The Retail Investor in the Stock Market Continues to Remain a Sucker

The National Stock Exchange’s Nifty index recently crossed the 10,000 mark for the first time and a lot of song and dance was made around it. Human beings really love big round numbers and that explains our fascination for stories around stock market indices crossing certain levels.

The much older BSE Sensex also has remained above the 32,000 levels for the last 10 days.

The bigger question is whether the retail or small investor has made money in the stock market or not? One good way to figure out is to look at the total number of mutual fund folios. Take a look at Figure 1. It plots out the total number of mutual fund folios as well as retail mutual fund folios since March 2008.

Figure 1: 

Figure 1 plots the mutual fund folios. The first two entries are for as of March 2008 and March 2009. After that the figure plots six monthly data up until September 2014. It then plots quarterly data for mutual fund folios. The blue line plots the total number of mutual fund folios and the orange line plots the total number of retail mutual fund portfolios. Figure 1 makes for a very interesting reading. The total number of retail mutual fund folios had stood at 4.69 crore as of September 2009. They fell by 19.1 per cent to 3.8 crore portfolios as of the end of September 2014. During the same period, the Sensex gave an absolute return of 55.5 per cent (or 9.2 per cent per year). But these returns were not enough to lead to an increase in interest of the retail investor in committing his money to equity mutual funds. This, for the simple reason that he or she was nursing the losses he had made by investing in equities through the direct as well as the indirect route, after the stock market crash of 2008-2009.

Since September 2014, the total number of retail mutual fund folios started to rise again. Take a look at Figure 2. It plots the yearly increase in retail mutual fund portfolios since March 2011.

Figure 2: 

What does Figure 2 tell us? It tells us that the rate of increase of retail mutual fund folios has gone up in the last two years. Between March 2016 and March 2017 grew by 15.2 per cent on a much larger base. Take a look at Figure 3. It plots the quarterly increase in retail mutual fund folios, since December 2014.

Figure 3: 

What does Figure 3 tell us? It tells us that the rate of quarterly increase in mutual fund folios has been the highest in the last quarter between April and June 2017.

Between September 2014 and June 2017, the period during which retail mutual fund portfolios have risen dramatically, how well has the stock market done? The Sensex has given an absolute return of 16.1 per cent (around 5.6 per cent per year). Now compare this to the situation between September 2009 and September 2014, when the Sensex went up by 55.5 per cent and retail mutual fund portfolios fell by a fifth.

What does this tell us? It tells us that the retail investors need a lot of validation before committing their money to the stock market. It tells us that the marketing spin of the Modi government about the economy being in a reasonably good shape, seems to be working with the investors. Further, it tells us that the returns from other forms of investing from fixed deposits to gold to real estate, have been abysmally low, leading to money finding its way into the stock market. It also means that the investors who have invested after September 2014 have missed out on the bulk of the rally. It also tells us that retail investors look at stock market levels before committing money to the stock market rather than past returns.

Of course, the stock markets might continue to rise and all the investors who have come in late, might also get to party. We live in the era of easy money and the astonishing amount of money created by the Western Central Banks can keep fuelling stock market bubbles till kingdom come.

But if the rally does not continue, the world will need to learn an old investment lesson all over again-the retail investor continues to remain a sucker.

The column originally appeared in the Equitymaster on July 31, 2017.

The sucker flag is up, as the retail investor is back into the stock market

Vivek Kaul

It’s morally wrong to allow a sucker to keep his money – W C Fields

The Indian retail investor is a sucker. He invests when the markets are high and he gets out when the markets are low. Don’t believe me? Look at the table that follows.
This table shows the net inflows(total inflows minus total outflows) into equity mutual funds in India during the course of a financial year. As can be seen in 2007-2008 equity mutual funds saw a net inflow of Rs 40,782 crore. This was the time when the stock market was on fire. In early January 2008, the Sensex almost touched 21,000 points. It had started the financial year at around 12,500 points.

earInflows/Outflows in/from
equity mutual funds (in Rs Crore)
2014-2015 (from April 1,2014 to October 31 2014)39,217

Source :Association of Mutual Funds in India

And when the party was on the retail investor couldn’t have been far behind. He poured money into equity mutual funds. In January 2008, equity mutual funds saw a net inflow of Rs 12,717 crore. The stock market started to fall from mid January onwards. In fact, the Sensex fell from 21,000 points to 17,500 points in a matter of a few days.
So, the good things came to an end pretty soon. Over the next few years, the faith of the retail investor in the stock market came down dramatically and inflows into equity mutual funds almost dried down. In 2010-2011, the outflows from equity mutual funds reached Rs 13,405 crore. The trend continued in 2012-2013 and 2013-2014 as well.
What these data points clearly show us is that the retail investor poured money into the stock market at high levels and got out only once the market started to fall. The opposite of the buy low, sell high, strategy that the stock market experts keep talking about. But what else do you expect from a sucker.
Nevertheless, things seem to have started to change again. The retail investor seems to be back into the stock market. This financial year (between April and October 2014) has seen a net inflow of Rs 39,217 crore into equity mutual funds. And if things go on as they currently are, the year might see the highest inflow into equity mutual funds ever.
This is not surprising given that the Sensex has rallied by close to 25% between April and October 2014 to reach almost 28,000 points. And this has got the suckers interested in the stock market all over again.
In fact, the Indian retail investor isn’t the only sucker going around. Maggie Mahar in her book
Bull!—A History of the Boom and Bust, 1982–2004, makes a similar point about American investors during the dotcom bubble.
Between 1982 and 1996, the Dow Jones Industrial Average gave positive returns in 12 out of the 14 years. In eight of the 12 years that the Dow had given positive returns, the absolute return had been 20 percent or more. This led to more investors entering the stock market.
The number of investors in the stock market increased, as many middle class investors made their first jump into the stock market. Wealthier Americans already owned stocks. Nearly three-fourths of those having financial assets of $500,000 or more had made their first investment in stocks sometime before 1990. Some 33 percent of the households with financial assets of $25,000 to $100,000 bought their first stock or invested in a mutual fund that in turn invested in stocks between 1990 and 1995. But 40 percent of those owning financial assets in the range of $25,000 to $99,000, and 68 percent of those with financial assets of less than $25,000 made their first purchase after January 1996.
So, the American retail investor started taking interest in technology stocks only after January 1996, and by that time the dotcom bubble was well and truly on. A similar sort of dynamic was visible in the real estate bubble that followed, when a large number of individuals started taking loans to buy homes that they wanted to flip, only by 2005-2006, when the bubble was at its peak.
Economic theory tells us that more often than not, higher prices dampen demand and lower prices increase demand. But when the stock market witnesses a bull run, investors do not behave like normal consumers.
As Mahar puts it in
Bull! In the normal course of things, higher prices dampen desire. When lamb becomes too dear, consumers eat chicken; when the price of gasoline soars, people take fewer vacations. Conversely, lower prices usually whet our interest: color TVs, VCRs, and cell phones became more popular as they became more affordable. But when a stock market soars, investors do not behave like consumers. They are consumed by stocks. Equities seem to appeal to the perversity of human desire. The more costly the prize, the greater the allure.”
This is something that every investor should try and remember.
What these examples show is that the retail investor tends to enter a market only once its done well for a while. In the process he or she ends up making losses or limited gains.
Let’s compare this to a situation of an investor who had invested regularly in the stock market over the years, through a systematic investment plan.
Let’s consider the Goldman Sachs Nifty BeES fund for this exercise. This particular fund is essentially an exchange traded index fund and invests in stock that constitute the Nifty index. A regular monthly investment in this fund from September 2007 till November 2014, would have yielded a return of 14.10% per year. During the same period the Nifty has given a return of around 9.15% per year, barely matching the rate of inflation.
What is the point of investing in the stock market over the long term, if you can’t even beat the rate of inflation?
Now let’s say you had started investing in January 2008, when the stock market was at a then all time high level and continued to invest in the Nifty BeES till date. The returns on the systematic investment plan would be 14.84%. During the same period the Nifty gave a return of 4.5% per year. Some savings accounts would have given more return than that.
Moral of the story: Successful stock market investing can be simple and boring at the same time.
To conclude,
retail investors entering the stock market in droves has been a clear sign of the market nearing its high levels, in the past. Is that the case this time around as well? This remains a difficult question to answer given that foreign investors are the ones really driving the Indian stock market.
As long as Western central banks maintain low interest rates, these investors can borrow money at low interest rates and invest them in financial markets all over the world, including India. Given this, the retail investor entering the market right now may not turn out to be suckers at the end of the day.
But the same cannot be said about the retail investors still waiting in the wings.
Stay tuned.

Disclosure: The basic idea for this column came after reading this piece in the Business Standard

The column originally appeared on on Nov 13, 2014

Sensex record high: When the bull met an old-time investor

bullfightingVivek Kaul  
So your horns are shining,” he said.
“Yes,” said the bull “with the BSE Sensex at an all time high and all that.”
“You must be really happy today?”
“Yes. Its taken me nearly six years to get there,” replied the bull. “The last time the Sensex reached these levels was in early January 2008.”
“Yes, I know. Its been a tough ride.”
“But why are you so sad?” asked the bull. “I don’t see any champagne bottles lying around.”
“You know the first time I invested in the stock market was in late 1991.”
“Ah, seems like you are old timer,” said the bull. “Your white hair should have told me that.”
“And I made a few good gains. Got my friends and family to invest as well.”
“Yes, yes. That’s a good thing to do. If there is a good deal going, no harm in friends and family also benefiting a little.”
“Then on April 23, 1992, it all came crashing.”
“Oh, what happened?” asked the bull.
Arre Harshad bhai‘s game came to an end.”
“Harshad who?”
“Ah. You are a bull. How come you have never heard of him?” he asked.
“So tell me then.”
“Harshad Mehta.”
“Ah. Now I remember. My father used to tell me about him. He was the Big Bull among us small bulls.”
“Yes. That’s what they called him when he drove around in his Lexus. He was the Amitabh Bachchan of stock brokers.”
“Oh, really?” asked the bull.
“But then his luck ran out. All he had been doing was siphoning off money from the banking system and investing it into the stock market.”
“And that drove up the market?”
“It sure did. The system finally caught up with him. And a huge number of cases were filed against him. He died on December 31, 2001, in a jail in Thane. At that time a decision had been made in only in one of the many cases that had been filed against him.”
“You must have lost a lot of money?”
“Yes, I did. But then I told myself, only if I had got out at the right time I would have made a lot of money.”
“Yes, that is the trick,” said the bull.
“And then in 1994, a lot of new companies started hitting the stock market with their initial public offerings (IPOs). And my brother-in-law had become a broker by then.”
“That’s cool.”
“And he asked me to put some money in these companies and I did.”
“You must have surely made money there. IPOs are a sure shot way of making money,” said the bull.
“Actually I did not. These companies simply took the money and disappeared. I guess no one ever made a proper estimate of how much money was looted. But it must have run into thousands of crores,” he said.
“Oh, so you have been bitten by the stock market, twice.”
“Then I took a break from the stock market and decided to go back to the good old fixed deposit.”
“But fixed deposits are boring,” jeered the bull.
“Oh, sure they are,” he replied. “But they ensure safety of capital.”
“And you never invested in the stock market after that?”
“Well I held out till 2000.”
“Then what happened?”
“I saw everyone around me making money in what came to be known as K-10 stocks.”
“Yes, I have heard of K-10,” said the bull. “Some of those stocks are still around.”
“So K-10 stocks were stocks which were a favourite with the broker Ketan Mehta.”
“Yes, another Big Bull.”
“These included stocks were Aftek Infosys, DSQ Software, Global Telesystems (GTL), Himachal Futuristic Communiations Ltd (HFCL), Ranbaxy Labs, SSI, Silverline, Satyam Computers, Pentamedia Graphics and Zee Telefilms.”
“Some of these names are still around.”
“Yes, they are. Also, around the same time the dotcom boom was also on. Hence, the price of information technology stocks was also going through the roof.”
“Yes, I remember that. I was just starting my innings in the stock market then,” said the bull.
“So someone told me there is this company called Infosys, you should invest in that.”
“And you did?”
“Yes I did. And this time I decided to do some research.”
“Yes, research is a must before investing in the stock market,” said the bull, making another motherhood statement.
“The stock price had shot up from around Rs 2000 (Rs 10 paid up) in January 1999 to Rs 12,000 (Rs 5 paid up) in March 2000.”
“Massive returns.”
“Yes. I knew that the stock was overpriced.”
“But you still bought?”
“Yes. Well I thought I was smarter than the others and would be able to find a greater fool to unload my shares on.”
“And that did not happen?” asked the bull.
“No, it did not. And I was stuck with huge positions in IT stocks. In fact, I found a beautiful explanation of how big a fool I was in a book called Stocks to Riches written by stock broker Paragh Parikh. Parikh wrote “In the financial year 2000, Infosys reported revenues of Rs 882 crore. If we were to compound this figure at 85% annually for 10 years (as some people believed the growth would continue), then in 2010, Infosys would report revenues of a staggering Rs 4,14,176 crore. At that time, assuming a market capitalisation of 100 times revenues (similar to what Infosys was quoting at its peak), it would put Infosys’ value at $9.2 trillion. The GDP of the US was around the same figure!””
“Oh, freak.”
“That was how stupid the Infosys trade was at that point of time.”
“The system also caught up with Ketan 
bhai. He was also siphoning off money from banks and investing it into the stock market. So after this I decided enough is enough, and retired from the stock market. I placed all my money in fixed deposits, post office savings schemes and some of it went into real estate.”
“And you lived happily ever after?” asked the bull.
“Only bulls can do that,” he replied.
“Well the market started to rally again sometime in 2003. But I managed to resist for a few years. Then one day, my brother in law, who had become an insurance agent by then, came to me.”
“And then?”
“He told me, 
ke boss, forget stock market, too much risk. You should try this new product called unit linked insurance plan (Ulip).”
“And you invested?”
“Not immediately. I resisted for a while. But finally I took the plunge in January 2008.”
“Ah, not the best time to invest.”
“But now with the Sensex crossing its previous all time high, your investment must be in positive territory again.”
“Nah. It took me two years to figure out the Ulip structure, it was so complicated. My brother in law was paid a huge commission for selling me the Ulip. That commission was recovered from me as a premium allocation charge. Then there were other charges like policy administration charge, and what not. So my investment is still in the red.. Only insurance agents made money of Ulips.”
“That’s sad,” said the bull.
“Yes, it is,” he replied. “Hopefully, I should be able to stay away from the market from now on.”
“But who are you?”
“Oh, I didn’t tell you,” he replied. “I am the Indian retail investor who lives in perpetual hope. 
Wo subah kabhi to aayegi.
This article originally appeared on on November 1, 2013
(Vivek Kaul is a retail investor who has been religiously continuing with his SIPs since 2006 in the hope that he will make money one day. He tweets @kaul_vivek)