Equity market is on a bull run; be wary of wannabe advisors

The Indian equity market is on fire, touching an all-time high recently.

Earlier in the week, the benchmark Nifty surpassed a new landmark of 22,000 while Sensex crossed the 73,000-mark for the first time on January 15. Both also hit new highs in the previous session though they ended in the red. Nifty50 touched a fresh record high of 22,124.15 on January 16 while Sensex hit an all-time high of 73,427.59.

Be cautious

In an earlier piece, we analysed how one must use thebull run. We discussed the importance of rebalancing one’s portfolio based on asset allocation and the need to get rid of dud stocks from the portfolio.

When the market heats up, even recent entrants see a profitable position of their holdings; they are tempted to commit more investment, throwing away the safety nets. People forget their asset allocation.

Everyone has an asset allocation plan, except at the top of a bull market and at the bottom of a bear market. That is the time when the asset allocation plans are discarded and wrong decisions are taken.

Mushrooming ‘experts’

In this melee, various stock recommendations are made through print, electronic and social media. Many ‘experts’ have cropped up. All sorts of recommendations are being made.

In the kingdom of Krishnadevaraya, Tenali Raman was his advisor. When the king asked what is the major occupation in the country, Tenali Raman replied that most people are doctors. When the king did not believe it, Tenali Raman enacted a drama to prove his point.

He told a group of people that the King is having stomach pain. Immediately, each one of them suggested a medicine.

Hidden agenda?

In the same way, self-acclaimed pundits have cropped up to suggest stock recommendations. Every day we come across a plethora of recommendations.

Many ‘experts’ are capable of articulating their points well. Some repeatedly recommend the same stocks again and again; viewers may be carried away by their persuasiveness. These so-called experts also entertain ‘question and answer’ sessions to clear doubts of investors.

Nobody knows whether these people have any hidden agenda to prop up a share price or put down a share price. Their position in the stock recommended is also not revealed.

Three categories

As everyone knows, any stock price may be perceived within three categories: underpriced, correctly-priced and overpriced. Based on these perceptions, there can be only three types of recommendations. They are (1) buy the underpriced, (2) continue to hold the correctly priced (if already holding), and (3) sell the overpriced.

But one can see that many experts will recommend not to buy a stock, terming it overpriced, but at the same time will advise that you continue to hold the same. God only knows what is the logic of holding a stock which is considered over-priced as if it cannot be bought again at a later date at a reasonable price.

Regulatory role

As the Securities and Exchange Board of India (SEBI) may initiate action against these ‘experts’ for the recommendations, they have started using the phrase “consider buying” instead of straightaway recommending a buy.

The regulator SEBI on its part tries to regulate the role of investment advisors (IAs) with a detailed system of registration. It regulates the registration of IAs under the SEBI (Investment Advisers) Regulations, 2013. The regulations define an investment advisor as someone who advises about investing in securities or provides research analysis.

SEBI qualifications

The SEBI has already prescribed eligibility criteria and qualification for registered IAs. The qualification prescribed are minimum age of 21 years, minimum five years of relevant experience, with no prior convictions for any economic offence or violation of securities laws, a net worth of at least Rs.1 lakh for individuals and Rs.25 lakhs for non-individuals, and should not be a stockbroker or sub-broker, depository participant or associated with one.

The individual should be at least graduate in finance, economics or business administration or have a professional qualification such as a CA, CFA or MBA. They must also pass a certification examination conducted by the National Institute of Securities Markets or any other SEBI-recognized organisation.

The SEBI has undertaken a crackdown on finfluencers (financial influencers) providing illegal investment advice through social media. It has placed curbs on intermediaries such as brokers and mutual funds from using the services of unregistered finfluencers to promote their products.

What to do?

As already explained, investors must maintain their asset allocation plan which has been structured based on risk profile and return expectation. They must not take the recommendations of unauthorized persons seriously.

There is nothing wrong in listening to different views. But ultimately investment decisions should be an informed one.

Expectation from SEBI

The SEBI must also crack down on persons offering recommendations by whatever name they call. As surrogate advertising is not allowed for some products, surrogate recommendations by other than authorized persons should be banned. The regulator must ensure that there should be a proper disclaimer clause and every communication must be backed by relevant information -- whether the person is SEBI registered or not.

Hefty penal action should be initiated against persons defying the regulatory guidelines.