Friday, December 28, 2012

Why retail investors seldom succeed in stocks? - The 5 Minute ...

In this issue:
??Will Japan be witness to a historic event?
??And now, a bailout for Indian banks
??Planning commission gets cold feet on India's GDP projections
??US economy will soon enter recession, feel most Americans
??...and more!

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First, the good news. Sensex, the Indian benchmark has risen around 25% this year. This makes it one of the most attractive emerging market indices. Are Indian investors then queuing up to buy stocks? Well, far from it. As reported by leading daily, domestic institutions have sold Indian equities worth a record Rs 550 bn in the year so far. And in most of the cases, the selling has been a rather forced one with investors going for redemptions. Thus, even as foreign institutional investors (FIIs) have pumped in record money, domestic investors chose to pull the exit button.

Sad as it may seem, this is not the first of its kind event. Infact, retail investors in India are now notorious for their bad timing. As highlighted by one of India's leading fund managers, Indian investors have almost always wrongly timed their investments into stocks. He further points out that nearly 80-90% money over a cycle comes in when valuations are high. Not just that. Inflows are also hardly seen when P/Es are low and when markets begin to recover.

We would be wrong to blame Indian investors alone for their flawed appraisal of the market. Investors the world over suffer from this tendency. But why would investors commit this same mistake over and over again. The best answer perhaps lies in the realm of psychology.

You see, human brains have been evolved not to embrace danger and uncertainty but run away from it. These skills, while very useful in the hunter gatherer age, have proved to be our undoing in the financial world. For in the financial world, the best opportunities always come when there is fear and uncertainty all around. Not when there is euphoria all around and when the indices are scaling new highs.

Also, we are not very good at calculating compounded growth rates over a long term horizon. We can easily divide or multiply few numbers but to appreciate the enormity of sustained compounded growth is beyond us. Thus, this, coupled with our inability to defer gratification leads us to look at short term gains rather than long term benefits.

These tendencies are so ingrained that most of us find it difficult to break this pattern. Consequently, as the fund manager pointed out, we end up investing at precisely the wrong time. Little wonder then when it comes to investing, research skills do matter. But what matters equally, if not more, is the ability to think long term and also the ability to keep a calm head when there is fear and uncertainty all around.

Do you think it's possible for retail investors to make long term money in stocks? Do share your comments with us or post your views on our Facebook page / Google+ page

01:26 ?Chart of the day
What do you think of a firm that grows sales after taking on debt? Well, as long as the debt remains within permissible limits, we should be fine with it, right? But if debt increases at a faster rate than sales, then alarm bells should certainly start ringing. In the same vein, if a country's GDP is growing but needs more and more money to make the growth happen, it is not a healthy sign. As today's chart of the day points out, while India's nominal GDP has grown at a fast clip over the past couple of decades, the money supply in the economy has grown even faster and this is something we should watch out for. Although the situation is not as alarming as in say US, we need to take steps to ensure that our productivity does not suffer. In other words, we should continue to increase our GDP at either the same rate of growth in money supply or higher. Otherwise, there will be inflation to deal with.
In order to achieve its macroeconomic goals, the state has two tools at its disposal. One is monetary policy. And the other one is fiscal policy. While monetary policy is used to control inflation and interest rates in the economy, the fiscal policy is used to increase the aggregate output of the economy. Currently, major central banks across the globe function as independent state entities. For instance, the Reserve Bank of India (RBI) operates independent of the Finance Ministry. Finance Minister P Chidambaram has been pressing for the need to ease interest rates to boost the economy. Of course, the burgeoning fiscal deficit is on his mind. But the RBI has refused to relent as inflation continues to remain high. Had the central bank given in to the government's pressures, it would have to sacrifice the returns on the savings of the people. As such, we believe the central bank's independence is important. Otherwise, the government would be tempted to manipulate the monetary tools to its own end.

But a worrying trend is emerging across some economies. For instance, the Bank of Japan is increasingly becoming a vehicle of the Japanese government. The Japanese government appears to be taking away the independence from the central bank to force the direct monetisation of its deficit spending. In other words, the government's fiscal deficit would be paid for by printing money by the Bank of Japan. It has been happening in the US too. The result of all this is that fiscal discipline goes down the drain. Eventually, this would result in high inflation and diminishing purchasing power of consumers.

US$ 1.7 bn bailout. No this is not yet another life support sought by an American bank. Nor is it by a bank or economy in Europe. In fact, the financial sector in India itself may witness a bailout of this sort if things turn for the worst! At least that is the estimate of India Ratings, a subsidiary of Fitch Ratings, quoted by Firstpost. A stress test of Indian banks seems to have opened up a can of worms. The test takes into account economic downturn, exposure to infrastructure sector and concentration to single corporate houses.

And it seems, Indian banks, particularly the PSU banks, could fail miserably if they were to overcome each of the stress. These NPA risks in Indian banking sector is not unknown. Reports have already claimed that the restructured assets sitting on the books of several large PSU banks are ticking time bombs. But the government too is trying to keep the entities afloat by recapitalizing them. What that means is that the depositors of these banks will not be at risk even if the loans eventually become non-recoverable. But as far as shareholder profits are concerned, that will be elusive.

What will India's growth forecast be for the 12th Five Year Plan? The Planning Commission appears to have already revised its estimates once before and now wants to pitch in for 8%. It must be noted that the initial estimate was pegged at 9% before the Commission revised it to 8.2%. And now Planning Commission Deputy Chairman Montek Singh Ahluwalia believes that 8% is more likely. So why the change in estimates? This is to reflect the changes in the global economic environment notably the ongoing recessionary trends in the US and Europe and persistent sluggishness in the domestic market.

Further, for FY13, which would be the first year of the 12th Plan, the growth rate has been estimated at 5.7-5.9%. This is the lowest in the last decade. An uncertain global environment aside, the need of the hour is to bolster growth in the domestic market. The government already has announced a slew of reforms. But has to now get going and focus on actually implementing them if growth has to pick up in the later years of the Five Year Plan.

What does 2013 have in store for you? Well, according to most Americans the US economy is expected to slide into a recession next year. This is whether or not policy makers are able to steer clear of the fiscal cliff. The US political system continues to remain at odds over fiscal reforms. If an agreement isn't reached soon, next year could usher in a series of tax hikes and spend cuts. This is a deadly combination which could very well tip the country into another slowdown.

Seeing the deadlock in the parliament most businesses and households have put their spending plans on hold which could contract the economy. While a decision may not be reached by Jan 1st - economists believe that the government will scramble through and come to a conclusion on how to avoid major tax hikes and address spending cuts.

Meanwhile, after spending the first half of the day in the green, Indian equity markets indices moved lower towards the dotted line and were trading flat at the time of writing. IT stocks were seen exerting the maximum pressure. While most Asian stock markets closed in the positive today, Europe too has opened on a positive note.
04:52 ?Today's Investing Mantra
"There are always going to be times when humans act irrational and this is time to make your money. I've made a career of cashing in when people act irrational" - Warren Buffett
  • Warren Buffett - The Value Investor
  • ?
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    7 Responses to "Why retail investors seldom succeed in stocks?"
    m s varadhan
    Dec 28, 2012
    This blanket comment implying that retail investor lack sufficient market knowledge is unacceptable.There may be a few such. not all.Some have long term objective . some have short term objective.Depending on that , they may make investments.They may consider compound rate also , while fixing such objectives.Share market,success or failure depends on various factors. Like?
    sunilkumar tejwani
    Dec 27, 2012
    may be it is the thing of the past. The Indian retail investor is playing safe and selling at every higher levels. It is the greedy FII factor which is going gung ho and buying at every price level. I hope this time around it will be better to be safe rather than be sorry. Even if the share prices go to crazy levels the Indian retail investor will still be booking profits rather than getting carried away. Like?
    Dec 27, 2012
    I do not agree with your view that retail investors seldom succeed in stock markets. I have been a retail investor for more than 30 years in stock market and have never regretted the decision. My investments have multiplied several times during this period apart from receiving regular dividend income. Like?
    Dec 27, 2012
    very few people know the def on investor let the investors see the dictionary and let them know who is an investor
    investing in shares hsould be like stamp collection and once you bois down to a compnay scrip after seeing lot of factors like one anlayses for one daughter to narrow down a good boy
    one should go on collecting .nowa days what happens it is for sheer thrill they invest sorry actually trade and loose lot of money since sev youngsters are getting far and much mor ethan they are worth.the brokers also make them invest in so claled commodities and try to teach them as to how to get alot of money by investing in commodities in the end they loose .all investors have now found sebi which is formed for protecting eduating and safe gaurding have actually collided with unscruplous promoters and giving so called consent orders and so on andasking the companies to go for delisting so that they can be outside the purview of sebi and not taking any responsibility in pricing of ipo and allowing the promoters to loot so the investors have got tired loosing money still the investors are preapred to loose but all thier wealth has vanished .if an investor wants to complaint against a compny one has to go to the computer and type and if done they will ask for it in writing and if you call over telephone the so called officer in charge first they will hear all the complaint and after that they inform that you have to go to western regional unit or southern regional unit whoacts like post office .there is absolutely no sense of belonging to anybody in sebi even sebi chief when confronted for balance sheet problem for the non receipt he silently walked away aafter he informs that he will take it up with mca.after 6 months also no action taken even in writing .sebi is getting lot of money from the exchanges rom all investors who trade or invest .silently sebi is amssing money .for a regulator why such ahuge in the end all have lost confidence in the equity market
    Dec 27, 2012
    As compared to earlier periods of 80's and 90', stock market in India has grown into huge proportions And attracted by the returns Stock Market provides , it attracts new set of investors year after year.But making money in stock market depends on how fast the new entrant learns the skills needed for investing and weathers the storm courageously and one who does will be rewarded handsomely. I have lost money in stock market but learnt lessons and modified my investment plans and reaped benefits.I am holding a pharma company since 1994 and which is recently included in the Index and have seen the initial investment grow manifold. A plastic furniture manufacture has given me multiple returns in the last 16 years. I invest in the stock market with optimism. And retail investors voice is not heard in the market.It should not be a concern. A Sachin , a Rahul Dravid , A Ricky,A Kallis, an Imran ,a Wasim ,a Clarke,a Lara, a Laxman , a Cook,a Walsh, a Shane ,a Waugh having the skills and techniques, undeterred by one or two failures here and there ,adopt to the various playing conditions and come out with shining colours. Like?
    r v iyengar
    Dec 27, 2012
    The market was languishing in the region of 15000 to 17000 for the major part of the year. It has reached 19000+ levels only of late. The upside from here is doubtful given the domestic and global conditions. Therefore it is perfectly logical to encash the holdings when the going is still good.
    Once the market goes down again the cash can be re-invested in the market. The discerning investor has
    enough knowledge to take the right decision. Besides there is a lot of data available, now based on which one can decide on the course of action.
    Dec 27, 2012
    Indian Retail Investors have lost confidence in share market because 1) Markets are ruled by whims and fancies of FIIs and Mutual Funds who gamble with others' money 2) We can not trust the Government because of their unstable policies which in turn affect the corporate functioning. 3) Entry of F&Os in the trading environment which has changed the climate from 'investments' to GAMBLING. 4) Unscrupulous management of the companies who have swindled the corporate wealth to their personal gains through fraudulent transactions including insider trading. 5) Inflated market prices of various scrips which do not deserve entry for 'investment' due to unsatisfactory fundamental principles. Like?(3)
    Equitymaster requests your view! Post a comment on "Why retail investors seldom succeed in stocks?". Click here!
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