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Opinion

Small Investors: Learn the ropes

Dhirendra Kumar at Value Research Online has an interesting post about Small Investors in India. He says that the Indian retail investor is overhyped, and we focus too much on small investors profiting from the markets. Every few days people complain that the “small investor” is staying away, and that is seen as a bad thing by all. Kumar questions why it’s bad at all.

I must say I agree with some of his arguments that we have overhyped the small investor participation. In fact what’s wrong, Kumar says and I agree, is that everyone wants the small investors to actually profit, regardless of how stupid their investments were!

Someone recently wrote in to say that they had invested Rs. 50,000 in the Cairn IPO. They didn’t expect to get full allotment, because they expected an oversubscription. Yet, the issue was undersubscribed (or close) and they got all the shares – which are underwater by about 15% today! The thing is: if this person invested in the stock for listing gains, which is what many investors think of IPOs as, then that has plainly been a bad strategy. In fact, investing for listing gains itself is a bad strategy, no matter how successful it has been in the past; the cost of the money involved is not even worth it!

Why should the market reward such investors? In fact such people are gambling, and we all know that losers outnumber the winners in any gamble.

Having said that I don’t like one statement made by Kumar:

For the small investor, the only safe way of participating in the markets is indirectly, through a mutual fund or some similar structure where their money is being managed by someone else who has a good track record that is transparently known.

I don’t believe this is the right thing to say. A small investor can be, or become an ultra-smart investor, sometimes even better than the highly acclaimed fund managers of our mutual funds. I think telling all small investors to go down the mutual fund route is as stupid as telling them to invest blindly in stocks. Safety, in todays world, comes only when you know what you are doing – in fact the more you know, the safer your investments are. The saying goes, “The harder I work, the luckier I get”.

What I think is that small investors have two choices:

1) Learn about investing, both in stock markets and mutual funds. Learn about simple stuff like stock exchanges, market prices and how to buy and sell. Then, learn about WHAT to buy – choosing the right stocks – and WHEN to buy – choosing the right price and time to buy them. Finally, the most important lesson: When to SELL.

This is not rocket science, regardless of what Kumar says. Stock investing is as logical as making a cup of coffee – you just have to do it a few times before you figure out how to get it right. Sometimes you will burn your coffee, and sometimes you will add too much milk.

Investing can be done in two hours a week. You don’t have to be a full time practitioner to understand investing, reading books and visiting online sites like www.fool.com will help you start the process.

The idea is to invest slowly, and over a few years build a good portfolio. Don’t blindly buy mutual funds either – even that requires a little bit of effort and thought every month. Analyse your portfolio every week or month to see where you are.

Unfortunately there are very few tools that help you do this in a simple way. Heck, time for software developers to start thinking!

2) If you can’t do the above, or don’t have the time to bother, simply buy mutual funds. Don’t invest on “tips” or for “listing gains” or such. Don’t invest the money you have saved for education, or to pay back loans. And never borrow to invest.

And don’t fall for advertisements on TV or print. Like one of the advertisements themselves says: “Dikhave pe mat jaao, apni akal lagao”.

I think the small investor is our future. The myth of the small investor is the word “small”. The number of retail investors today add up so much that the word “small” is really not applicable. Like Seth Godin says, “Small is the new Big”.

  • Mohan C Nair says:

    >Hi Deepak,

    When Dhirendra kumar referred to small investor, he would have absolutely meant people who have their regular hectic jobs but earning a decent amoount of income which also gives them investible surplus. They within their schedule would find hard to go thru the fundamentals of the companies they wud like to invest (this by itself is quite relative and a whole new thing). For them MFs would be best thing. I wish the small investor do this in their early years of investment and gradually move to stocks.

  • Deepak Shenoy says:

    >Mohan: I doubt it. I think he meant “retail investor”. Basically anyone who does not do stock trading as a full time job. I don’t blame him – this kind of view is prevalent in the entire industry. I think he is doing the standard Indian thing of painting everyone with the same brush and talking to the lowest common denominator.

    I think anyone and everyone has about two hours a week to learn. And that’s all it takes. I have learnt all of my stuff in three years, by studying it a few hours a week – I was working full time, even 20 hours a day, on a regular job. I don’t think anyone can use the excuse that they don’t have the time to understand; they should put their money in a bank FD with fixed interest then.

    If you’re going to take even the slightest bit of risk, you should make the effort to understand that risk and the market. And unlike what people like Kumar say, it’s not rocket science and it does not take more than a couple hours per week.

  • Anonymous says:

    >Hi Deepak, Great post as always. I completely agree with you when you say that small investors can pick stocks directly and its not rocket science. I personally know many people who are pretty good at this.

    You also said that putting in a few hours per week can help people take an informed and logical plunge into equity investing. I was wondering how I could go about this. I have been investing in mutual funds for past few years and I know the basics of stock markets and exchanges. I follow some financial websites and magazines regularly. But how do I take the next step of learning to pick fundamentally good stocks and learning about price points i.e. when to buy and when to sell?

    Hope you can provide me a few pointers here.

    Thanks,
    Srini

  • Deepak Shenoy says:

    >Srini: Thanks for the compliments again 🙂

    Start here:
    http://www.investopedia.com/university/
    and
    http://www.fool.com/school/basics/basics.htm

    These are US based investing sites, but you can substitute Indian terminologies.

    Secondly, get some books. There’s a book called “Stock Investing” by Debashis Basu which is an Indian perspective. Also you can get magazines like Outloom Money, Money Today and Money Life – these have very intersesting articles. YOu can read them online too.

    I wish you all the best. I will publish a list of starter sites also, that you can visit – probably a different post!

  • Anonymous says:

    >Deepak
    Wht are ur views on Exchange Traded Funds or ETFs particularly the Spice ETF of ICICI Prudential?
    The traded volumes are negligible but is it a good investment option? Because it achieves diversification and has less management costs and of course only tracks the SENSEX.
    Keep up the good work
    Vikram

  • Deepak Shenoy says:

    >Vikram: I don’t know about SPICE but I own shares of NiftyBEES, the Nifty based index fund. I love it – it has a much better return than any other mutual fund I own, in the last six months!

    Index funds are the way to go for fund investors. Frankly, no one else has beaten the index (post buying costs) in the last year!

  • Anonymous says:

    >Thanks Deepak. Do publish that starter’s list soon. Sharekhan’s knowledge center seems to be very comprehensive:
    http://www.sharekhan.com/KnowledgeCentre/

    -Srini

  • Vivek says:

    >In the original piece by Kumar, I find these lines which sort of answer some of the comments here:

    ——————————–
    Am I saying that no individual should invest directly in stocks at all? After all, expert investors too start out as individuals investing for themselves. The way it happens is that a large number of investors try their hand at the markets, usually when the markets are booming. As long as the markets stay strong they all make money, more or less. This makes them confident so that when the bulls stop running, most of them lose heavily. Some, however, turn out to have the right mental make-up for this activity and go on to become experts. There is nothing wrong with this. Markets are inherently Darwinian and it is in their nature that those who make the wrong choices will lose. For a market to function correctly, those who make the right choices must make money those who make the wrong choices must bear losses. If we see this as a problem and try and fix things, we will actually end up breaking them.
    ———————————

    I think given the requirements for becoming a smart stock investor, most people are actually not going to become one. A vast majority of people don’t have what it takes in terms of time or the kind of personality required. The idea that any given person can make money on the markets by buying some books etc will benefit 5 per cent (figuratively) and harm 95 per cent.

    Which is what I think Kumar is saying. Of course what he’s saying is futile because it’s precisely the people who are least likely to become expert investors by reading books etc are the ones most likely to believe that they actually can.

  • Deepak Shenoy says:

    >Vivek, I must choose to disagree. I think a lot of us can become smart investors by learning about the market. I’ve personally done a lot better than some of the funds I own, and I’m in no way an expert.

    I think the ratio is more like 30-70% – by that I mean, 30% are bound to fail as investors, and 70% are going to get excellent returns. And again, I don’t mean in a short term – these people will stumble, fall, learn and make better choices. Overall, people need to keep investing, learning and working their money. It’s as simple as saying – forget the funds, I want to buy a strong company and I want to stick with it for a long time – and guess what, I’ll analyse which company I want to buy every six months.

    My father had bought Hero Honda when it was Rs. 10. Mom still owns the stock which has multiplied 75 times over approximately 20 years. In fact, just in the last 10 years, it’s multiplied 20 times. And that’s not counting obscenely huge dividends they pay out every year. My dad was not a genius investor by any standards, but you know what, the small amounts of money he put in has ensured that my mother will never need a pension of any sort.

    No fund has come close to that kind of a return. Not even in its wildest dreams. The max I’ve ever heard, over 10 years, is a 1000% return – which is 10 times. 10 years ago, money in Infosys, Ranbaxy or Hero Honda, would have gone much higher. Heck, why think so long back – I invested in Reliance when the brothers were fighting. I’ve got around 4.5 times my money in three years.

    Investing is all about thinking long term. Short term investments are for traders or fools. That’s a business in itself. Thinking long term, though, is not rocket science; a lot of times it’s just understanding that there is value in something that is bound to appear later.

    Of course, You don’t learn to swim by reading books – you have to jump into the water. That’s what I mean by talking to the lowest common denominator – the fact that some people will not benefit from learning about investing doesn’t mean that most will not. Heck, most people have far more useful investing information than they are aware of.

  • Madhab says:

    >Thanks Deepak for this blog,
    I was about to start buying stocks then came across Kumar’s article. Though he mentioned a few truths but it is “Must not read” for a newbie who was about to start . To my rescue I read your blog, so I am optimistic again. I do agree with you when you say ” Investing is all about thinking long term”

  • arun says:

    >I agree with your point on Mutual Funds.

  • shan says:

    >Great posts sir! 🙂 Bookmarked your blog!