How Retail Investors Got It Wrong Each Time Over the Last 18 Years

Apr 16, 2018

Ankit Shah, Research analyst

I have something exciting to share with you today. It's strongly connected to what I wrote to you on Friday.

In case you missed it, I made an honest confession about how sometimes, the anxious, child-like part of my brain tries to hijack my rational thinking.

I even shared a passage from one very thought-provoking book. (I know it was a bit of a heavy read. But trust me, if you really get the heart of what the author was hinting at, it has the power to trigger a radical shift in the way you perceive not just the investing world, but practically everything.)

At the crux of my writing was the secret to why just a few investors become truly rich.

The trick is to stop fearing 'uncertainty' as an evil monster, and instead, befriend it.

If you do that, Mr Market will open the doors to immense riches.

But that's easier said than done.

It's like me telling you to be fearless in front of a tiger...

Or walking on a tightrope...

It's not an easy path.

It's like walking inside a tunnel. It can be very dark sometimes. Sometimes the ground can be shaky. There will be moments when you will feel lost.

But if you keep walking steadily, with courage and discipline, you will make your way to extreme wealth.

Now, I understand the practical challenges of disciplining our emotions - worry, panic, anxiety, fear, greed, euphoria...

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And I'm here to help.

It's exactly why Equitymaster exists.

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I've been guiding an exclusive, elite group of successful investors for nearly 10 months.

I'm saying this because my experience and research shows that most investors seek certainty and shun uncertainty.

They buy stocks when there's certainty and optimism in the stock markets.

And whenever the markets go through phases of uncertainty and pessimism, they shun stocks.

In fact, I have very solid proof to validate my thesis.

Look at this chart carefully...

It shows the net annual investments by mutual funds in equities from 2000-01 to 2017-18.

How Retail Investors Often Dump the Best Buying Opportunities

(There are many gems of insights inside this chart. And I'll take them up in my future writings. But I'll stick with the subject at hand today and focus on the buying and selling behaviour of retail investors.)

As you may be aware, the buying and selling behaviour of mutual funds is a good proxy for the investing activity of retail investors.

So let me take you on journey about how retail investors have invested since the turn of the millennium.

Starting with the dotcom bubble and the subsequent bust...

The internet bubble peaked around early 2000. The BSE Sensex hit a high of 5,933 on 11 February 2000. And then the market started tumbling lower.

By 21 September 2001, the Sensex had shed 56% from its all-time high.

And like always, mid-cap and small-cap stocks were hammered mercilessly.

The days of euphoria and certainty had ended. And the markets were going through the dark tunnel of negativity and uncertainty.

You can clearly see in the chart how mutual funds remained net sellers during the most lucrative 'uncertainty' buying window. From FY01 to FY05, mutual funds were net sellers of equities worth Rs 69 billion.

But just when 'uncertainty' started receding and investors saw a 'certainty-filled' bull market, they started pouring in the money.

For the four-year period from FY06 to FY09 - the period of expensive market valuations - net equity investments of mutual funds surged to Rs 417 billion.

This exuberant bull market peaked with the Sensex achieving a peak of 20,873 on 8 January 2008 (also my birthday 😊).

Then we dived into a very dark tunnel with the global financial crisis of 2008-09. By 9 March 2009, the Sensex was down 61% from its peak.

And just when hundreds of future multibaggers were available at a huge discount, retail investors were rushing to the exit doors.

From FY10 to FY14, mutual funds dumped Rs 755 billion worth of equities (net).

Just imagine...

When the stage for the next big bull run was being set, most retail investors were dumping equities.

Since 2014, we've been in another big bull run. And what has baffled me through this bull cycle is that investors felt more and more confident and certain as the markets kept getting more and more expensive. It's strange how people shop for stocks.

Over this four-year period from FY15 to FY18, mutual funds have pumped in an unprecedented Rs 2,879 billion into stocks.

I don't know how and when this period of bullishness and certainty will end.

What concerns me is how retail investors will react when the next phase of extreme uncertainty sets in? Will you repeat the same mistake that fellow retail investors have been making for decades?

The choice is yours.

Happy Investing,
Ankit Shah
Ankit Shah (Research Analyst)
Editor, Equitymaster Insider

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1 Responses to "How Retail Investors Got It Wrong Each Time Over the Last 18 Years"


Apr 16, 2018

I think this article mixes cause and effect and comes up with a over simplified concept. You say that investors dump stock (MF units) when markets are falling and buy when they are rising. They should actually do the opposite.
However, this is too simplistic. It does not consider why the markets are falling in the first place. The markets fall when investors dump stocks. So it is basically the selling pressure that causes a rapid drop in stocks not the other way around. If investors were to buy when markets fall, they wouldn't fall.

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