The economics of a tip

Most trading in the Indian equity markets still happen on tips, news and advice from brokers. The stock market absolutely craves tip-o-logy as it ensures that the greater fool theory works fine. For a value investor, these tips are suicide ... unresearched and risk-heavy. As Wareen Buffett once said, "Even an insider's tip can be wrong".

Interestingly, the only person who is absolutely sure to gain from a tip is the "tip giver". Take a look at this -

Day 1
You wake up and go through your rather extensive phone book. There are exactly 1000 mobile numbers. Not worrying about the day's valuations or what Udayan Mukherjee has to say on CNBC TV18 or the latest scoop in moneycontrol.com ... you start by neatly dividing the stock of mobile numbers in two equal parts. Then you start the rather laborious exercise of sending a message to the first 500 people - "Reliance Industries will go up today" and to the other 500 people - "Reliance Industries will go down today". Your cost = 1000 rupees (Re.1 being the charge of an SMS)

Day 2
Another wonderful morning. You pick up the morning paper to find the Reliance stock to have shot up. You look to the skies, say a small pray for the people who got your prediction wrong and get about your work for the day. You divide the remaining stock of 500 people who got the right 'advice' into two parts. To one part (250) you sms - "Infosys is definitely up today" and to the remaining 250 - "Infosys is surely down today". Your cost = 500 rupees (total cost = 1500)

Day 3
Infosys seems to have gone down today.. these cut in spends in the US are creating some havoc, you say and get down to business. 250 correct tips (for two days) get cut in 125 and 125. To one half, Wipro to go up and to the other, Wipro to go down. Cost for the day = 250 rupees

Day 4125 is broken into 62/62. Now HLL is at stake, and you have me (the famous stock analyst) to give you your daily sms stock tip. Cost = 125; total cost = 1875

Day 5
By now these 62 people who got all 4 tips correct would be really going nuts. Some might have also invested using my tips while some others would be really scouting for some money because they now have this amazing stock analyst who gives correct predictions after another. For them equity market investing was never so much fun and easy.

Only this time it's pay-back time. In return of these wonderful tips, I ask for a paltry sum of rupees 10 for the next tip. Let assume the 62 of them pay up 10 rupees. Thats a cost of 62 for me (for the sms) but an earning of 620 rupees. Total loss is now down to 1,317 rupees. Again we do the 31/31 split.

Day 631 is split as 16/16 (rounding off numbers here for illustration purposes). This time I charge a premium of 20 rupees because its 5 correct tips in a row.

Day 7, day 8, day 9 and day 10
16 = 8/8; 8= 4/4; 4=2/2; 2=1/1
Premiums also increase to 30, 40, 50 and 60 rupees. I am currently sitting on a cumulative profit of 362 rupees.

Day 11
Last day at work. I pick up my phone for a rather lackluster day, flip a coin and sms the one lonely fellow my tip of the day (boy, this guys must have gone real crazy by now). He must be eyeing an expensive lunch table with Warren Buffett. Not even, Buffett might have got 11 bets right in 11 straight days .. afterall, he is a lame value investor.

At the end of 11 days of work the tip giver has a net PROFIT of 431 rupees.

Scenarios -
a) Had I started the share-tip collection in the fourth iteration itself, I would have made profit of 2921.
b) And if I had charged a premium of 10 rupees throughout from the fourth iteration - i would have gained 491 rupees.

The king of torts may ask - "Is it legal?". Well what makes any aspect of this illegal? The people receiving the tip have a choice to act or not act on it. Consideration is being taken for a service rendered - i.e. pain-staking research of Indian equities.

Excellent money making machine, eh? (Q.E.D.)

If you like this content, then do check out my new blog on investing and stock markets for lots more information on the Indian equity markets

(Story available on my previous blog. Just went down memory lane !)