It’s official now. Some of the matches in the Indian Premier League (IPL) are ‘fixed’. We still don’t know the extent of the malaise, but we intuitively realize that more names will tumble out of the league’s cupboard in the near future. For me, who writes on stock markets and watches cricket avidly, what is true about the IPL is also true about the Indian bourses. For instance, as investors, don’t we instinctively know that there are a lot of ‘bad eggs’ out there to buy and sell?
So, I decided to draw some parallels between the IPL and the working of the Indian stock exchanges. More importantly, I decided to put forward a few lessons that a retail investor can draw from what has happened to the cricket league. If you carefully follow the recent events about the players, who ‘fixed’ an over each, it can help you make a few more bucks, or cut your losses as investors. You can be a slightly better buyer or seller if you incorporate these learning in your stock strategies.
Lesson # 1: Watch out for conflicts of interest
Last year, when a TV sting found that several IPL players took money from the organized and illegal betting syndicate, the BCCI dismissed it as one of those ugly, but rare, occurrences. This time, when four players have been arrested, N. Srinivasan, the Board’s Chairman, put forth a similar argument. The involvement of a few players in betting, he said, does not prove that the entire IPL is ‘untenable’ or corrupt. Former players, cricket experts and commentators agreed with him.
Watch out for such comments when there are several conflicts of interest involved. How can Srinivasan, who heads BCCI and owns one of the IPL teams, Chennai Super Kings, criticize the league? How can others, who get paid huge sums during an IPL season, say bad things about it? In that sense, if the Finance Minister, leading experts and brokerages, ‘talk up’ the stock market, be wary of them. They cannot, and will not, tell you the whole truth or even a part of it.
Lesson # 2: Don’t get taken in by volatile performers
In the three cases of IPL players who were initially arrested for fixing an over each, there was a common thread. The first over that they bowled was a good one; they gave away 3-4 runs. It was the second over they bowled that was fixed, and in which they gave away 13-14 runs. Obviously, the bookies’ idea was that after the first ‘good’ over, most people would bet against more runs being scored in the second one and, hence, they could up the odds and win.
Similarly, if you find a company, whose financial performance is awry – it has a good quarter, suddenly a bad one, and consistently so – don’t touch the stock. It could imply that there is something wrong with the results; either the management of the company is truly bad, some unknown external factors are at play, or the finances are questionable. For all you know, the financial results might be ‘fixed’ to force you to buy at the end of a good quarter or sell after a bad one.
Lesson # 3: Sometimes, discount good performers
Clearly, when the three ‘arrested’ bowlers of Rajasthan Royals bowled a bad over each, the batsmen facing them at that time gained an advantage. The latter were able to score quick runs off wild deliveries and improve their performances. What is important to note here is that the batsmen themselves had little role to play in this scenario. Yes, they were competent but they benefitted from factors that they were not aware of, and the benefits could prove to be temporary.
The same rules apply to a stock that performs admirably for a particular period. You need to look at it more closely, or give it more time to prove itself as a ‘buy’. For all you know, its performance may be entirely due to external, but temporary, factors. Or it may have gained positively because of a negative some- where else, which could reverse any time. For example, a company may have done well because the prices of its raw materials crashed for a few quarters!
Lesson # 4: Don’t base your judgment only on the CEO
Consider the case of Rajasthan Royals. Its captain is Rahul Dravid, whose honesty and personal
integrity cannot be questioned at all. But all the four players arrested so far belong to his team; one of the arrested players has named two others, who played for Rajasthan Royals in the previous season. Therefore, the personality and character of the leader, or the captain in this case, is not enough to ensure the overall moral and value quotient of the team.
In the same vein, a good CEO heading a company does not imply that the entire management is honest, capable, efficient and clean. There could be many ‘bad eggs’ among the senior team members, or mid- dle-level executives. They could harm the interests of the company without the awareness of the CEO. So, it is in your interest to look at the entire management team. A good leader is an important, but not sufficient, ingredient for a good corporate recipe.
Lesson # 5: Don’t believe the ‘fixed’ auditors
Each time there were rumors that IPL matches were fixed, during the second season held in South Africa and during the fourth and fifth seasons, the BCCI had a standard response. The ICC Anti-Corruption Unit monitored all the games; the Board had its own internal Anti-Corruption unit for IPL. Most former and existing players said how their mobiles were collected during the bus ride to the stadium and they were not allowed to ‘talk’ to anyone during the match. All of this proved worthless.
Time and again, the same has proved to be correct in the corporate arena. Several times, internal auditors as well as external ones have goofed up. They have either deliberately or unwittingly cleared results that were manipulated. In India, we know what happened with Satyam; in America, much has been writ- ten about Enron’s financial irregularities. Thus, as an investor, try to read as much as possible about a company or a stock from as many varied sources as possible.
Lesson # 6: Stay away from certain mid- cap stocks
Most of the players involved in fixing are neither too young nor too old. They have played for several years, and can easily be categorized as mid-cap players. How- ever, there are some unique traits about them. Many know that they may never play for the country; they inherently realize that they may have reached the zenith of their cricketing careers. Hence, they feel this is the ‘right’ time to maximize their financial gains and make money, both legitimately and illegally.
There are several mid-cap stocks, whose future is certain. They are most likely to remain stuck in the same category; they will neither become a large-cap nor get downgraded to small-cap. In such cases, the managements may decide to maximize their personal gains and resort to financial impropriety. They may talk up the stock to sell their holdings and cleave you holding the baby.