Cheap doesn't mean good

On Monday, when Global Telesystems and its telecom tower arm, Global Telesystems Infrastructure, slumped 60 and 40 per cent, respectively, retail investors couldn’t find a way to exit. It was quite similar to the January 2009 fall in Satyam Computers, when the stock slumped 77 per cent in a single day.

With no way to exit, investors are now being advised to wait out the tough times. When things improve and there is a bounce back, they could exercise the exit option. Despite clarifications from the company, fears continue to persist among analysts.

When stocks go on a free fall, there aren’t many buyers for some time. There is an occasional pullback when traders enter the stock seeking a quick buck, but it takes some time before long-term investors enter.

The woes of the telecom sector, especially after the 2G scam hit the industry, are affecting the overall mood of the market. In case of GTL stocks, the proposed renegotiation of the Mauritius treaty further fuelled the fears. Sun TV faced the wrath of investors when the scrip slipped 30 per cent, following a tiff with cable TV operators in Chennai and questions raised against former telecom minister Dayanidhi Maran.

The sudden change in the fate of these stocks reasserts what financial planners usually advice: Stay away from direct stock investments, especially in the mid-cap segment. Importantly, retail investors should not invest in speculative or trading stocks, as they have the tendency to go up or down according to trader sentiment.

Typically called trading stocks, they are driven by betting and fundamentals have a very small role to play. As a result, these are highly risky and are meant only for traders, not retail investors.

It’s a completely different story if you are holding fundamentally stronger stocks. For instance, during the bribe-for-loan scam involving LIC Housing Finance, all major bank stocks fell quite a bit. But, investors were advised to hold on to the stocks.

Stocks fall due to psychological reasons or fundamental ones. Satyam had fallen on the back of corporate governance. The stock was under pressure clarity came on the company’s road ahead.

Once there is clarity, brokers/analysts readjust the valuation and come out with a new target price. If it is less than the current market price, the stock should be sold and vice versa.

Yes, stocks that have fallen sharply are available very cheap. There are people who will talk about valuations looking very attractive. But, the best way is to stay away till there is clarity.