The Indian stock markets are on a roll. They are swaying to dizzying heights after experiencing a never seen before bull-run. But there’s one question that baffles me did the retail investor take advantage of this opportunity and make the kind of money that he or she should have?
The Nifty and Sensex multiplied fivefold since March 2003. But reality is that not more than a handful of Indian investors have increased their wealth in the same ratio. While most investors feel euphoric about the bull-run, the real wealth creation from the stock markets has eluded them.
A typical investment decision is heavily influenced by the actions of our acquaintances, neighbours or relatives. So, if everybody around us is investing in a particular stock, the tendency for us would be to do the same. Very few investors research the stocks before putting money into them. A glaring example is the stock market crash after the Harshad Mehta securities scam was exposed.
Whenever market fluctuations happen, emotions run high and greed and fear rule our investment decisions. Desperate selling begins with our investment not based on company fundamentals but short-term trends and speculation. This short sightedness has been taking its toll on the average investor who is the last to get in (when the stock is at its highest) and the last to sell (when it hits the bottom). And who makes real money? The manipulators.
The present bull-run has also seen great panic moments. On May 17, 2004 trading on the bourses was suspended and then again on May 22, 2006. Investors who had taken speculative positions lost heavily when blood was on the street. Even investors having capacity to hold on to their investments lost faith in the markets and sold, when they were supposed to buy. Within a couple of months markets delivered handsome returns, making the same investors jump into the markets and buy at peak prices.
Only prudent investors, who put in money systematically, in the right shares and patiently held on to their investments have gained outstanding returns. So, it’s not timing the market but the time in the market (horizon) that has created wealth.
Other reasons for the relatively poor performance of portfolios of retail investors include the market breadth that varied a lot. Different industries participated at different points in time in taking the markets up. Sometimes for several months the entire rally was led by a handful of large, frontline stocks. On other occasions, mid-caps generated remarkable returns and made large-caps look pale in comparison. Staying invested in quality stocks, which don’t move for months while the index goes to record heights, is very painful and requires oodles of patience and discipline.
As our markets mature, buying into indices makes a lot of sense. Over the last couple of years it had been very difficult for even seasoned fund managers to beat the benchmark returns. Investing in index funds has not been popular in India, where the majority of investors like to take risks by directly investing in stocks. Though plenty of mutual fund schemes have generated extraordinary returns with consistency, they are yet to become popular with investors.
(The author is CEO of Invest Shoppe India Ltd)