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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”.

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