x

The Epic Of The Erratic Investor

Home »  Magazine »  The Epic Of The Erratic Investor
The Epic Of The Erratic Investor
The Epic Of The Erratic Investor
Manik Kumar Malakar - 01 October 2021

Dhritarashtra had a clear view of the battleground Kurukshetra, thanks to Sanjaya’s real-time narration. But he was foxed when Lord Krishna pulled Bhima away and placed an iron statue in front of the blind king. There was no one to guide the bereaved father that what he was holding was not a human being. Bhima could avert the fatal embrace but Dhritarashtra lost his chance to avenge the death of son Duryodhana.

That’s precisely what happens when some investors rush into the equity markets and base their moves on what they hear and what they see. The lack of a professional advisor in most cases drive them to wrong stocks. Along its wild and unpredictable movement through the second wave of the pandemic, the Indian equity market has seen the emergence of this new-breed of investors.

Meet the DIY brigade of the stock market. The do-it-yourself investors believe they do not need any professional guidance to pick the right stock and reap the most out of their investments. And, in the process, they overlook the fine print. More than 95 per cent of all stocks do not even end up beating the returns yielded by fixed deposits – the simplest of investment options – over a long haul and almost 99 per cent of the wealth is created by the top 1 per cent of the stocks.

Much like the young Abhimanyu, who had ventured into the Chakravyuh with only the knowledge of entering the trap and no idea of how to step out of it, the DIY investors park their money trusting only what they hear in the market. This self-deception is a fundamental mistake the DIY investors make.

“The biggest error that these investors commit is not doing an adequate amount of research on their own and just relying on brokerage reports or media hypes,” says Kishor P Ostwal, chairman and managing director of CNI Research. “They should ideally spend more time on analysing the company, its operations, cash flows, and its management.”

It’s as simple as opening the annual report of a company and checking cash flows as this information is mandatory for a company to submit. Cash positive is a good sign. There are more tell-tale signs for a DIY investor. A stock with a high P-E (price-to-earnings) or a stock that has seen a run-up or increase in prices are also red flags for investors.

“Avoid companies where the promoters have pledged a large amount of their shares,” Ostwal suggests. “I am also not very comfortable where the company’s debt to equity is more than 2 or where the price-to-book is above 2.5 times.” Price to book means market value to book value.

The DIY brigade fails to assess the target stock because of faulty heuristic view or their inability to process information correctly that had cost the life of Drona because of Yudhishthira’s tricky lie of Kunjarova. “You must not enter the market unarmed because lack of knowledge about market dynamics puts your money at risk,” says Ostwal.

The unarmed and defenceless investors cannot justify or calculate their moves and fail to restrain the temptation of toeing others into a dash for buying a particular stock. “Herd mentality is quite common in the markets and retail investors are more prone to fall into this syndrome,” says Ajit Mishra, vice-president research at Religare Broking. “In most cases, such moves backfire on the investor.”

For instance, retail investors went on a mad rush when Reliance Power launched its maiden public issue with impressive growth prospects. But deteriorating fundamentals of the company shattered the growth story very soon and the stock began slumping into an abyss.

When it comes to intelligent investing, experts give only 1 per cent weightage to buying a stock and 99 per cent to the patience of holding it for the right time to sell off. The new breed of investors do exactly the opposite. Where a mere 2 per cent of the market accounts for 99 per cent of the wealth in one’s portfolio, it becomes all the more important to avoid wealth destroyers.

Identifying and draining out the bad blood in the system is of supreme importance. Shakuni’s devious conspiracies had contributed to the fall of the Kauravas in the Mahabharata. Duryodhana never realised the vengeance of his maternal uncle against Hastinapur for the annexation of Gandhara.

“One of the things investors can scrutinise is to check the divergence in retail shareholding of a stock. The idea is to filter out the stocks which have too many speculators,” says Nirali Shah, head of equity research at Samco Securities.

A few case studies can make it easier for a first-time investor to choose the right destination for his hard-earned money. Hindustan Unilever has 7.4 lakh retail shareholders, while Colgate-Palmolive and Dabur are owned by over 2 lakh retail shareholders. While such quality-resilient businesses have up to 10 lakh shareholders, some businesses which are weighed down by massive debt and have difficulty in repaying their creditors have more shareholders. For instance, Reliance Power has over 30 lakh shareholders, Suzlon has around 11 lakh and Vodafone Idea has over 15 lakh.

“This proves that wealth destructors constitute a much larger slice of the public shareholding pie, mostly filled by speculators who run away at the first signs of trouble, driving the stock to crash,” says Shah. “So, look at stocks with quality investors, rather than punters.”

More than the numbers, it is the quality of the stock that matters when it comes to investing. The Pandavas went to the front with 7 akshauhini (1,530,900) warriors, while the Kaurava army had 11 akshauhinis (2,405,700). But the result went in favour of the Pandavas.  

“Retail investors looking for high volumes (of shares traded on the bourses) is one of the commonest mistakes,” says Ostwal. “This is all the more inexplicable behaviour when they are buying just 100 to 500 shares.”

The Café Coffee Day stock hit the upper volumes with some 2 crore shares being traded. Investors thought that some high net-worth individuals (HNIs) were buying the shares, and so, they too jumped the bandwagon only to experience the downhill drive.   

Alok Industries throws up another case study for DIY investors. From bankruptcy to 1,500 per cent returns in barely three months, Alok Industries hogged the limelight during the early pandemic period. The company had been taken over by Reliance Industries and JM Financial Reconstruction Company and was relisted in mid-February 2020.This dream team did wonders for the stock as it hit upper-circuits every day.

But the stock was fundamentally weak and the momentum was only based on hype. Investors had rushed for the ‘get rich quick’ scheme and doubled the retail base after relisting. By July 2020, all this fizzled out and the price tanked nearly 70 per cent, trapping the retail investors in a blackhole.

“A simple and effective way to avoid the ‘hot tips’ would be to do your own research before investing. Going by the popularity of a brand isn’t the right method,” advises Shah. Mishra suggests a safer play. “If retail investors are investing for the first time, then they should invest in blue-chip stocks,” he says.

Much of the success for a retail investor depends on the financial discipline maintained in the investments. The more robust the discipline, the more protected is the investment even through a phase of extreme volatility in the markets, believe experts.

Those who invest systematically in the right shares, diversify their risks, and hold their investments for a longer period, tend to avoid the noise, and let the compounding machinery work on their portfolio. “Hence, patience is the backbone of wealth creation,” says Shah.


The writer is a financial journalist

The Death Of Debt In Money Market
Is The NFO Euphoria Good For Investors?