Does Muhurat Calls work?

Diwali in stock market is celebrated with Muhurat Trading – Special trading session that follows Lakshmi Pooja.

This is an interesting trading day when majority of trade is executed by retail investors. FII’s and institutions who usually dictate the market are on holiday.

And Stock broking houses have formed the habit of announcing their Diwali Picks / Muhurat calls. While many investors are aware of these calls – by media coverage and oflate whatsapp messages, very few investors invest in these stocks. And worst they forget these stocks the very next day. Hence the actual performance of these stock recommendations, which have been the outcome of some research haven’t been validated.

And this has been repeating year after year. And current year would be no exception.

Atleast for academic interest sake, we compiled the stocks of some of the broking houses to check the following:

• Was was the expected profits
• What was the actual profits
• What was the peak profit in these stocks in the last one year.

Usually Investors prefer to invest in stocks:

• Which are priced reasonable / affordable : Now let’s not confuse this with valuations. Investors ‘believe’ that if the price is low (say below Rs.200), then the price is reasonable. Psychologically you get satisfied if you get more shares for the same quantum of money. Say you invested Rs.100000 (1 Lakh), a share priced say Rs.50 would get you 2000 shares. On the other hand, a share priced Rs.1000 would get you only 100 shares. If both the stocks rise 20%, Rs.50 share would become Rs.60 while Rs.1000 share would become Rs.1200. But investors ‘feel’ the chance of Rs.50 going up is more than the other one. Hence Investors prefer to buy low prices stocks.
• These stocks are often recommended with an indicative target price. Investors tend to buy stocks which quote higher target price. The sad truth is that many of them are not equipped to analyse the possibility of the target being achieved. They blindly go by higher target price.
• While the companies recommend a set of stocks – investors often invest in one or two of these ideas. As a result, investors rather than spreading risk – tend to concentrate their risk on one or few stocks.

We sorted the 2016 Muhurat picks based on : stock price – target price – current target price and peak target price. Following were the obsevations:

• At current holding price, 50% of the stocks recommended last diwali have delivered returns above the sensex returns (13%).
• The logic of low price stocks giving maximum returns does not hold good. Any stocks with strong fundamental growth (irrespective) of price has delivered good returns.
• The worst has been the target price estimate. It looks like these companies have been playing a guessing game in arriving at a target price. There seems to be little correlation with the estimated profits and actual profits. Hence investing based on perceived upside potential does not work.
• The best part is that 100% of the stocks had delivered positive returns – atleast once during the last one year.
• Though these data looks impressive, these are all post-mortem reports. While investing even if the investor had invested in all stocks given by a company – sometimes luck may not be in his favour and might end up in below average returns. Hence we explored the opton of investing in all these stocks in equal value, then the chance of generating positive returns – above the sensex returns – is 100%

The learning from 2016 Diwali Muhurat Calls – for current years Diwali 2017 are:

• Don’t invest blindly if the price is low
• Don’t invest blindly if the target price / percentage is high.
• Don’t invest in one or two stock picks given by a company. Better invest equal amount in all the stocks given by this company. You stand a better chance of making returns.
• If you want to be even more fool proof, then invest in all stock recommendations (looks crazy though) and seal it as a portfolio – coffee can portfolio. Keep track of this portfolio – isolated from you other holdings.
• If you are really smart, keep track of these stocks during the next one year and book profits when the profit is maximum. Though this looks impossible, for those who can keep tight watch on their portfolio.
• And the smartest, high conviction investor would buy more of these stocks when the price falls during the next one year - outperforming even those fund managers / stock brokers who recommended them!