I was surprised to read a report in the India Today magazine yesterday which suggested that small investors are fast exiting the stock markets.
One reason for my surprise (and sadness) was to think about the future of Safal Niveshak.
After all, if small investors stop investing in stocks, who would read my daily rants on sensible, long-term investing?
But a bigger reason for the surprise came when I read this…
Most retail investors have lost faith in the capital market…Investors are exiting because there has been no capital protection in India.
Then I read this…
Investors are fast losing confidence in the capital market and unless Securities and Exchange Board of India (Sebi) brings in radical reforms, they would hardly return.
Now my question is – who was worried about “capital protection” during the heydays of 2004 to 2007 when everything they touched turned to gold?
Did the experts who are blaming the SEBI now – for not bringing radical reforms – warned investors then that they could lose most of all of their wealth when the bubble bursts?
Did the investors themselves control their emotions instead of flowing with the rising tide, only to realize later that some of them were swimming naked?
As far as the thing about capital protection is concerned, it is a stated rule that stocks have never guaranteed capital protection – not in India, and nowhere in the world.
Capital protection is something people must be worried about while risking their hard-earned savings speculating on bad stocks and derivatives.
SEBI won’t guarantee you capital protection and neither can it help you get your capital back once it’s lost in a stock market crash.
An investor’s capital is his sole responsibility, and he must worry about it while making an investment decision – not after making it and then seeing everything go down the drain.
The magazine report also suggests that around 16 lakh investors operating through systematic investment plans (SIP) in mutual funds have closed their accounts over the last year.
Well, if I’m right, the term ‘accounts’ means ‘folios’ here. And 16 lakh accounts mean 16 lakh folios, not 16 lakh investors.
I can assume this safely given a recent case where a friend’s father had invested in mutual funds through 190 different folios/accounts. So that was a case of 190 accounts but just 1 investor.
Even if I were to assume 1 investor having 10 different folio numbers (and this is a very conservative number), the 16 lakh accounts closed (as the report mentions) would represent just 1.6 lakh investors…or 90% lower than what the report suggests.
Out of this 1.6 lakh ‘investor’ accounts, 95% would belong to those who wouldn’t be ‘investors’ at all…but ‘speculators’ who are fleeing seeing poor short term returns.
These 95% speculators are anyways ‘momentum chasers’ and will be back once the bull market resumes.
So assigning their exit to “SEBI’s carelessness of not protecting capital” is absurd!
As far as the remaining 5% investors who have closed their accounts, there could be several reasons for their exit.
They may be upset with the way their fund managers were mis-allocating money.
Frustrated by this, they may we pulling out money to invest on their own, and in a more sensible manner.
Or else, they may be closing accounts with bad funds and redirecting the money to their existing good funds.
So there can be several reasons I can think of why these 5% ‘investors’ are not exiting the stock markets but just reallocating money more sensibly.
Of course, it’s difficult for even the most sensible of investors to keep a calm mind and invest in such volatile markets…but you don’t just exit stocks completely when times are bad.
Remember, you miss 100% of the shots you don’t take, so exiting and getting to the sidelines is not a profitable plan for long-term investors.
Staying in the game always has been, and always will be, the way to profit.
In short, if you are also thinking of exiting the stock markets, don’t!
Instead, re-think why you were here in the first place (for long-term wealth creation) and how you can re-align your investments to fit the current investing environment.
But wait…are you seriously thinking of exiting the stock markets?
Let me know in the Comments section below.
After all, I should be prepared with my plans for Safal Niveshak if I know in advance that not many people are going to read me in the future. 🙂
Vishalji, can you explain what is “losing money in market crash”. I find it difficult to understand since money can be lost only if the company goes bust. Market crash basically means too much selling and not enough buying, if I am not mistaken. In that case, the price could fall (sometimes extremely), then when the market bounces back, the value of the stock also goes up as long as the company is still in existence. I know I am missing something somewhere which is making it difficult to understand.
Second question, like the saying goes what goes around comes around. A market bear is followed by a bull followed by a bear. Although investors are meant to hold their investment long term, even Buffett sold few businesses and booked profit, if not all. What is your opinion about this?
And last, do not worry about people not reading your blog. That 5% people will always stay 🙂
Hi Mansoor, thanks for keeping your faith in the future of Safal Niveshak! 🙂
As for your first question, well you can permanently lose your capital even if the company survives and continues to do business. See the cases of Suzlon, SKS Microfinance, and many such companies. The way these stocks have fallen and the poor economics of these business, it is hard to expect the stock prices to come back to their previous highs, at which many investors would have bought these stocks.
Also, if you are a short-term player in the market, you won’t wait for stock prices to recover. You will sell at a loss. That’s why short-term players (traders, speculators) rarely make money in the long term.
As for your second question, there are reasons Buffett sold businesses in the past other than due to correction in stock prices. Some of his businesses had worsened in fundamentals and some had gotten way expensive than fundamentals would justify. As for a long term investor, ‘buy and hold’ would not mean ‘buy and forget’. You still need to consistently review your investments and take actions (to buy/hold/sell) accordingly.
You are most welcome, education for free, what more one could ask?
Ok, understood Vishalji. Partial loss of capital due to buying at a ridiculous price with a difficult chance to recover.
I think, by you saying that out loud that Buffett too sold some businesses for a reason and that forever is not forever, is a big message.
Thanks for sharing.
As someone rightly said: ” Timing the market is not important”, ”Time in the market is more important”. If you buy quality stocks and stay tight(for the long term), you would be immensely benefited.
I have also observed that if you have picked up a good stock, at a price greater than its intrinsic value, the longevity, neutralises the initial higher price you paid for that stock.