Dec 25, 2012

Singapore - Beware dangers of copycat investing

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It can certainly pay when a prominent individual attaches himself to a firm - just ask Geo Energy Resources and Etika International Holdings.

The shares of both firms went up in recent weeks - one in spectacular fashion - after it was announced that prominent businessmen were getting involved.

And it is not just because there is little else in the market to focus on amid the quiet holiday season.

Experts point out that investors have always followed the lead of these "market gurus", who they believe will help them pick good stocks.

Geo Energy's jolt came on December 3 when it announced that renowned "commodity king" Jim Rogers was joining it as a non-executive director.

Shares in the coal mining firm surged 27 per cent to 44.5 cents the day after and continued to climb, reaching a record 50 cents last Tuesday before slipping down to 49 cents last Friday.

Geo Energy stock is now 51 per cent above its October initial offer price of 32.5 cents, making it one of the top performers among market newcomers this year.

Etika found some of the same magic when it announced on December 6 that "Popiah King" Sam Goi, the successful founder of popiah skin firm Tee Yih Jia Food Manufacturing, planned to invest S$14.99 million by taking up new shares.

Shares of Etika, a producer of condensed milk, advanced 9.8 per cent to 28 cents the following day, although they have since slipped back to 25 cents.

NRA Capital executive chairman Kevin Scully noted that the market has always rewarded firms that manage to attract big names as directors or shareholders.

"There are a number of market gurus who investors follow in the belief they have done their due diligence and homework on the firm, so they believe that if they too can go in at a similar entry price as those prominent individuals, their risk is limited," he said.

Investors also tend to believe that such prominent businessmen can help boost a company's fortunes from within, said Sias Research chief executive Roger Tan.

"These gentlemen may be able to bring opportunities and connection to the company, which may enhance profitability and growth."

These prominent "gurus" include Koh Boon Hwee and Oei Hong Leong, whose moves are often very quickly copied by market participants, for better or worse, said DMG & Partners Research head Terence Wong.

"Such astute investors are deemed to be in the know and have insider knowledge, but this is not always the case."

Investors should still go back to basics when deciding whether to invest in a company, he said.

"If you have been wanting to invest in the stock, and these prominent individuals validate the company's story, that's fine.

"But if you would not have invested in it otherwise, it is probably best not to jump in just because someone prominent has done so. It may not be a good long-term bet."

After all, even successful investors can sometimes make bad calls.

The shares of education provider Informatics are languishing at 8.6 cents, compared with 18.5 cents when news of Oei's interest was revealed in June 2004.

Scully said that when deciding whether or not to copy a move made by a prominent investor, it would be wise to have an exit strategy.

"If something goes wrong, these big investors have direct access to the company's management, so they can exit as fast as they came in, but you won't know they exited until they announce it to the market," he said. "So ask yourself - how will you know when to exit? Will you be able to exit whenever they exit?"

Yasmine Yahya

Business & Investment Opportunities
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