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How Retail Investors Often Dump the Best Buying Opportunities
Apr 16, 2018


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.

(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 any 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.

Data Source: CMIE

This Chart Of The Day was published in The 5 Minute WrapUp - How Retail Investors Got It Wrong Each Time Over the Last 18 Years

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