The Hindu Business Line : 13k and the frowning retail investor

The stock market is on a high, but the mood on the street is sombre — there is no dancing, jubilation, hype or hoopla. Remember, business channels had gone to town in February, when the Sensex had crossed the psychological 10,000 mark, celebrating the event with special T-shirts, caps, balloons, festoons, etc; TV cameras were stationed along Dalal Street and even the paanwallahs and sandwichwallahs were quoted by journalists covering the event. It was as though Diwali had come a good eight months early to Dalal Street.

And then came the next 1000, and another 1000 in quick succession before the market did a U-turn after May 11, and virtually crashed, falling below 9,000.

Hard knock

But today, the market is soaring, yet, why is it that this time around there are neither crackers nor laughter or dancing on the Street, as pointed out by Mr Arun Kejriwal, Director, KRIS, (Kejriwal Reseach and Investment Services)?

This is because the retail investor did not participate in the latest blast on the index. Retail investors, typically, have a herd mentality. On May 22, when the Sensex delivered the hardest punch ever to the Indian equity investor, by plunging 1111 points — a figure many an investor will never forget — it knocked out the lifetime earnings of many investors.

Indeed these `investors' may be better described as speculators, for, in reality, they belong to the growing tribe of `day-traders' who play the market on a daily basis.

When the equity indices soar and the media give wide publicity to how `smart investors' are reaping rich dividends, with their portfolios soaring by the day, to the uninitiated it looks so easy to make money in the market.

Making `serious money'

But anybody who takes the effort to dig out how "serious money" is made in the stock market, he will discover that this is not an exciting casino play but a slow and boring game, where patience, a long-term outlook and, above all, sanity and research are required. The wealth planners and equity analysts the author spoke to in Kolkata recently were unanimous in their opinion that "wealth creation" is a long and boring pursuit; those looking for day-to-day excitement and watching their portfolios on an hourly basis are certainly not qualified to participate.

But the proliferation of TV channels and newspapers covering the stock market and beaming success stories make it seem so easy to make money. As a stockbroker in Mumbai recently pointed out: "Try and find somebody who has lost a lot of money to come before the media and give an interview on what he/she did wrong. You'll not find many takers because it is very difficult to admit before the whole world that you've been a sucker and taken for a ride, and lost either your life's savings or what you inherited."

The real problem

But the problem is that making money in the stock market appears so easy that there has been an explosion in the population of day-traders. The market players love them because their frequent trades give exchanges the volume and the high turnover.

But trading is serious business and the untrained and uninitiated can burn their fingers burnt badly.

This, many discovered in the crash in May. As a leading Mumbai stockbroker had explained to this correspondent, there are many such traders in Mumbai, Kolkata, Ahmedabad, Bangalore or Chennai, who come to brokerages armed with Rs 20,000-30,000. Normally this amount is kept with the broker and used as a kind of a safety net or "margin" to facilitate the trades. By its definition, trading is an activity where the traders play for gains of a few rupees, sometimes much less.

For instance a `jobber' in Mumbai would buy and sell a share such as Infosys or Reliance in lots of 1,000 or more for a mere gain of 25-50 paise. And such a buy-and-sell trade would take him barely a minute or two. "If he waits for a bigger gain than that, then he is not a jobber, he is a speculator," the broker, who hosted a dozen jobbers in his office, explained.

But, then, the jobbers and professional traders are astute at the game and trained to read the warning signals and `run' the moment they spot trouble. Years of experience and a hawk's eye on the trading terminal give them sufficient warning. But the uninitiated, the small people with Rs 25,000-50,000 or even Rs 1-2 lakh, can get annihilated in an hour when the market tanks. And that did happen on that Black Monday in May, with the result that for several months a body of traders was virtually wiped out from the market, and left scrounging for money to repay their debts.

Keep off borrowed money

The worst possible mistake a trader can make is to dabble in stocks with borrowed money. The broad average is that eight out of 10 times the `trader' will make tiny gains and this convinces him that he can afford the interest cost and make a living too. But the two times he loses, through bad trades, all his profits, if not his capital, can get wiped away. This set of traders virtually disappeared from the market on that terrible May day, as the brokers closed their positions, adjusting the "margin" money.

But on October 30, it was the opposite of May 22. The market moved up to a dizzy 13,000. And yet there were neither smiles nor dancing on the street. This is because while such heavyweights as Reliance Industries, HDFC or Infosys Technologies touched new highs, the small- and mid-cap stocks, where typically the small investor/trader parks his money, did not move up.

On the contrary several small/mid-cap stocks, which the retail investors had entered during the exuberance of the first few months of 2006, are half, or even less, their earlier peaks. Lacking the agility to get out of a losing investment/trade, thousands of such retail investors are sitting on the sidelines, watching the party with long faces.

As Mr Kejriwal explains, it is not that big a deal for the Sensex, which is a narrow band of 30 stocks, to go up when only a few stocks that have recorded very strong quarterly earnings, rise sharply. But the broader indices, such as the BSE-200 or the NSE-200/500, are nowhere near their earlier highs. It is in the sagging priceline of this group of stocks that the bulk of retail investor money is parked; and till the small/mid-caps start moving up, this set of investors will keep wondering what the fuss is all about the Sensex touching 13,000. To them, `13' is certainly not a lucky number.

(Response may be sent to rasheeda@thehindu.co.in)

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