If you have found the stock, it may be a potential Multi-bagger, If the stock has found you it is a potential Disaster.
For those who don’t know what cloning is, It is basically copycat investing. When you are new in stock market ,you have not figured out your own strategy yet so you buy a company’s stock because a famous Investor has bought it and you anticipate since the famous guy is rich he would be well informed so the stock will definitely go up and take you with it. Well in my opinion it is always better to form your own strategy and conviction with time but sometimes Cloning itself is not such a bad deal.
Although i didn’t know that cloning process officially existed and was very famous among the investors, i had been doing it from last 6 years. The results were bad at first, but I evolved through the process. So I think I am eligible enough to tell you some things about how not to do unsuccessful Cloning.
Well first let me put it briefly and then we will go in detail.
Remember news headings like “10 stocks RJ owns” or “Potential multi-baggers according to DK” or “ This VK owned stock made 10X, should you buy?”
Not only you should not buy these stocks, you should also exit if you have any, because these investments are going to lose you money. in fact i see these headlines as an exit strategy of the investor from that particular stock. Lets see how.
Lets say. Investor X buys company A’s 1 crore worth shares at 21 INR and then at 22 and then at 23 and so on till 35. And when the stock reaches at 48. He buys worth 5 crore INR share. Now he knows if he buys 5 Crore worth share it will appear at BSE website as a bulk deal or block deal and that’s the strategy. He already has 50 crore worth shares in company A. And he buys 5 crore INR share more in the company so that it makes the headline. What will happen post news? People will be all over each other to buy that stock. This will provide him enough volume in buying section where he can dump his 50 crore worth share in 90 crore. He makes money, and guess who is stuck with the stocks?
I can give you 100s of examples. In each and every case this has happened, Tricky part is that stock actually goes up for like 5 to 10 days after the news surfaces before it turns your money in dust. Don’t take my word for it. Lets do one exercise.
Type on google “Mr. X buys bulk deal in stock ” go into news section, select some of those news where It is about Mr. X taking those deal in some stock, find out the date of the news and then go to the chart of that particular stock and start analyzing it from that day. 90% of the times it will look like above chart.
Fortunately for me, before I started in the market I promised one thing to myself that I will never take tip from anyone even if i don’t make even a single buck and that saved me from a lot of frustration of losing money this style, but there is one more indirect trap which got me in lot of trouble and its a good one.
What is that trap you ask?
In this trap when you read about ideas, the blog or the news will not directly talk about the particular stock, but will talk about the screening process a successful investor follows and when you will apply the same process or google about that process, only 4-5 stocks will match your conditions. You will think that you have found the stock, but the reality is stock has found you and when stock finds you, its a signal of up-coming disaster.
If you have ever come across a time when you bought a stock which was doing fine and it fell right after you bought it, you can say that the stock found you and not the other way round in the very first place. And this all comes from unsuccessful cloning.
When I look at the world as whole, the reason I find for the widening the difference between Rich and Poor (not just in stock market but overall), it is unsuccessful cloning. Funny Part is When you unsuccessfully clone someone’s idea, the person who gets benefitted most of the times from that will be the person who you are copying.
Remember E.g. 1 when you tried to clone Mr. X and you instead you ended up giving your wealth to the same Mr. X?
You see when you are following someone it is very easy for them to fool you. That’s the whole point here. I am not sure who is them here (Investors or media houses or somebody else) I don’t know.
And that is also the reason i forbid Technical analysis, All the technical analysis indicators are the function of Price or/and Volume. So when your indicator signals you buy, it means it is actually telling you that some Mr X or a lot of small xs have bought the stock. so basically you are following them not knowing that those bulk deals are genuine or just to trap you.
Needless to say there are a lot of advantages of cloning, Big investors are well connected and know promoters in person. they may also have better idea about the Management and insider trading than you.
So can this Process of cloning be refined and made profitable for us?
Welcome to successful cloning,
We have made a robust framework incase we want to clone which goes through 3 sieves.
- Conviction – We dont clone everyone. since we are value investors, we only clone Value investors (eg. Vijay Kedia, Porinju Veliyath) and some Value Mutual funds. We never clone Growth funds, Dividend funds. Because its not about buying a stock but to hold that stock long enough. And for that, One needs conviction.
Find out what type of investor you are and follow accordingly.
- Quality – Some aspects of Corporate governance and Management matters can be left to the Investor you are cloning but you still have to check for the financial quality of the company. We mostly check Book value, Interest coverage, Sales and Profit growth, Related party transaction and auditor’s flag (if any)
- Valuation – We are very rigid on buying a company only when stock’s Market price comes to Min Intrinsic value of Business (Read about min Intrinsic value in this Blog. Valuation allows us to Exit peacefully, making profits even after Investor has exited his positions and news reaches to us after the quarter (Happens several times). you can set your own parameters for valuation (PE/PB whatever you follow). Don’t rush, Stock will come to your quote price. It always does.
Also Make sure-
a. DO NOT trust any news source, always check quarterly data, that too from the report or BSE website, Confirm that the investor is really invested in the company.
c. Look at Company’s last 2 quarter shareholding patterns and check for any bulk selling from same investor or Promoters- This buy can be a dummy buy to sell previous stocks.
d. Avoid cloning stock which were bought by investors long back, sometimes they just keep good stocks for all the dividend they get after the stock turns multi-bagger. It may not give you very good returns.
- Don’t ask Google which stock will become Multi-bagger.
- Don’t get trapped by Mr. X.
- Clone investors who share same philosophy as you.
- Set your own guidelines and checklists to check in a company.
- Never go for “Buy at any price” model.
See, Potential multi-baggers will never be in the news. Why would they? If they are potential multi-bagger and everybody knows about it, they would already be multi-baggers because market always rewards wannabe winners even before they become winners. This is very much important right now also because everyone is so pumped up about the Market making new Highs everyday.
If YOU have found the stock- Potential Multi-bagger
If the STOCK has found you- Potential Disaster.
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