Do not catch a falling knife

Investors need to be careful while bottom fishing in stocks that fall like a pack of cards

Whenever there is a crisis in certain stocks, investors generally start avoiding them, irrespective of the fundamentals surrounding the companies. There is wide skepticism in the market about those companies which are in the news for the wrong reasons. This explains why stocks such as Opto Circuit, Core Education, Onmobile, HDIL, Unitech, Arshiya International, Suzlon Energy, Lanco Infratech, IVRCL, HCC have kept on falling. And those who tried to average their investments or buy at the initial reaction or fall have suffered a huge loss. Today, most of them have become penny stocks.

This brings a very popular maxim to our attention which says 'Do not catch a falling knife". To explain it better, here is what Ramesh Damani, member-BSE said during our earlier interaction on the subject: "The maxim comes from the principle that a lot of people start buying just because the stock has fallen 10 per cent, 20 per cent or 50 per cent. This is fairly dangerous way to make a living. When we go back to the technology boom and see the so called K-10 stocks in that era, they fell from the peak they made by 50 per cent and then by another 50 per cent and then another 50 per cent. So, any time if you try to bargain hunt or catch the falling knife you essentially put blood on your hands. There is only one way to buy the stock, buy them when they are cheap and you do that by way of including variety of factors."

There is a belief that stocks that see a sharp fall, may not have seen its bottom. In large number of cases, the capitulation in share prices have taken place in a gradual manner after a initial reaction. Most of the investors have bought these stocks during the initial reaction in the hope of a recovery justifying the fundamentals of the companies. But none of them have recovered and today no one is talking about their fundamentals.

Importantly, the institutional investors and the informed investors have sold hugely and today most of these companies have dragged down the portfolio of retail investors.This may not be the end of the fall. Presently,companies like Financial Technologies and MCX are in news. Both have fallen significantly and there is still no clarity on the possible outcome. Best alternative for the retail investors would be to wait for clarity and let the share prices stablise before taking any further exposure in the stocks.

Company	CMP on 01/08/2013	Mcap	CMP on 01/01/2013	% change
Hind.Construct.	7.97	483.46	18.95	-57.9
Unitech	15.9	4159.92	34.9	-54.4
Lanco Inds.	5.21	55.27	14.4	-63.8
Financial Tech.	191.75	883.97	1138.1	-83.1
IVRCL	11.41	350.17	46.55	-75.4
CORE Education	22.1	253.04	315.35	-92.9
Suzlon Energy	6.96	1455.75	18.75	-62.8
Opto Circuits	22.1	535.53	108.05	-79.5
H D I L	31.05	1300.99	114.9	-72.9
OnMobile Global	21.65	247.31	48.8	-55.6
Multi Comm. Exc.	512.05	2611.46	1484.4	-65.5