It Happens Only In Markets!!!

Imagine I buy something from you, then can we both lose in the trade??
I think No because this is a Zero Sum Game... Either you gain or I gain or we both stay same (if Price = Value).

But that's not what happens in Stock Markets!!!

Torrent Pharma decides to buy Indian Branded Formulations Business of Elder Pharma for 2000 crs.
And what Mr. Market does?
It punishes both. Torrent down 4%, Elder down 8%. At one point, both were more than 10% down.
How can both lose in the trade???

Actually both can lose if we involve Tax angle. Elder would receive only 1300 crs (assuming 35% tax). So if intrinsic value of the business is between 1300 & 2000 crs, both will lose. 700 crs goes to tax dept.

However, Torrent Pharma lost more than 900 crs at one point (when down 10%) & Elder lost 70crs. So clearly there is more to it than just the Tax Angle.

Lets think from Torrent's shareholders' perspective. If I am a shareholder, I will think-

1. Oh No!! They are buying other business, means they are not confident of growth from their own business segments. Let me sell.
2. M&As are generally value- destructive. May be this is also the same. Let me get out. 
3. Oh No!! Who will pay for these 2000 crs? This will distort the balance sheet & the company will have to pay the interests also. This will hurt the near term PAT also. Let me sell.

And none of the concerns is illogical.

Lets think from Elder's shareholders' perspective. If I am a shareholder, I will think-

1. Oh No!! I was bullish on that segment only. What's the point of keeping this stock now without that segment?
2. Will I get anything from this sale? The press release hasn't even talked about dividend. So, I guess, nothing is come my way. Lets not keep this.

And none of these concerns is illogical either.

So it makes perfect sense for both to fall after this trade announcement. It happens only in the Markets!!

Behind every trade there is a Buyer and a Seller, and, I think, both can be right due to difference in time frame, access to information, analysis of the information and/or circle of competence.

And this is precisely the reason why equity markets are so volatile and so interesting. In case of perfect information & perfect analysis, stock returns would have just followed earnings growth just like Fixed Deposits.

And because of these shortfalls, it isn't possible to master equity markets (with zero errors) even with decades of experience!!!

Disclosure- Neither invested in Torrent/ Elder nor planning to invest.