Source/Contribution By : NJ Publications
Around 25 Lac new demat accounts have been opened during the lockdown phase. Lot of retail investors have hooked on to the direct Equity bandwagon. Most of these investors happen to be so called “millennials” who are using “new age digital platforms” to participate in Equity story. This is being portrayed as “growing maturity” among investors. Investing when markets were low. Discussions are happening about these “smart” investors who prefer to invest directly in stocks over the boring Mutual Fund route.
But seriously is that the case? Young Millennials flocking to stock markets, buying shares directly is probably the most disastrous thing happening to Long Term Equity investing in the country. These first time investors have all the time in the world, have access to loads of information from various apps, websites, blogs and have hit the Equity Markets to make a quick buck. When you see good quality stocks down by 40-50%, obviously many people are enticed to invest and make some money out of it. But do you really end up investing in “good quality stocks”?
In Equity trading, only one person makes the money, the stock broker. If making money in Equity markets would have been so easy, we would have Equity crorepatis in every nook and corner of the country. The general progression of an Equity trader, Level 1, buy large cap stocks from sensex/nifty. Stocks like Infosys, TCS, HDFC Bank, ICICI Bank, etc. Make some money in these stocks due to market volatility in week 1 or week 2. Then you broaden your horizons and start looking at mid & small cap stocks and realise probably you would have made more money by investing in them(Indusind Bank/Axis Bank). Level 2 – Exit Large cap, Move to mid cap and small caps. Now start observing stocks available at cheap prices, less than Rs. 10 or in some cases Re 1 and see how phenomenally these stocks move or watch stocks hitting daily upper circuits and wish you had bought them. Level 3 – Move to Penny stocks or stocks in the news like Vodafone, Alok Industries, Ruchi Soya, etc. The super risk takers discover F&O segment in stage 3 and realise with same kind of position or investment, they could have made 5 to 10 times more profit!!
The thrill in equity markets is unparalleled, the volatility gives adrenaline rush to investors, till the time markets are moving upward and you keep making money, you keep putting in more money in order to increase your profits in the short term. But then one fine day, BOOM! the markets start changing course. Now investors are stuck with illiquid stocks whose price don't move or stocks perennially hitting lower circuits. In the initial stage, the concept of averaging comes in. Keep buying at lower levels to average out the cost. After a point though, you realise you are stuck badly. All the money invested or earned is wiped off significantly. Then you curse the Equity markets and pledge never to invest again and conclude with your experience that nobody makes money in Equity.
Don't believe me! So which stock did most of Direct Equity investors have in their portfolio in 2019. The answer is Yes Bank. As of Dec 19 end, retail investors collectively held 48% in the bank. Never mind, all of them have become long term investors now with 3 year lock in on their investment. And the stock price has slid from Rs. 400 to around Rs 25. And this is not the first time, it has happened before also. Remember 2008, Reliance Power. 40 Lac retail investors were shareholders in the company. Yes 40 Lac!! The stock was a craze during its IPO with subscription of some 7 Lac Cr against IPO size of 11,000 Cr. From a price of Rs 250+ in 2008, few days back it touched a low of Rs 1 (it's trading around Rs. 4 now). While the millennials might enjoy dabbling in this penny stock now, Old investors have lost 98% of their money!
Is it Easy or Tough to make money in Equity Markets then?
Money can definitely be made in the stock markets. You need to have loads of patience, research skills, be updated about markets, sectors, industries, global and local trends, changing regulations, economic conditions, etc etc. Sounds crazy, isn't it. Opt for a simpler option, invest in Equity through the Mutual Fund route instead and keep patience.
Stock market investing is a specialised skill. It's a huge industry world wide. There are thousands of books written on it, we have had nobel laureates deciphering how to invest in stocks. From Benjamin Graham to Peter Lynch to Warren Buffett, there are gurus who have made money as investors. There are also lots of predictions and forecasts but truth is nobody knows what's going to happen in the markets tomorrow. Every new day is a day worth learning in the stock markets.
Investment mistakes can be very expensive.
When experienced fund managers, analysts, researchers with all their experience, knowledge and resources can't crack this stock market code, it's a bit tough for retail investors, esp for those who have started recently during the lockdown mainly to kill boredom. Value investing or Growth. P/E model or P/B model. Profits or cash flows or market share. There are too many variables in the play for buying the right stock at the right price. It is not as easy as it looks like.
Still, you may argue that ok I don't buy crap companies or penny stocks and I am a having a long term horizon as an investor and am not a trader. I can still do it. Well, you may not be wrong. But, being a large corporation today making loads of profits doesn't guarantee long term performance. Remember market leaders like Nokia, Kodak, Lehmann Brothers. To add more, Blackberry, Yahoo, IBM. All market leaders of yore, have now gone kaput. Too American na! OK lets talk about India.
Say you were in 2001 and you choose companies to invest from sensex, top 30 companies in India. So, you may buy Satyam, MTNL, NIIT, ZEE! Yes, they were all part of Sensex in 2001. You will be surprised to know that 50% of the companies in Sensex in 2001 were not part of it in 2010! Companies who were part of Sensex in 2010 included Reliance Communications, DLF, JP Associates, Reliance Infra, Tata Motors! Some of these companies have ceased to exist, while some have performed really badly. Even stock of Reliance Industries gave close to 0% return between 2008 to 2017. BHEL, a Navratna company delivered a 0.1% return from 2000 to 2010. Only 10 stocks, have remained as a part of Sensex from 2001 till 2020. So should you buy them? Is there a guarantee that they will continue to deliver superior results in future too? Nobody knows!
Sensex has delivered 15%+ compounded return since it's inception. From 100 to 36,000, 360 times in last 40 years. But still large number of investors have ended up losing money in Equity markets. This has happened because retail investors can't control their emotions and end up buying and holding on to wrong stocks at wrong time. It is much easier to book profits but our ego, doesn't allow us to book losses. Rather than investing we are more in love with the stock. Due to this behaviour, we end up selling our winners (as they give short term profit) and are left with losers ('cause we expect them to regain their price). Investors behaviour is highly irrational at times, in fact the subject of investor behaviour itself is so complicated, that books have been written on it and nobel prizes have been awarded to those trying to decode it.
It's really a shame that media sings the praise of the fact that too many investors have joined Equity bandwagon. Media should actually start cautioning such new investors and teach them about perils of direct Equity investing. Stories like millenials going digital might sound fancy but truth be told what we learn from history is that we don't learn from history. Human behaviour in general and investor behaviour in particular has not changed even in the developed markets, who are having more than 100 years of investing in Equity Markets.
Only time will tell whether this hypothesis is right or wrong. The truth of the matter is when in all other walks of life be it health, nutrition, beauty, home decor we are ready to take professional advice and pay hefty fee to a professional, it always makes sense that when it comes to our own money, it's beneficial to take expertise of not only a professional fund manager but also getting the right advice from a financial expert, who can make a financial plan for you and guide you to invest your hard earned money according to your needs and risk appetite. And if you like speculation, believe me, the thrill will be much more in a casino!
Written by Mr. Husaini Kanchwala - Head of Investments, NJ Group.
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"Disclaimer : All stocks mentioned in the article are for example purpose only. NJ or its employee do not recommend any stocks for investment"