Results of Equitymaster Investor Survey (6th January, 2009)

It’s not the US but the greed of global financial firms that has led to losses you might have incurred on your stock portfolio. FII activity will determine the fate of Indian stock markets in the near future. PSU banks are preferred over private sector banks when it comes to trust.

Wait! These might seem like random thoughts to you. In fact, these are thoughts - though not random. The statements made in the above paragraph are actually what readers of Equitymaster are thinking and acting upon.

These are the most voted answers as part of the investor survey that we ran recently. The idea behind the survey was to share with the world what the Equitymaster community of long-term, thinking investors, is doing with its money in present times.

The survey was taken by 2,000 people and the results paint an interesting picture.

On the question - 'Who is to blame for the losses you may have incurred on your stock portfolio?" the highest number (35.3%) of votes were for the option - greed of global financial firms. ‘Greed to earn good returns’ got 27.5% of the votes. Interestingly, the ‘broker’ community was blamed by the least number of voters (3.8%).

We second the voters’ opinion that greed has been the key reason behind the bursting of all the previous bubbles across asset classes. This time too, it was no different. But putting the blame squarely on the US financial firms would be an incorrect analysis. After all, these firms in no way coerced us into investing in equity markets when valuations at most companies were running at multi year highs.

As 28% of the respondents correctly pointed out, a part of the problem was of our own making and it is this tendency that one should keep in check if one has to avoid similar losses in the future. If one cannot remember anything about when to sell or stop buying, he should atleast remember to be fearful when others are greedy and greedy when others are fearful.

Indeed, just before the markets went into a free fall, everyone was talking about the stock markets, an indication that most of the investors are already invested. Thus, if there are few investors left, the only way stocks could be headed in near term is down.

One of the most interesting answers indicated that Equitymaster readers have not lost faith in stocks. On being asked - 'Are you staying invested in the Indian stock markets?" a majority (71.6%) voted that they remain invested. Only 0.7% of the voters said that they are not invested in stocks, and never will!

Buying at higher levels was a bad enough mistake. Fortunately, investors did not compound it by exiting at the wrong levels. Stocks should be viewed as long-term investment avenues and anyone not willing to digest near term price swings of the order to 30%-40% should perhaps be best served by staying away from the markets. We were indeed very pleased to read our readers display that rare sense of rationality of not exiting in a hurried manner.

Now comes the interesting part. On being asked about the time frame in which the Sensex is likely to regain its lost glory, around 41.7% of voters thought that the BSE-Sensex will be able to touch its all-time high levels of 21,000 within 2 to 3 years. Another 32.5% of participants put the time horizon at 4 to 5 years. Interestingly, there were also people, although a small 3%, who believed that the Sensex could retest its all time highs within a year.

Here too, we would like to be on the same page as the majority of our participants. In other words, even we believe that if the Sensex were to regain its lost glory, it will not be before three years from now. Our belief is based on the assumption of an average P/E of the Sensex of 15x and annual earnings growth of 15% for the Sensex companies.

Given the historical track record, we believe it is a reasonable assumption to make. Excessive reliance on the prediction however, could prove to be fatal. Hence, diversification across asset classes is highly advocated.

Now, how scary the banking crisis has turned out to be was known from answers to the question - 'Whom do you prefer placing your bank deposits with?" A majority (52.4%) voted for public sector banks while private banks got a mere 17.5% votes.

Although most Indian private sector banks are in sound financial position, they seem to be paying a price for the follies of their counterparts in the west. A perception that seems to be ruling the roost is that the private sector banks indulge in more risk taking than their public sector peers.

But investors or account holders should bear in mind that a Dena Bank is as likely to fail as is a GTB. Efforts should be made instead to look at the past track record of the bank and the quantum of non-performing assets on the bank’s balance sheet during bad times.

Here is a pictorial representation of the survey’s results. All figures are in percentage (%) terms.