Are small investors a worried lot?

May 31, 2010

In this issue:
» Small investors scaling down their stakes in Indian cos.?
» India's 4QFY10 GDP grew 8.6% YoY
» SAIL's chief's advice to his future competitors
» Rising prices not to impact gold demand: WGC
» ...and more!!

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"The period since early 2008 is the worst time since I began the company. These are the most violent markets. Most people are still in a state of fear. I'd say 98 percent are still very concerned. And for a lot of good reasons. Look at the headlines. You've got these scoundrels doing all this stuff. People wonder, 'Who can I trust?'"

These are the words of Charles Schwab, also known as the father of the modern American individual investor. Schwab is generally considered an optimist by nature. He has always preached asset allocation, diversification, and investing for the long term. But his pessimism regarding the current global stockmarket turmoil knows no bounds. And he is especially concerned about small American investors, who are on the sidelines horrified from the news flows regarding the European crisis, inflation, and what not!

While the case is not exactly similar for Indian investors, news flows remain very mixed here as well. While one day brings in cheer of a bailout, the next day brings forth worries about the after-shocks of such a bailout. While one expert is talking on the television channel about stocks looking to crash in the coming week, the other warns that the crash will happen the week after!

In short, an individual investor like you must be having mixed reactions currently - whether to invest or wait. Without offering any of our own view here, we would like you toshare with us - whether you are investing in stocks currently or are waiting considering the fearful news flows regarding the global economy and stockmarkets?

 Chart of the day
Today's chart of the day shows the stake of small shareholders in top Indian companies. Small investors here are represented by individuals holding less than Rs 1 lakh worth of shares in a company. And the data is for 87 of the BSE-100 companies that were listed in June 2006. As seen from the chart, the stake has come down a bit over the years - from 9.5% four years back to 8.3% currently. Interestingly, the sharp plunge can be seen just before the markets cracked in early 2008. Apparently, this was when small investors were a worried lot as against the big guys (especially the FIIs) who loaded up on stocks only to see their money vanish in the crash that followed. And interestingly, small investors have cut back on their stake after raising it again just before the bull-run started in early 2009. Smart guys indeed!

* Small investors are represented by individuals holding less than Rs 1 lakhworth of shares in a company;
Data Source: CMIE Prowess - Data for 87 of the BSE-100 companies that were listed in June 2006

The Indian economy seems to be getting back on track. This is suggested by the 8.6% growth in GDP that was achieved in the quarter ended March 2010. This is the fastest pace of growth since the quarter ended December 2007, and was mainly fueled by government and consumer spending, and the manufacturing and services sectors.

Anyways, while the recovery is good, one negative fallout of the same is rising inflation. What started earlier with food price inflation has now spilled over to non-food areas like commodities as well. Although food price inflation has eased from its peak of 20% in December, it is still above 16%! Rising cost pressures are also dragging down the pace of manufacturing growth.

India's bureaucratic machinery is not exactly known for its quick silver efficiency. Thus, starting a huge new manufacturing operation is always going to be a difficult proposition. Just ask MNCs like Posco and Arcelor-Mittal! They are most likely to tell you that the word 'difficult' is a huge understatement. Wanting to start a plant in India since as long as in 2005, their frustration seems to have really come to a boil. Despite a lot of struggle, there isn't even a semblance of headway of any kind.

However, if the Chairman of SAIL, India's largest steel PSU is to be believed, these companies could do well to not lose heart from the entire episode. "I can only say there are always initial problems, hurdles in doing business in India and those who did not really get distressed by the initial difficulties have got success," Mr. Roongta, SAIL's chairman is believed to have said.

Anyways, besides few words of encouragement, there is very little that will come in the way of these MNCs on how to go about doing business in India. They may have to figure that out all by themselves. Sadly, very little of that has happened so far

Genuine deregulation in fuel prices is a long overdue move. The situation where the government forces oil marketing companies (OMCs) to price final products below the input cost is simply unattainable. The trouble is fuel prices is a highly charged political issue. Since it directly affects the vote bank of political parties, they are quick to go up in arms at any sign of higher price. But, as per a leading business daily, the government plans to free petrol and diesel prices. It also plans to hike price of Kerosene by Rs 6 per liter and LPG by Rs 100 per cylinder. Apparently, the move is well supported by various ministers.

Will the government actually let OMCs set their own prices? Or will the ministers be quick to jump in the moment crude prices goes up? Also, will the opposition parties let it go through? Intent is one thing, executing it will require immense political will. We will wait and watch.

Are you skeptical about investing in gold at the current levels? This especially after the strong run up in the yellow metal's price over the last three years! Well, if the World Gold Council's (WGC) view is to be considered, you don't have much to be cynical about. As per WGC, demand for gold is only likely to move upwards, irrespective of the upward surge in prices. It believes that consumers have gotten 'accustomed' to higher prices.

This rationale has been arrived at after considering the demand during the last few quarters, when prices have been hovering around their all time highs. A significant portion of the total volumes was driven by India and China, which were in turn driven by the rising jewelry demand. WGC also expects demand to rise given that gold is seen as a safe haven during times of uncertainties. With the US and Europe being impacted by the slowdown, the chances are high that the demand for the yellow metal as an investment remains strong. However the idea is to never go overboard with it. A 5-10% allocation of your portfolio is just about sufficient.

Anyways, Indian stock market had a lacklustre day today. The BSE-Sensex was trading with losses of around 35 points (0.2%) at the time of writing this.Buying was seen in PSU and pharma stocks. However, realty and metal stocks continued to face the heat. Among other key Asian markets, while China closed down by 2.4%, Singapore was up 2.6%.

 Today's investing mantra
"What makes a company valuable, and why it will be more valuable tomorrow than it is today... earnings and assets." - Peter Lynch

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66 Responses to "Are small investors a worried lot?"


Jun 10, 2010

I am waiting for reasonable correction to invest



Jun 5, 2010

Waiting for cheaper prices



Jun 5, 2010

i am not investing rite now as i am waiting for a meaningfull correction..its really confusing with such type of negative newsflows like from the united states n eurozone.i wish i gets the opportunity to invest at the correct time.



Jun 5, 2010

Investing per Value Investor...results have been amazing till now ...Simply love it.



Jun 4, 2010

Invested in select scrips which are on my watchlist. Using each correction to increase allocation on them. Also tracking another list of scrips, waiting for their PEs to come back to realistic levels.


K Srinivasan

Jun 3, 2010

Holding back on investments. May also exit a few scrips. The market is very unpredictable and the flow of news is adding to the worries. Looks like the crises in Europe will have a greater bearing on indian markets than one fears.



Jun 3, 2010

am not investing



Jun 3, 2010

It better to wait for an imminent crash in the market. We had seen market crashes in 2004, 2006 and 2008. The 2010 crash is now due. And all symptoms are showing towards such a crash. With more in store after Greece(started with Iceland and Dubai), there is a crash coming. Be ready with cash to invest at that time....



Jun 2, 2010

dear sir,
when the market has been sliding for weeks on end, a small investor must be a yogi not to be worried , inspite of all the faith he may have in the stocks invested. worried is different from jittery.



ramarao m

Jun 2, 2010

dear sir,
yes. this volatality in the market is sapping. having invested as per reccomendations of equity master, we see the investments steadily erode. reinvesting as the markets decline, it creates worries at times ,especially when investments in shares and mutual funds keep more or less declining continuously.

ramarao m

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