RCOM - A Case Of Inveterate Masochism - 7/12/2016Reliance Communication's stock is a good example of how investors clings to a failed investment despite having all evidence against its success. At some point it looks like people with indelible hope for RCOM's rise to their investment's breakeven point is suffering from masochism ;) There are so many people asking for investment in RCOM ( with usual argument that it is so cheap ! ) so we thought let's clear some confusion here.
For uninitiated here are few things you need to know,
1.) Telecommunication requires huge infrastructure investment.
2.) Current pace of innovation in telecom sector requires continuous improvement in existing infrastructure and at some point companie's existing network becomes obsolete. e.g. you need to invest for GSM, CDMA, 2G, 3G, 4G etc.. So if something can't pay you off in next 5 years then there are chances that the money is gone and the company is soon going to need more for network upgrade.
3.) Unless the company operates in cozy regulatory environment, it is difficult to make good returns on investment. For example, if reliance gets cheap spectrum from government with huge subsidies and other customer ripping benefits then it may survive longer. In fact that's what investors thought initially and looks like Mr Billionaire himself was delusional of extracting good deals. But gamble didn't work out.
4.) Just having deep pocket isn't any guarantee of success. ( Ask Mr. Son about how his Sprint deal is going in USA ;) )
5.) Investors got distracted ( Well, most even didn't do any homework so can't say distracted ) by siren song of one of the appealing brand name of the country and paid preposterous premium. But well, caveat emptor !
No we don't want to rub salt into the RCOM investors wound. We just want to make them aware that the best strategy would be to get out of the thing which is not working and take whatever money it offers during good market climate where speculators may propel it higher ! Why not invest the money where things are rosy and something works when general market goes higher.
For traders also, it is advisable not to get sucked into the sinkhole ! People are often lured by low price label on big names but we should be aware that it is cheap or trading at this level for a reason. Far richer investors and people with grater insight / insider info than us are avoiding this for a reason. So in buying the stock whenever it shows the pulse on a chart, your money is being sucked into the drainage hole.
