"Buy Y shares. Why? Broker No. X holds huge number of Y Share" -Understanding the Logic Behind this Statement

Have you ever been advised to invest in certain share citing the massive accumulation by broker company? If so, this article is just what you need to read.

Two types of accumulation analysis

When evaluating stocks in Nepal’s market, two different types of accumulation analysis are often used to guide buy, sell, or hold decisions:

1. Accumulation/Distribution Indicator Analysis: The first one is study of accumulation based on price change and volume. This globally recognized method is also a part of technical analysis of stock.
2. Broker-wise Accumulation Analysis: This method examines the share holding pattern of specific broker in specific stock and understanding the properties of this method is the focus of this article.

The Context of Broker-wise Data in Nepal

When I started trading five years ago, people were able to view the broker details in live floorsheet of Nepse but in April, 2022, the SEBON considered the suggestions given by some of its stakeholders and issued a letter to Nepse instructing it to publish the broker details in the floorsheet only after the market hours. I did a little research about which other countries allow this information to be available in public domain and to my surprise could not find one. Many global stock exchanges prevent this data to appear in public domain due to reasons like privacy breach or unfair market practices. Some stock exchanges like that of South Korea (KRX) shows similar daily trading data based on type of investors such as Individual, Banks, Insurance, Foreigners, Financial Investment Co., Government Funds, etc.

Now that we know how useful this broker-wise info is for capital markets around the globe (sarcasm), let us move to our main topic. I, myself have made some wrong trades based on the observation that the average holding quantity of company by Broker X for last few months is very high and current market price is low in comparison with average buy price of Broker X for such huge quantity. So, I did lots of research regarding what went wrong in my trades and whether this broker-wise info should even be looked at while making your decisions in the market.

Findings from My Research

1. This Broker-wise info helps track the share which has upward/downward potential.

If you receive call from your broker or anyone in your investing circles regarding potential of company X in certain duration, and persuades you to invest in that particular stock. In that case, it may be wise to take a look at the accumulation in the broker-wise list and also consider other factors (mainly, reason/s for such potential) before taking the investment decisions. While verifying the top buyer section, one should also keep in mind the top selling broker.

You should understand that it is very hard to track the company of potential by looking at the stock accumulation by broker, but in contrast, to this it is very easy to track the doubtful company by looking at the stock decumulation by broker. If you verify the broker-wise info of sell in one of the listed companies whose lock-in period was released in last August, you will find that a major promoter has exited the company within a week after the release of lock-in period. It’s usually better not to invest in those companies where even the promoter has lost their confidence. 

 2. Can you enjoy rollercoaster ride?

If you are asked to make buy/sell/hold decision based on following table:

The above table is extracted from a popular investment app in Nepal and it resembles the factual and real holding of one broker company in one particular share for the aforesaid period. It can be easily established that total accumulations have started only from last 6 months as there is no much difference between the buying and selling of past 6 months and 12 months figures. These figures surely provide the following assurance:

1. The share price will not drop as the holding broker (XYZ Co.) will bear huge loss if it allows the price to fall below Rs 549. It has the investment worth Rs 172 crores in this share as on date.

2. The share price will definitely go above Rs 549 and it’s the best decision to buy this share from the market for price below Rs 549. The XYZ Co. will make some earnings only if the price rises above Rs 549.

With these two assurances, it looks very lucrative to enter in this trade. But what you need to understand is that the XYZ Co. is enjoying the roller-coaster ride. Anyone in a roller-coaster ride enjoys while moving up as well as enjoys while going down. Let me break this down for you:

We can’t deny that the XYZ Co. holds significant number of shares of this company. Suppose, its current market price is Rs 550, XYZ Co. starts supplying share at 545,540,535….500. Once the supply rises in volume, people will start offloading their shares as well due to panic. If XYZ Co. sells 2 lacs unit of share (average price of sell is Rs 520) and again buys 2 lacs unit @ Rs 500. The XYZ Co. will make a profit of Rs 40 lacs in very short span due to fall in price and achieved it even without changing the number of its holding shares. Likewise, the profit can also be achieved in similar manner but from price increment by creating artificial demand scenario. This is also one of the reasons why share price in some of those companies becomes dull where the massive holding is accumulated by individual broker.

The only reason this mechanism works is due to small size of Nepal’s capital market as it gets easily operated by single or group of small entities. Now, that you know how the rollercoaster ride is created, it is also very important to understand that you can enjoy the rollercoaster ride only if you can ride it too. Don’t try to put yourself in that situation where you have purchased the ticket but can’t get on the roller-coaster.   

      3. The Psychology of Seeing is Believing

One reason broker-wise data is so persuasive is simple human psychology. We tend to trust what we see. Let me give you an example: Even if you have never visited Italy, you know that the Leaning Tower of Pisa exists in Italy, it’s beautiful and has value. It happens because you have seen the tower on the internet or in books and even have seen people picturing themselves with the tower. If you were not able to see it and just had to imagine and believe it to exist, you would not care much for it. So, if some stranger in social media claims to have bought n numbers of shares of Company X, you will probably ignore it because you don’t trust their words but since s/he can prove this claim through floorsheet, you get trapped into Fear of Missing Out (FOMO).

Final Thoughts

As an investor, we should care very less about the accumulation of brokers but instead what we investors actually want to know is what the major businesspersons, business houses, institutional investors are buying. In Nepal, the only source of information of these kinds of data is through monthly investment reports of Mutual Funds and annual reports of other financial institutions. But trust me, you will not be able to 3x or 4x your return in very short time based on the investments made after analyzing those published reports. Having been served as the member of Investment Advisory Committee in one of the leading financial institutions of Nepal, I can share my firsthand experience that it’s really hard and almost impossible to justify to the board regarding logic behind making an investment in the company who have negative net worth and negative EPS. So, it’s difficult to find those types of companies in the list of investments made by the financial institutions of Nepal.

So next time when someone tells you to look at the broker accumulation of the particular stock, you now know exactly how to respond. You need to be careful and cannot blindly make trades or investment based on the broker accumulations. Even if you have incurred losses after being influenced from broker-wise info, there’s nothing to be worried about. Its alright to make mistakes but we need to learn from those mistakes to improve your future trades.

“Warren Buffett is fond of saying that any player unaware of the fool in the market probably is the fool in the market and the fool, was a person who was willing to sell a stock for less or buy a stock for more than it was worth.” Take some time off to remember all the trades that you have ever made. On that very moment when you placed the purchase order you were very positive that the share price will go up. But did it go up? If it did and you made the settlement, congratulations but even if not, it’s perfectly alright. Being a fool and finding a fool are ongoing processes and in trading world, even the traders who have the hit rate of less than 30% are considered highly successful traders. It means even if 7 out of 10 different bets made you loss, you will still have the opportunity to make a fortune for yourself if you can perfect your timings – (Timing to hold the profit-making stocks as well as Timing to offload the loss-making stocks).

Article By: CA Binesh Rauniyar