A gap no exit could stop: Satyam, 2009
Satyam Computer Services was one of India's best-known IT companies, a large-cap share held by funds and many individual investors. On 7 January 2009 its founder and chairman sent a letter to the board and the stock exchanges admitting that the company's accounts had been falsified for years. Among other things, about ₹5,040 crore of cash and bank balances shown on the books did not exist.
The share fell nearly 78% that day, to about ₹40, and the Sensex fell 7.3%. In the following days it traded as low as about ₹6.30. For holders, there was no orderly exit: the price simply jumped from one level to a far lower one.
What Satyam teaches about size
| Position before 7 Jan 2009 | Exit planned 10% below | Approximate loss that day |
|---|---|---|
| ₹1,00,000 (20% of a ₹5 lakh account) | ₹10,000 planned | About ₹78,000 (15.6% of the account) |
| ₹50,000 (10%) | ₹5,000 planned | About ₹39,000 (7.8%) |
| ₹25,000 (5%) | ₹2,500 planned | About ₹19,500 (3.9%) |
- Fraud is rare but real. Even large, widely held companies can hide serious problems.
- Stop-losses cannot sell at prices that never trade. The share opened and stayed far below any exit.
- Concentration decided the damage. The same 78% fall cost 3.9% or 15.6% of the account, depending only on position size.
Chapter 5: Gaps and slippage
Your planned risk assumes the exit fills near its price. Overnight news, fraud and thin trading can make it fill far worse. Only position size protects you against that.
- Estimate slippage
- Size positions for gap risk
- Reduce risk before known events
This article is adapted from the book. Examples marked “Example” use invented names and numbers; company stories are based on public sources listed in the book. Education only: not investment, tax or legal advice.
