What keeps these retail investors going after losing their shirt? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What keeps these retail investors going after losing their shirt? 

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In this issue:
» Brazil's govt not behaving very differently from the one in India
» Global bank payouts have not really dropped
» India's contingency plan for tackling Eurozone crisis
» Impact of declining rupee on sovereign rating
» ...and more!

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Rule No.1: Never lose money. Rule No.2: Never forget rule No.1. Unfortunately such golden rules preached by legends like Warren Buffett are easier memorized than practiced. Plenty of retail investors in India have burnt their hands in the stock markets. Not once, but time and again. So much so that some have sworn to never return. But the story is not the same with their counterparts in China. What is it that makes the latter a more optimistic lot despite the volatility that has encompassed global markets?

It is a known fact that markets misprice stocks based on the underlying sentiments prevailing then. Economic uncertainty, poor performance, political upheaval, scams etc. just add to the volatility. And these are not restricted to few markets. Investors across the globe have lost tons of money at some point or the other due to each of these phenomena. But in very few have investors chosen to abandon the choice of equity investing in scores. Especially given that very few asset classes other than gold and equities tend to offer inflation adjusted returns. Hence, the apathy of Indian investors towards equities is surprising. Worth nothing that equities and mutual funds combined account for less than 10% of household investments. Even the wealthy in India prefer to stick to tangible assets like gold and real estate. Meanwhile retail investors in China are losing no time in piling up equities. This is while China's growth story and economic outlook is going through almost as many bumps as India's.

The secret to the renewed investor confidence in China lies with the head of China Securities Regulatory Commission. The chief regulator assumed office seven months ago pledging reforms. Since then, Mr Guo Shuqing has taken several measures to boost investor confidence. Ensuring higher capital inflows, better pricing of IPOs, urging more dividend payouts from listed companies have been some of his ways to keep investors happy. To add to this there is tightened scrutiny of companies and lesser transaction costs for stock investing.

As per Bloomberg, China's 50 million individual investors lost an average of 40,000 Yuan last year. That was almost twice the annual average disposable income of an urban Chinese. Add to that scams, IPO mispricing, companies' reluctance to pay dividends, and speculative bets on smaller companies' back- door listings contributed to equity flight. But Mr Guo Shuqing's efforts have undone most of the damages. The renewed interest in equities will ensure that Chinese investors reap the fruits of their economy's well being in the long run. We can only hope that regulators in India spare a though for those who have lost their shirt in the stock markets. Bringing them back will improve the prospects of India Inc's and investors' prosperity in the long run.

Do you think the SEBI should take a lesson or two from its Chinese counterpart in boosting investor confidence in equity markets? Let us know your views or post them on our our Facebook page / Google+ page.

01:20  Chart of the day
Despite the spiraling prices of petroleum products, the demand for automobiles in India is hardly very disappointing as compared to that in the West. In fact as per data from OICA (Organisation Internationale des Constructeurs d'Automobiles) demand growth for automobiles in India was amongst the highest when compared to that of the top 5 manufacturers globally. Little wonder that more and more automobile companies are looking to grab a pie of the Indian auto sector's growth story. However, fuel prices and interest rates will have some important roles to play in the long term growth prospects.

Data source: OICA

Is the much fancied BRIC crumbling? It certainly looks like it if the data is any indication. That China and India are going through some tough times is already known. Now even Brazil is feeling the jitters. As per the Financial Times, Brazil's manufacturing sector shrunk by nearly 3% during the first quarter on a YoY basis. Like policymakers of other countries, even the ones at Brazil are not willing to take the flak for its poor performance. Instead, they are putting the blame at the doors of a weaker exchange rate. Yet another misconception of the highest order we believe. It is competitiveness and not exchange rates that drives an economy's performance. Thinking for a moment without the exchange rate in mind will make the point clear. You see, while lower exchange rates improve foreign currency reserves, a country effectively gets less real imports for a given amount of real exports. In other words, it gets poor in terms of real wealth. Thus, the solution is not to devalue currencies but improve long term competitiveness and infrastructure. And sooner the Governments of countries like Brazil and also India realize this; the better it will be we believe.

Looks like global banks have not yet learnt from their mistakes in the past. Or they choose not to. Given that risky practices adopted by bankers were one of the reasons that escalated the global financial crisis, there was increased outcry over the fat bonuses and salaries being doled out to them. Since then, more and more voices have called for regulations and caps in terms of how much bonuses have to be paid to employees. Many of them have adopted the deferred mode of giving out bonuses. Despite this, bank employee payouts have not really dropped. At least that is what the compiled by Financial Times (FT) for 13 big international banks shows. As per this, FT has measured trends by considering the proportion of an overall pot which includes net profits and staff costs. This shows that dividends comprised just 4.5% of the allocation last year, down from nearly 15% in 2006. In contrast, staff costs accounted for more than 81% of the total, compared with a pre-crisis tally of 58%. Meanwhile, profits have not grown by much. In such a scenario, banks risk attracting the ire of citizens and governments alike if they do not stick to reasonable norms.

The crisis in the Euro zone is all set to worsen. The situation in Spain is getting worse by the day. Things are not too good in other parts of the region either. There are rumors flying around the place that Greece would exit. The contagion that this incident would cause is something that has scared investors all over the world. Everyone is drawing up their own contingency plan. Naturally so is India. As per the chief economic adviser, Mr Kaushik Basu, India has drawn up its own contingency plan. Interestingly a large part of this plan is to bank on lower crude oil prices to cushion the blow. As India relies on imports to fuel nearly 80% of its crude needs, it would be right to hope for lower crude prices. But with our exchange rate hovering at the levels that it is at, it is unlikely to provide much relief. What India needs is a stronger plan. Something in the lines of simulating domestic consumption and investment. But for that it needs reforms. However the economic advisor was mum on what the content of the contingency plan. We are sort of hoping that active reforms are a part of it.

The Indian rupee has been falling, recording new lows. This has had an adverse impact on corporate profitability as well as government finances. However, as per ratings agency Moody's Investor Service, the declining rupee will have a 'limited' impact on India's sovereign rating. The reason for this is that only 7% of total government debt is from overseas. As a percentage of GDP (Gross Domestic Product), this comes to about 5%. Comparatively, the private sector is set to be more hurt. The rupee depreciation has significantly increased the cost of repaying their foreign currency borrowings. Indian corporates have about US$ 96.6 bn in external debt. However, only 40-60% of this is estimated to have been hedged. Even then, the exposure of the private sector to external debt is "relatively low" at 16% of GDP. This means that the impact on the sovereign ratings due to this would not be too substantial. Fortunately, India's exposure to external debt is not too high. If that had been the case, India would have witnessed its own debt crisis akin to the troubled Eurozone economies.

Indian iron and steel industry has grown at a rapid pace in the last decade. Despite strong growth, the sector has a long way to go when it comes to meeting environmental norms. According to a report published by the center for Science and Environment (CSE), India's best iron and steel company gets average score. Sector's overall rating is poor and Steel Authority of India Limited's (SAIL) plants of West Bengal rank among the most polluting. Among the worst performers were Bhushan Steel, Monnet Ispat and Energy Limited and the IISCo Burnpur plant of SAIL. The relative best performers (their overall rating on the CSE scale was 'average') included the Vizag steel plant of Rashtriya Ispat Nigam Ltd (RINL), Essar Steel and Ispat Industries. The report cites the poor environmental performance of this sector as a measure of the failure of the regulatory institutions in the country. Overall average performance of the sector, on all parameters put together, was as low as 19%. Thus, the steel sector rating is a reminder of the challenges, but also the enormous potential of bringing about environmental changes.

Right from the start of the day's trade, the indices in Indian equity markets made a secular up move into the positive territory backed by investor interest in heavyweights across sectors. The positive sentiments seem to be primarily based on hopes of rate cut by the RBI. At the time of writing, the BSE Sensex was trading 417 points above the dotted line. The indices in most other Asian markets closed higher in today's trade. Those in Europe have also opened in the positive.

04:50  Today's investing mantra
"People calculate too much and think too little." - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'
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12 Responses to "What keeps these retail investors going after losing their shirt?"

John Williams

Jun 9, 2012

Exchanges are ammsing tons off money irrepective of market conditions, they make thier money wheter one sell or buy and they would list any tom tick and harry posing as company to loot already poor retail investors, SEBI should protect retail investors, should not be a spectator to the lootings, please protect the small investors, they are the only one who always looing why this is happening ? what is the solution ?



Jun 7, 2012

Dear Sir ,
I could understand your anxiousness on retail investor participation in stock market, here in our country the story is different, every thing comes under the control central power, & it widens the road towards many scams & scandals, otherwise they would starve with out black money for their 10 generations extravagant expenses.For them then politics may become dry & unworthy. Do not expect any morally fruit full development to the people of our nation.You Dream appears to be so Greedy.
With Regards:

Like (1)


Jun 7, 2012

Sebi is a watch dog and will only watch poor retail investors are looted by the fraudulant organisations. They will impose a fine of 5-10 lakhs INR to those firms who cheated millions of amounts of retail investors.

Like (1)


Jun 7, 2012

The fact that their pants are still on is what keeps these investors going. So long as the pants are on, not everything is lost. A new matching shirt will come some day or the other to complement the pants. This hope keeps us all alive. It is the universal truth not just in investing but other aspects as well. Jesus Christ had very truly said 'Unless a grain of wheat falls into the ground, it still remains but a grain of wheat, but if it falls and dies then it bears much fruit.' When you are on ground Zero, there is only one way to go and that is UP !!!

Like (1)

Dr. Arun Draviam

Jun 6, 2012

From an severely controlled regime of the Controller of Capital Issues, under the Capital Issues Control Act, 1947, which in effect followed the Defence of India Rules during World War-II, we suddenly moved to the free pricing regime under the SEBI. The ‘Disclaimer’ clause in the prospectus for public issue does not infuse confidence, rather it is evasive of responsibility of the Regulator. Who hold offices in the SEBI or for that matter in any government jobs? People who seek job secuirty in the form of permanent jobs. They forget that their life itself is temporary! Make the posts in the SEBI temporary; it will function properly. Else we must pray for more personalities with bettter conscience like Mr. Rai, the present Comptroller and Auditor General.

Like (1)

Malcolm Bersohn

Jun 6, 2012

What keeps retail investing? The macro picture, young generation is big
and labour costs are low. Also heroes, the most recent of which is
Nandan Nilekani.

Like (1)

Gopinathan k

Jun 6, 2012

Most of the retail investors enter the equity market without
any knowledge of anything.Firstly,Your day to day life commonsense and logic has no value and is not of much help in equity markets.Secondly the so called brokers just don't help in any manner
manner.Their staff themselves don't know anything.
What to say of technical analysis,OSCILLATORS,volume charts,
SIMPLE MOVING AVERAGE,EXPONENTIAL MOVING AVERAGE, candle stick, line bar etc.Like me, at the time
of initial entry most of the retail investors would never
have heard of any such things.They wake up only after
loosing their money and by the it is too late.Any investor
entering equity market with Rs.10000/- can say good bye
within a week if he were to conduct day trading and
is on the loosing side.

Like (1)


Jun 6, 2012

China is guided democracy & hence one head will take action on reform,but India has wide full free democracy where so many crooks sorry so many cooks spoil the broth IE reform

Like (1)


Jun 6, 2012


Like (1)

Anupam Garg

Jun 6, 2012

Till the time SEBI learns its lessons, Indians will continue to invest in their favourite asset class i.e. bank FDs...this is a class which offers returns which no other country can dream of. hardly any risk and higher returns than equity (at least since the past few year and for a coming few too)

low transaction cost still eludes Indians...even if costs reduce, i doubt investments will rise in equity compared to FDs

Like (1)
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