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Right to Believe in Rumours

You are far more likely to lose money by believing an optimistic rumour

Here's some news that you may not have heard. The other day, the promoter of a major business group accused a cabal of stockbrokers of boosting his group company's stock prices without any rational basis. He said that there was a bull-cartel at work which was circulating completely fabricated and baseless rumours by emails and text messages and that these rumours were far more optimistic than how things stood in reality. They painted a picture of his group's businesses that was so rosy that he himself had a hard time believing that they were actually talking about his businesses.

He further added that he was worried that investors would buy into his stocks with unrealistic expectations and then would be disappointed even if the companies turned up a reasonably good performance. His view was that Sebi should trace and crackdown the perpetrators of these rumours. The reason you haven't heard the above news is that it didn't actually happen and nor is such a thing ever likely to happen. Markets move up and they move down in response to news as well as expectations of news.

What may sound like a rumour to someone's ears could well be a reasonable conjecture based on real information and events. If I think something has a reasonable likelihood of happening, then surely I'm justified in trading based on that expectation. And, if my conjecture was wrong, then I (and those who have taken my advice) will lose money. That's the way markets work.

Frequently, promoters think or say that the market price of their stock is unjustifiably low. That's hardly news. As an investor, you are far more likely to lose money by believing an optimistic rumour than a pessimistic rumour. Despite whatever you may hear, it's extremely hard to sustain a false, rumour-led price level for companies which have a large shareholder base and high trading volumes.

Large companies are generally worth something in the range of what the market thinks they are worth. And if investors think that it's better to believe rumours rather than disbelieve them, then they have the right to do that.

This column first appeared in The Economic Times on February 14, 2011