How To Safeguard Yourself from Karvy-type Frauds?

This article written by Niteen S Dharmawat, co-founder of Aurum Capital, has appeared in Moneylife magazine. You may find this of use.

Recently, the Securities and Exchange Board of India (SEBI) found that Karvy Broking had illegally diverted nearly Rs2,000 crore of clients’ shares to its own accounts. Equity brokers have defaulted in the past as well, but this is surely one of the largest cases. Also, remember that there is never a single cockroach in the kitchen; we might have more such cases. So what should you, as an investor, do to protect your interest?

Power of Attorney (PoA): Brokers insist on PoA which allows them to operate your demat account. This is a necessary evil. Without PoA, the trade settlement becomes highly risky for the broker. What if you do not deliver the shares you have sold? However, with PoA, brokers have a route to misuse your stocks. The PoA should be limited only to market trades and, as per the latest SEBI rules, brokers need to call you before they execute any trades on your behalf. These calls are recorded. If you receive calls from a mobile phone, do not entertain them. Also, keep a recording on your files.

Delivery Instruction Slips (DIS): DIS is an alternative to PoA for trade settlement. But it is cumbersome for many in the era of the Internet. There is an alternative to DIS that is also elaborated below.

Download the Mobile Apps of CDSL/NSDL: Depending on where your demat account is, download and configure the app for your demat account. You would need your demat account number, PAN (permanent account number) and your date of birth, to register. The demat account has a 16-digit numeric character (in case of CDSL), whereas in case of NSDL, the demat account number starts with ‘IN’ followed by a 14-digit numeric code. An example of a demat account number with CDSL can be 01234567890987654; a demat account number with NSDL can be IN01234567890987.

Verify DP Holding with Broker Holding: Once your DP app is set up, you can see your holdings in the DP account. Never forget to verify your DP holding at least once a month and crosscheck it with what you see in the broker’s holding. It will not take more than five minutes (unless you have hundreds of stocks).

Verify Pledging of Your Stocks: Whenever you get the details of your stocks with the DP, also check if any stocks have been pledged without your knowledge. This can be another route to misuse your holding.

Transfer the Cash: Preferably transfer the cash lying with the broker to your bank account. It does not earn anything; the cash remains idle with the broker and is open to misuse.

Active vs Dormant Account: People do invest for the long term and, as they say, buy and forget. Please do not do that in India, at least. Keep your account active. If you have a sizeable holding in your account and if your account is not active, it could become the target of a rouge broker. It can happen not only with stocks but also with the bank account. Yours truly is a victim of such a fraud in one of the leading banks where my wife’s dormant bank account was compromised. So be careful and keep it active, maybe by way of logging into the account to verify the details/once a month trade, etc.

Check Client Master: The client master has critical information related to your address and mobile number. Keep it up-to-date and verify it from time to time.

Full-service Brokers vs Discount Brokers: I got messages from the worried investors about their holdings with discount brokers. I also read articles that discount brokers will suffer the most after the Karvy scandal and investors will move to the full-service brokers. It is important to note that Karvy was not a discount broker. It was a full-service broker. Frauds can happen anywhere.

People have recommended many full-service brokers on various social media platforms instead of discount brokers. There is nothing wrong with full-service brokers or, for that matter, with discount brokers. The choice is with the individual.

I would suggest that you go with a broker who is large in size, has execution capabilities and provides uninterrupted services with a stable platform (especially during periods of high volatility). One can also select a combination of full-service and discount brokers.

Some Other Preventive Measures

  • Use CDSL’s ‘easiest’ or NSDL’s ‘speede’. These are Internet-based facilities that permit clearing members of beneficial owner (clients) to submit off-market, on-market, inter-depository and early pay-in debit instructions from their demat account.
  • When you register for easiest/speede, the broker loses the PoA over your demat account; this would mean that you cannot sell shares from your holdings using your trading platform because the broker will no longer be able to debit your shares from the demat account. You will now have the power over your demat account as a result of which you will be able to transfer shares using easiest/speede.
  • Separate your broker from the DP. For example, your DP for the holding can be a prominent broker while your broker for the trading purpose could be a small/discount broker who charges less.

Do these steps and best practices guarantee that fraud will not happen? No, it does not; because fraudsters are always there to find new gaps in the system. But these practices will surely help in the early detection of fraud/misuse of funds/securities. If there are any new ways/gaps, they should be followed with newer practices.

Trust this helps. As always, we look forward to your feedback.

Happy Investing.

 

Predicting short term movements in the market

The fallacy of predicting Short-Term movements in Investing

I keep getting asked this question a lot of times “What do you think of the markets?” My answer is “I don’t know.” We are in the business of equity analysis and not astrology. Let me give a recent example of how hazardous predicting short-term movements can be. Two events happened recently. On the same day. The RBI governor resigned abruptly and the ruling party lost elections in 3 key states.

According to media and pundits, these were big negatives. The market should have gone down due to these events. But, we all know what happened. We had a superb rally. Nifty rose by more than 600 points and broader markets also participated to a good extent. This has happened many times before too, when market behaved contrary to what many think in the short term.

Investors spend too much time thinking about short-term views. They must be spending that time wisely, researching companies, reading annual reports, learning about industries/sectors, understanding market and business cycles, doing scuttle-butt. There are a few things investors can control and a few things they cannot.

What they cannot control is market behavior. What they can control is their behavior. We try to predict the former, which is not in their control. Do the things that you can control. Control your greed, master your fears, focus on buying companies at good valuations, learn to be patient, understand and learn from mistakes and so on.

On the macro and micro front, there will be something or the other wrong at all points. Learn to live with them. What one can do and must be focused on is buying businesses at good valuations. Below their intrinsic value. Track them diligently. Always write a hypothesis before you buy. And keep visiting it at periodic intervals. A value investor always should focus on buying a dollar worth of assets at 40-50 cents or lower. And opportunities do come. Just wait for those opportunities. In short-term markets may always be not efficient. But in long-term, as long as the company you invest in performs, the stock price will follow, provided you have entered at comfortable valuations. Control your temperament.

One must also learn the art of selling. Every asset has a price to sell. When valuations are in blue sky zone, one may book profits. It doesn’t matter, even if it is a good/great company. Corrections are inevitable. Blue sky valuations also correct. Wait for the companies to come into value zone, before buying. An example. An IT major is still at a 30%+ discount to its price of the year 2000, despite growing its profit by 25 times in this 18 year period. It was a decent company then and is still a decent company. One will find many examples like this in the market. My belief is one should be detached from stocks. Never love them and never be married to them. Look at them critically from time to time. Seek disconfirming evidence from people in your trust network. Building a trust network is very very important and it really helps.

As far as Indian markets are concerned, we must have a long-term view. Short-term challenges will always be there. This country is going to grow at a good pace for many years to come. The demographics simply point to that. As per capita income crosses $2000, a lot of things change. Incremental income is spent a lot on consumption, health care and so on.

We, at Aurum Capital, always focus on the long-term. We believe our job is to identify good companies at good valuations, keep tracking them rigorously, and stay the course, till valuations are in favor. This is what we can focus on, and that is what we focus on.

As always, we eagerly look forward to receiving your response.

-Happy Investing.

Jiten Parmar
Aurum Capital
SEBI registration No: INA000011024
To know more about our services: https://aurumcapital.in/services

Disclaimer: The stock name/s mentioned are only for the education purpose. These should not be considered as our recommendations/advise. Please consult an investment advisor before taking any decision.

Jiten Parmar’s presentation at IC 2018, Live on bloomberquint.com

This is the presentation that Jiten Parmar made at IC 2018, and which was presented on bloombergquint.com . The live feed and the presentation both are attached below. We believe it will be good for investors to see the presentation and understand the psychological aspects of investing and learn some traits of successful investors.

https://www.bloombergquint.com/in-the-news/investors-carnival-jiten-parmar-on-what-makes-an-investor-tick

 

https://www.slideshare.net/JitenParmar4/investor-behavior-traits

Regarding market condition

This note was written to our subscribers about two weeks ago.  The underline message continues to be valid and may benefit others. So we decided to post it on the blog.
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Dear Subscribers,

There has been a big panic since last few days in the market. This had seen a correction in several stocks.

We have been cautious in giving recommendations, and hope subscribers understand the reasons now. We had been facing macro headwinds and to top that valuations in many stocks were not attractive. We now believe risk-reward ratio is returning in favor and there is an enhanced margin of safety.

In our views, such times of panic are friends of long-term investors and provide great opportunities.

Also, remember that when a big earthquake comes it is followed by tremors. We will continue to witness volatility, it is going to be here. On the economy front, there are macro issues. But on the micro front, our economy is doing well and the ground reports suggest picking up in economic activities all across. While the economy does well, we will have to keep a close watch on macros too. If they deteriorate any further we will keep you posted for next actions.

Specifically regarding NBFCs. The valuations are critical and we have been harping on this from the beginning. NBFC valuations were very high and it needed a trigger to correct, howsoever small it may be. Always understand, the sectors once they go out of favor, do take time to come back in flavor. So, one must be very careful in catching falling knives. Unless you understand the knife well.

If you have any questions, feel free to post it in Investor Forum available for paid subscribers. These are not responded by any assistant or Account Manager. All the emails and questions in the Investor Forum are personally replied by the founder. If we find a merit in the question, e.g. related to the investment, market, and not repetitive; we surely address the question.

Happy investing.
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Regards,
Aurum Capital
SEBI registration No: INA000011024

 

Musings on valuations of certain stocks

Case study : Valuations

 

These are scenarios of 4 famous companies. which it’s not important to name.

 

Scenario 1 : Your grocery/consumables  bill purchase for the month is 10000 Rs. And you buy at a low-cost famous supermarket. Assume, that someone else offers the same set of goods for Rs 9500/- . What would you do. Most probably, you will buy from the 2nd store.

Scenario 2 : Let’s say you want to buy a TV. Price is 1 lakh and Rs. 30000/- is your down payment. Rest is 0% EMI (financed by store/manufacturer). There are 2 counters of the financial lenders. First one, who is a very well-known and famous lender,  offers 24 month EMI, 2nd one, is not a well-know name but  offers a 30-month EMI. Majority of users would use the 2nd option.

Scenario 3 : You want to buy undergarments. You go to a store which offers it for Rs. 300/- and is a famous brand. There is/are also other brands, which gives same fabric, elastic, finish but sells the product for Rs 200/- . Most will still go with the 1st option due to the brand pull.

Scenario 4 : You want to buy a cruiser bike. You go a showroom of a famous player in this segment who sells it for Rs 2 lakhs. There is an adjoining showroom, which sells a similar cruiser bike with same engine option, etc. and prices it at Rs 1.5 lakh.  Most will go with the 1st one as they had their eyes set on that one.

The first 2 in this example, are superb companies, with superb execution, but point to understand is that there is no moat. One should not confuse great execution with moat. These can be disrupted in a short period, let’s say 2 years. The 3rd and 4th are also great companies, with great execution, but have a superb moat. Disruption, if it has to happen, will take much longer time, maybe 5+ years.

 

The point, I am trying to make is on valuations front. Do all 4 companies deserve similar kind of valuations ?

Just my musings on valuations in some stocks currently in the market.

 

Disclaimer : These are personal thoughts. None of these are recommendations/thoughts by Aurum Capital.

-Jiten Parmar