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Back in October 2013, top-gun investor Rakesh Jhunjhunwala bought 2.5 million shares of Dewan Housing Finance Corporation for an average price of Rs 135.32, a Rs 33.8 crore transaction. As the news spread, the share price surged 13 per cent to Rs 147 on the BSE. And, in a little less than three months, the stock surged 41 per cent as delivery volumes in the counter began rising and more investors began to buy into the counter, following Jhunjhunwala.
When another ace investor, Radhakishan Damani, bought 4.02 mn shares of Gati, which operates in the logistics business, its stock, quoting at Rs 23, immediately began racing up as more investors began buying it. Since then, Gati has surged 70 per cent and is now trading at Rs 70.
Such big moves in stock prices are not new when the big investors are buying. As this bulk buying gets reported, the news sends the stock soaring as more people try to latch on. The big question is whether you should follow these individual investors and try and ride out their strategy, Will you match their performance? Sure enough, many of the big-gun investors have a good track record and many of them have made good gains solely through investing. So, investors are easily swayed to follow them.
Not so simple
However, big investors might not always get their investing calls right. Even experts are prone to making mistakes. Hence, following these investors blindly is not a sure way to make profits in the stock market.
When in June 2013, big investors began homing in on the Rs 1,250 crore Radico Khaitan, the stock did enter into a bullish zone. Ashish Dhawan, senior managing director, ChrysCapital, bought 1.83 per cent at an average price of Rs 124. But when Jhunjhunwala began accumulating the stock last month in January 2014 picking up 685,000 shares at an average price Rs 167, its price had already run up significantly. The stock is hovering slightly lower at Rs 164, suggesting that Jhunjhunwala's buying this time did not have the same push it had earlier.
Experts say it's good to analyse why the big guns are buying. For, it might not be prudent to follow them. Says Sonam Udasi, head of research, IDBI Capital: "Essentially, an investor needs to take his own call and judgment. I would obviously like to know what Warren Buffett is buying and why. But, investors must evaluate what they are buying (for themselves)."
Experts say the profitable investments of the big guns are tom-tommed in the media, making them look savvy investors. However, ace investors are as prone to making mistakes as normal ones. Jhunjhunwala has bought down his investments in A2Z Maintenance from 18 per cent to 10.1 per cent, since the stock was going nowhere. The stock is down 46 per cent since March 2013, and 81 per cent lower since the beginning of 2013.
What one should remember is, for the big investors, some of their large holdings are so profitable that they can sustain losses from many others. Says Udasi: "Many a time, one only talks about the big gainers but there are many stocks these investors bought which have not performed, which are not talked about."
On the other hand, a significant paring by big investors might not mean the stock is not a good investment. For example, Jhunjhunwala brought down his stake in Lupin from 2.1 per cent in March 2013 to 1.66 per cent in December 2013. But even while he was doing so, the stock has been on a rise. Since March 2013, Lupin is up 44 per cent, to Rs 908. Experts also say there are many stocks these big investors buy or sell but only a few get reported. Market watchers say transactions taking place through the bulk deal route are sometimes reported in the media; open market operations might go unnoticed.
Risk capacity
And, the risk appetite for a particular stock investment of big investors might differ from yours. For example, top-gun ones can take big positions in a small stock and wait years for it to play out. This position will only be a fraction of their total portfolio. But for a small investor following the same stock, the risk of including that in a portfolio could be many times over, depending on the position one takes.
For example, in a Rs 1,000 crore portfolio, a Rs 20 crore position for a big gun is only a two per cent exposure. For a smaller investor, with no more than eight or 10 stocks, even a small position could mean a 10-15 per cent exposure to one scrip.
Experts also say small investors must watch their risk appetite and align the investment philosophy. A small investor might want to only make trading gains; for a big investor, it could be a very long-term holding, and vice versa. Besides, some of these top investors might be buying a stock based on their investment research and outlook; things might turn out differently. Says Mehraboon Irani, head private client group, Nirmal Bang: "Big investors have different risk appetite while small investors will have different risk appetites. Hence, small investors have to consider that when looking at the big investors."
Market watchers point out that buying by the big guns could see a stock race up swiftly, making it expensive when small investors try to get in. Says Udasi: "Sometimes, the cream is already gone; then, you enter at a price point that's way higher. It's always good to do your own homework with every stock investment."
