Satyam Fraud and the Advantage of the Self-Investor

Something I’ve talked quite a bit about over the past few years in running this blog is the big advantage of the small guy- the self investor, over the big, laboring elephant that is the institutional investor. You are the nimble, market ninja able to move to cash quickly by cutting losses quickly on positions and waiting for better investing environments.

The big fella has no such advantage because of the requirements to stay mostly invested and the slow process of unwinding positions and moving into new ones. Institutions are forced to rely on on the financials of the past and management guesstimates of the future to make million dollar bets. The problem with this approach is the executives lie or are just flat out wrong AND long before the earnings show deterioration, the stock will have already fallen off a cliff.

Case in point, Satyam Computer (SAY) of India. Now here’s a company that continued to show very good earnings and sales growth all the way up to the revealing of the massive fraud. Had you relied on fundamentals alone or the words of management, you’d be wiped out on your position… and many institutions are.

Taking a look at MSN ownership information, I see that institutions own 20% of this stock with Fidelity, Barclays, MFS Investment Management, Lazard Assets Management, Trilogy Global Advisors, Fred Alger Management, Westfield Capital, Aberdeen Asset, Renaissance Technologies and Merrill Lynch all owning at least a million shares.

It’s possible that some of these institutions were cutting their losses and unwinding positions, but the process is slow and it’s difficult to unload millions of shares. Not to mention few are probably using sound technical analysis. You, the self investor, know better.

The stock really began to break down last July meeting resistance and failing at the 50 day moving average on several occasions. Somebody always knows something and the smart money was clearly dumping Satyam well before the massive fraud was revealed.

No, technical analysis wouldn’t have told you that this company was a sham, but it certainly indicated there were problems. It’s a stock that offered short opportunity, after short opportunity after short opportunity and yet major institutions with millions at their disposal to research Satyam failed to find the fraud and rode it out all the way to the end.

Remember, the charts are the only leading indicator you can rely on. Stick to stocks showing momentum while cutting losses short and you will do very very well.

Disclosure: None

Comments

[andyn:]

Wait a minute... this is totally in hindsight by chartists to fit the news to the chart.

Before the "fraud" was revealed, the 1st gap down was talked about my chartists as an "opportunity" since the gap needed to be filled as the reason for the fall was reversed. That's one of the reasons the stock climbed from $5 to $9.5 so almost a double there.

Now everyone is rushing to say that one should have gotten out at $9.
Even if you were nimble and watching the market like a hawk, it was impossible to get out as the gap down was so huge and there was no trading for 2 days after the news hit.
So for the innocent investor, my point is that you cannot predict all the events and if you are afraid, either buy puts with the stocks or just dont be in stocks.

Jan 19 09:06 AM

[candersoh:]

you are very right andyn. the other point is that even if you had purchased a put with this stock you wouldn't have been able to get out when it collapsed. that very evening of the collapse, i was watching the bombay exchange and had refreshed the screen to see SAY move from 7% gain to 80% loss in a mere minute. sitting here as a private investor, there was nothing to do but cut my losses in pre-market trading.

Jan 19 11:00 AM

[notsosmart:]

small or big,you cant trust anybody or anything anymore.there is no ethics left.all this is less controlled than gambling casinos. i take relative small positions in many co's. so my losses are not that great.you cant even trust the accounting firms anymore.be very careful & think for yourself.

Jan 19 01:09 PM

[Subhankar:]

I think the market will be a very boring place if one didn't have the occasional juicy little scam to liven things up! What would the bloggers write about? ;-)

On Jan 19 01:09 PM notsosmart wrote:

> small or big,you cant trust anybody or anything anymore.there is
> no ethics left.all this is less controlled than gambling casinos.
> i take relative small positions in many co's. so my losses are not
> that great.you cant even trust the accounting firms anymore.be very
> careful & think for yourself.

Jan 19 01:36 PM

[Tate Dwinnell:]

andyn, yes it's a look after the fact in this case but the bottom line is that deterioration showed up months before the fraud was revealed. Regardless of what ultimately happened, this is a stock that should never have been held because it broke down below the 50 dma again and again.

true, gaps often get filled and that offered a high risk entry point for a trade on the long side.. its also true that once the gap came close to being filled, the odds of retesting the lows (or lower) increased greatly

many many more examples of the charts revealing big problems before the news gets out.. this is just one example

Jan 19 03:37 PM

[toots:]

Could you please link to your articles where you advised people to go short or get out of Satyam?

Jan 20 12:32 AM

[donzelion:]

Small or large, quick or slow, the problem with Satyam was that people only saw the charts - and never bothered to look past them into fundamentals (like business legal protections). The funny thing is that those protections are worse in most of the emerging markets than they are in India.

And the hilarity is the claim that the charts could have led an investor out of trouble. After all, the charts would have led investors into trouble in the first place. I suppose many investors think they're smarter than the professionals for whatever reason, but I'm not so confident of my own prowess in beating the big guys.

Jan 24 05:34 AM