retail buyer, once having bought, gets stuck. He either becomes a long-term investor or makes a quick exit (profit or loss borne by him). So, stock markets are a zero-sum game. At different points in time, different hands hold the parcel. Change in market prices (which are a function of demand, supply and expectations) increase or decrease the value of holdings. If you are a short-term trader, you actually experience the pain or gain. If you are a long-term investor, you only see changes in your asset value. Of course, you can also get your annual dividends.

I always wonder at human frailty, when it comes to stock markets. There are occasions when everyone agrees that, at some point, the markets are very expensive. How many actually sell? Or how many actually go short on the market at this stage? Surely, no one does this consistently. At some level, you sell your shares. Do you again buy them when the market comes off? I always wonder. No list of names of the worlds rich ever includes any stock-trader. Warren Buffet has probably never sold much and what his fund owns are significant chunks of many companies. Bill Gates owes his wealth to one stockof the company he founded. This leads me to think that stock-traders are not all that productive in what they do. They are part of the make-believe world that the media creates for pulling in an audience. Serious wealth has been perhaps made only by investors who keep hanging on to their shares and not churn them like a mutual fund manager.

In this context, I recall meeting a stockbroker in Mangalore. He is carrying on his fathers business and has a loyal clientele. He would advise people to invest regularly (before systematic investment plan became a buzzword). He would come out with an annual investment list of around 20 large-cap stocks, dividing the money equally. He would not churn the portfolio at all, unless there was a compelling reason to sell any stock. He would do an annual review and, sometimes, he would add one or two stocks. He preferred to stick to established names, with high emphasis on management quality and return on equity. He had kept tabs on what the portfolio did. It generated a compounded annual return of over 30% over 20 years, excluding dividends. His churn was less than 5% of the portfolio, over 20 years! This return was almost twice what the Sensex delivered in the same timeframe.

I quite liked the way he went about his business. Many of his clients were second-generation clients! He never strayed from his approach. He also refused to offer his clients any platform for trading in derivatives. His view was very simple. I am an investment counsellor and not a casino owner. He also eschewed the small-cap and mid-cap stocks. He said that he did not have the resources to do homework on them. He did not want me to identify him, unlike the top brokers who are always seeking to be on television. I dedicate this column to this low-profile gentleman at Mangalore and wish him the very best.

The author can be reached at balakrishnanr@gmail.com