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Commentary

Value, Momentum and The Risks of Coat-Tailing


Fame is a double edge sword. While everyone wants to become famous, being famous brings its own set of scrutiny and limitations. Take the recent controversy regarding twitter handles followed by Prime Minister Modi. As an Individual, he is entirely at his own liberty to choose whom he wishes to follow and who he doesn’t.

But being the Constitutional head of a Government means that every action he makes is scrutinized, every statement read carefully and every action thoroughly analysed. So, when he follows twitter handles, that is as close to endorsement as you can get on social media (and this is evident as many who he follows have that as a Bio input).

Virat Kohli, the Indian Cricket Captain recently opined that he shall stop endorsing soft drink giant and fairness products because of their association with junk food and racism. That action will cost him a lot of money, but when one is looked up my millions of youngsters, it’s important that one’s action is in line with the broader social agenda.

Of course, Kohli isn’t the first sportsmen nor will be the last to take a stand that in-line with the image he wishes to project to his followers. The rise of Social Media brings its own challenges – people who otherwise would have remained Anonymous have now huge followings with their tweets being critical input for their followers.

And this brings us to the controversy that we saw thanks to a Whatsapp message I received about a tweet by Porinju Veliyath who runs Equity Intelligence India Ltd, SEBI Regd Portfolio Manager. By his own words, he is a Value Investor who tries to dig into companies that are ignored by the analysts due to its size.

Lack of data stop me from making a longer term analysis, but based on whatever data is available at SEBI, he has done pretty well for his clients. Better returns means that he is followed by investors hoping to get some ideas of what stocks to Buy. Not surprisingly, his follower numbers on Twitter have shot up and are now close to 400K mark.

On April 21, 2016 he tweeted about Eastern Threads with the disclosure that he was invested.

If one were to look at the Annual Report of Eastern Threads, he was invested for more than a Year though based on twitter’s limited search ability this was the first time he tweeted out the stock.

The difference between Momentum Investors (myself included) and Value Investors comes down to time frame of holding. Value Investors are willing to hold onto companies they believe in for years and even decades. Momentum Investors on other hand are much more fickle, we are willing to stay with a company as long as the stock price is rising, once the rise stops, we are happy to part-company.

Markets move in cycles and this means that it’s rare for any momentum investor to hold for years let alone decades. So, it was indeed surprising to see that Porinju divested his personal stake completely within 30 days of the tweet. (Annual Report provides the dates of Sale)

Here is another interesting data point. This one relates to Nirvikara Paper Mills where Porinju bought a stake enough to trigger interest in the stock by those who follow (RJ Blog wrote on the same here and here).  While he continues to hold a stake as on 30th June 2017, the second post coincided with his sale at a price the stock hasn’t yet seen till date.

Coat Tailing is a concept that originated in the United States with one of the biggest follower of the strategy being Mohnish Pabrai. In 2008, Gerald S. Martin & John Puthenpurackal wrote a paper titled “Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway” wherein they showcased that copying Berkshire Hathway from his filings earns significant Alpha. Those who buy into stocks that are recommended (Direct or Indirect) by well-known investors are following the same strategy even though many may not actually know much about the Risks and Rewards of it.

As a momentum follower, I would love trading Porinju picks and the mood in the current market is all about, Buy First – Ask Questions Later.  We buy a stock not a business and this means that focus in only on the price of the stock rather than how the underlying business itself is performing.

Porinju has not violated any legal rules. But when one is famous enough that just mentioning a stock will push it to upper circuit, moral and ethical behaviour comes under scrutiny too.

Based on returns he has generated in his PMS, he has generated tremendous cash and goodwill of his clients. But becoming a client of him isn’t possible for everyone given that the minimum capital comes to 50 Lakhs. This means many a follower wishes that he can generate better returns by following what he invests into.

Most replies to his tweet where he sarcastically thanked me and another friend who tweeted more info about it was that no one was compelling anyone to follow / buy stocks he talks about. This is very much true – Caveat Emptor is something that goes without saying. But blaming the victim is always easy.

People who have attained fame and are widely followed which to me means that their actions have to be inline not just with the legal rules but with ethical and moral values that he stands for. When I entered the market, I didn’t come with a MBA or an ability to analyse stocks. The only way to learn – follow the big guys. Same holds true for most newbie’s who enter the market today. Very few start by first preparing themselves – acquiring requisite degrees / experience for investing isn’t a full time activity for many but a way to scale up one’s own savings.

Fame as I said earlier brings it’s own set of requirements that go beyond what one may need to follow. As Spiderman learnt, With Great Power comes Great Responsibility. Large Investors have a greater responsibility to the public than what the law requires.

 Caesar’s wife must be above suspicion.

 

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