A few days ago, I wondered aloud about why Porinju Veliyath, who has publicly professed his love for a “concentrated portfolio”, has been buying so many random small-cap and micro-cap stocks. Each purchase is in a bulk deal which gets reported to the stock exchange. The disclosure attracts a great deal of attention from Porinju’s vast army of followers and fans on twitter and elsewhere. Several of them throng the counter to buy the stock. The stocks are generally illiquid or have low floating stock and it is usual for them to stay in the upper circuit for several days till the excitement cools down.
The interesting part is that what while Porinju’s purchases of the stocks are known, it is not known whether he holds onto the stock or dumps them soon after the purchase to take advantage of the increased prices.
Of course, Porinju is under no obligation to disclose any fact relating to his transactions. He does not publicly recommend these stocks and is not making any warranty that he will hold the stocks for any period of time. He is perfectly justified in buying the stock on day one (in a bulk deal) and selling it on day two or thereafter (in a normal deal) and pocketing the profits.
Palred Technologies is a case in point. This unknown micro-cap shot into the limelight when the Bulk deal data showed that Porinju had bought 2,00,000 shares on 27.05.2015 at Rs. 23.55 per share.
The purchase created great excitement because Palred Technologies, an e-com retailer of electronic products, was suddenly supposed to become “the next Amazon.com”. The stock price soared to a high of Rs. 144 on 21.10.2015.
At the peak, Porinju was staring at incredible gains of 526% in just five months of investment, which works out to eye-popping annualized gains of 1300%.
Thereafter, the excitement began to peter out. Also, the Company’s top management, Palem Srikanth Reddy (CMD) and Ameen Khwaja (CEO) were accused by SEBI of having indulged in alleged acts of insider trading and pocketing illegal gains.
The result is that the stock price has plunged and is presently resting at Rs. 57.
Porinju got into a bit of a skirmish with some of his followers/ fans on twitter. They wanted to know why he bought an alleged tainted stock like Palred Technologies. In the process of that discussion, Porinju revealed that he had bought the stock at prices ranging from Rs. 15 to Rs. 25 and that he had dumped the stock when it had surged to about Rs. 100.
The information about Porinju’s transactions in Palred was revealed in fortuitous circumstances because Porinju has otherwise made it clear that he generally does not disclose his trades:
@Trivendraa I disclose my sale of shares only to Income Tax Dept. – except Force Motors & Shreyas being disclosed on biz channels 🙂
— Porinju Veliyath (@porinju) February 17, 2016
Anyway, the important lesson from the episode is that the fact that a well-known investor has bought a stock should never be a reason for other investors to blindly copy his move and buy the stock. We never know when the investor might dump the stock. In fact, Porinju had himself administered this warning in a TV show. He pointed out that there is an “unhealthy trend” in the markets of casual investors paying attention to “who buys what“. He cautioned investors (@ 8.50) not to blindly clone the investments of celebrity investors but to invest only if they are personally convinced about the fundamentals and valuations of the stock.