Retail brokerages shutting may be good news for you... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Retail brokerages shutting may be good news for you... 

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In this issue:
» China's 'magical solution' to get rid of bad banks
» Ex-Chief Eco. Advisor Arvind Virmani's interview with Equitymaster
» Greenspan reiterates view about growth at any cost
» Why India's power problems may be here to stay...
» ...and more!


00:00
 
The BSE-Sensex closed at 4,802 on 25th October 2003. Seven years later, the Sensex touched 21,000 for the first time in November 2010. And once again on 24th October 2013, the 21,000 mark was re-visited by the benchmark index. Therefore for someone who had invested in the index 2003 and stayed invested, every Rs 100 would have fetched Rs 437 in 10 years. That makes it a compounded annual return of 16% per annum. Even considering the prevalent high rates of inflation, the real returns from equities are amongst the best across asset classes. Why then has the willingness of retail investors to participate in Indian equity markets nearly vanished? And why are the so called big brokerages which lured clients with gusto a decade back and subsequently listed themselves, shutting retail operations?

This week we came across instances of three large retail brokerages downing their shutters. By their own admission their retail clients are no longer interested in equities. They would rather prefer some advice on mutual funds, gold and insurance. And the brokerages that so far banked on volume of trading are willing to do just that.

In fact we recently wrote about the extent to which retail investors have lost trust in their brokers and have chosen to quit stock markets in droves. As per Economic Times, the share of retail investors in total turnover of cash market is at a 10-year low of 34% from a high of 84% in 2003. This is indeed testimony to the flight of retail capital. And the brokers themselves seem to have given up hopes of winning their clients' trust back. We believe that for serious long term investors in equities this may be a boon in disguise. After all, they will now be subject to less noise!

Now it is not as if the fundamentals of Indian companies have deteriorated dramatically over the past decade. Even the ones that are facing temporary headwinds have companies that can very well tide over the temporary problems. So if chosen carefully, we do not see any reason why Indian stocks cannot deliver 16% per annum returns over the next 10 years as well. And if they no longer wish to rely on their brokers, investors should equip themselves with some credible and independent research on stocks they wish to invest in. More importantly investors should make it a point to read the advice of legendary investors like Buffett and Munger besides the annual reports of their favourite companies. After all, Buffett's emphatic advice to new investors has always been "Read everything you can"!

Do you think retail investors should give equities a miss for their long term investment portfolio? Let us know your comments or post them on our Facebook page / Google+ page

01:35  Chart of the day
 
The government may want to pass on the blame for poor coal mining efficiency to Coal India. It can even accuse the private sector companies of misusing their coal block allocations meant for captive power plants. But the fact remains that high cost and irregular supply of power has forced Indian companies to rely on captive power supplies. And that is the reason companies have tried every means of laying their hands on captive coal blocks. It is not just industrial but also retail supply of power that has been in a shoddy state over the past decade. Despite the increase in power generation capacities the per capita consumption of electricity in India remains abysmally low. And if the ambitious ultra mega power projects (UMPPs) do not get access to cheap coal or become financially unviable, India's power problems are here to stay.

India's per capita power consumption least amongst BRICS
Source: Ministry of Power


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02:05
 
When it comes to solving the problem of bad debts, China appears to prefer magic rather than coming to any meaningful solution. Indeed, as reported in the Financial Times, the government is looking to establish a second batch of 'bad banks'. This involves the transfer of assets gone bad in major banks probably to separate asset management companies. Bad debts have risen in China in recent times particularly in sectors such as cement, infrastructure and steel on account of problems of overcapacity. The reason for such transfer appears to be a response to China's intention of relaxing interest controls. If that happens, the cost of capital will go up for many companies retarding their growth. But the transfer of bad assets is hardly the solution to China's problems. Simply because it lacks transparency. Not just that, China's financial markets are increasingly becoming integrated with global markets. On top of that, the dragon nation harbours ambitions of dismantling its capital controls and making the Yuan a reserve currency. If the latter has to happen, China can ill afford to resort to such financial gimmicks

03:07
 
'Debt is important but growth is more important'. Are you drawing the same conclusion from this statement that we are. Is the person involved trying to imply that growth has to come at all costs even if it means very high debt? Well, if we reveal the face behind this comment, you would certainly agree with our understanding of the comment. It is none other than the former Chairman of the US Fed, Alan Greenspan who uttered these words in an interview with Charlie Rose. Now, knowing Mr Greenspan's legacy and his tenure at the Fed, the sentence does not come as a surprise, does it? For Greenspan and even his successor Bernanke come from the school of thought where there has to be growth at all costs.

This is a totally flawed thinking as per us. The only sustainable growth is the one that comes from productivity improvement and from savings and innovation. Of course, more debt also leads to more growth. However, this amounts to nothing but shifting future consumption into the present. And then the debt eventually has to be repaid which can only be done by reducing future consumption. And the more people like Greenspan think about growth and not debt, the higher the future price the American citizens will have to pay we believe.

03:31
 
We recently came across an interesting and hitherto unexplored explanation for India's economic slowdown. This was given by Dr Arvind Virmani, ex-Chief Economic Advisor and India's representative to IMF, during our interview with Dr Virmani. He says that the reason India's growth has slowed down is simply because legislators and private sector participants alike became complacent about the growth. They thought that growth would continue at the blistering pace year on year every year. And in the process they forgot to put in place measures and reforms or in a layman's words, maintenance, to ensure that growth continues. And this complacency led to an over spending on welfare. This is because the government assumed that spending on welfare was the only way to get re-elected. This led to the deficit problems that we see now. The key for long term sustainable growth is to balance welfare spending and economic growth. Because if you don't then both of these get derailed. And this is what we are seeing in India. We all hope that the government will wake up to this fact and take the necessary steps to bring about this balance now. Otherwise the growth and eventually the welfare of Indian citizens will all go for a toss.

04:02
 
The end of the shutdown and increase in debt ceiling by the US government last week had cheered markets across the globe. The positive sentiment continued in some of the major global markets. The US markets ended the week up 1.1%. Even stock markets in UK and Germany were up by up to 1.5% each.

However, majority of the Asian indices ended in negative territory for the week. The Chinese markets ended lower by 2.8% on tightening liquidity concerns. The Chinese Central bank withdrew cash from the system for the third time in two weeks. This raised concerns for the repeat of the credit crunch witnessed in June this year. The Japanese market was down by a steep 3.3%. The fall was exacerbated by an earthquake of magnitude 7.3 that struck around Japan's east coast near the Fukushima nuclear site and tsunami warnings being issued for the area. Even the Hong Kong index was down 2.8%.

The BSE Sensex closed the week down 1% as cautious mood set in ahead of the review of key interest rates by the central bank in the forthcoming monetary policy scheduled on 29th October, 2013.

Performance during week ended Oct 25
Source: Yahoo Finance, Kitco


04:50  Weekend investing mantra
"Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day." - Charlie Munger
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11 Responses to "Retail brokerages shutting may be good news for you..."

DrHA!

Oct 27, 2013

The reasons for the retail investors disappearing from the stock market are many. They are, 1)the investors are to be made aware that the indices are an advance indicator of the financial and the business cycle, 2)the brokerages do not have a research wing of their own, 3) the brokerages do not organize lectures to keep their clients educated/enlightened about the market movements,finance conditions of the companies and finally, the retail investors themselves have to be blamed as they want tips only and do not want to be educated themselves. Many retail investors who have invested lakhs of rupees do not read any financial newspaper,atleast once in a week. An investor is like a soldier engaged in a battle field.The investor has to get trained in the use of a particular weapon(methodology) and know when to use and when not use his/her weapon,when to retreat,etc.

Like (1)

hari lulla

Oct 27, 2013

yes retail investor has lost intrest in equities. So let us close down the business channels also.

Like (1)

B K Nandi

Oct 27, 2013

Indian market is more risky than other markets. Here manipulation is an important factor. Here there is no fear of price manipulation. Moreover in many cases companies policies to be benefiting investors are disclosed internally before they are announced for public. This gives opportunities to big and influential stake holders to squeeze full benefit before it come to public. Many cases retailers don't get any profit from the policies that are aimed to benefit share holders. There are many other reason retailers are cheated by many companies. They are losing confidence on market. SEBI could not fully protect retailers and also could not present honest and open market.

Like (1)

parimal shah

Oct 27, 2013

"Greenspan and even his successor Bernanke come from the school of thought where there has to be growth at all costs"

Those institutes (where these guys learnt or studied) should be sued by IMF for peddling economically unsound principles and practice; and putting the whole world economy on to the path of catastrophe.
-Parimal

Like (1)

raghavan

Oct 26, 2013

Yes, Stock market is not for retail investors. Only brokers make money out of stock market/ retail investors.

Like (1)

Radheshyam Sharma

Oct 26, 2013

Many theories have been propounded as to why retail investors are shying away form the share market.
I have been trading in shares since 1983 and can be considered as a very small investor.
I believe, the reason why retail share holders have left is because the government has allowed new issues to be made at a premium which has no bearing on the quality of the issue.
The promoters with the active connivance of merchant bankers hype up the issue and sell it to the retailers.
8 out 10 issues are bombed and the retail investor is left with a sick baby.
Earlier, most issues were made AT PAR or at a premium of 10 or 20 rupees.
In those days, even if you got one or two good shares you could become a lakhpati for they appreciated with time to the benefit of both the promoter and the shareholder.
Nowadays, the promoters do not care for the shareholder.
They want to make a killing in the IPO itself like killing the hen that lays the golden egg instead of waiting for the eggs.
An example is the case of DLF.
They came out with a public issue in July 2007.
The price of a Rs 2/- share was fixed at Rs 525/-
175 million shares were off loaded and the owner K P Singh raked in Rs 9187.5 crores.
The share reached a value of Rs 1210 in January 2008 and then collapsed and is now trading in the range 128 to 162.
Overnight he had made it to the Forbes's list of top 100 richest men in the world.
DLF is the same company which allowed Robert Vadra pocket a huge sum of money through a sham deal.
A second example is that of Reliance Power.
It came out with its issue in January 2008 at a issue price of Rs 450/- i.e at a premium of Rs 440/-
By 30th June 2008, it had tanked to Rs 120/-.
In contrast, Dr Reddy's issue came with a premium of Rs 40/- only.
If any shareholder purchased 100 shares during the Company’s IPO in August 1986, plus the 60% rights issue in August 1989, and held on to these till date, the person would be owning a total of 5,760 shares of Dr. Reddy’s Laboratories at a face value of Rs. 5 per share. Against a total outlay of Rs. 2,500 (Rs. 1,000 during the IPO and Rs. 1,500 to purchase 60 shares of the rights issue at Rs. 25 per share) that investor will have earned a total of Rs. 1.95 lakh as dividends, including the proposed total dividend of Rs. 6.25 per share for 2008-09. On 21st Oct, 2013, the Company’s share on BSE was being quoted at Rs. 2400. Thus, the value of this investor’s portfolio would have been Rs. 1.39 crores.
I should know because I had got 400 shares of Dr. Reddys in the initial IPO.
I used those shares whenever I had some large expenses to meet in my home.
I never had to ask anyone for money.
I do not have any shares of the company now.

Like (1)

Kulbhushan Thatai

Oct 26, 2013

Real problem for retail investors is high rate of brokerages specially for small investors buying small lot of shares below the par value.Minimum brokerage runs from Rs.50 to 100.A purchase of 200 hundred shares quoting Rs.5/-per share will lead to brokerage of 25 paise to 50 paise per share-exorbiant!is not it then why buy?

Like (1)

Prabal Biswas

Oct 26, 2013

If an investor feels he can beat inflation in the long run without investing in equities / equities in selected MFs, he should start from play school again.

Like (1)

saby chacko

Oct 26, 2013

what ever you may say, even your advise has been pretty bad and i have paid money for your valuable advise and invested money accordingly and lost a lot with no more hopes of revival in nera future. that is the reason i don't subscribe to your new options any more. some how want to get out of these share mkt at the earliest as i am in loss of about 4 lakhs, had i invested this in real estate , i should have gained double the money. this investment is from 2007 onwards and lost the trust. no wonder people are leaving this field. My only hope is for Modi coming to power to improve the situation in full command!

Like (1)

rangan v

Oct 26, 2013

i am life member of equitymaster .com under clent code longterm iam in the equitymkt for last 37yeras .i am tracing back sevral bull mkt and bear mkt previously there was no sebi mutual funds fi p/e and so on .

i find with the advent of sebi rogue promoters has been left and sponsored of lately it is coming less not because of regulation but public has lost money due to pricing of equity issues at very abnormal rates by saying all buyers beware and so on ultimately what happened sebi seizes the money of public ltd co who have come out with heavy premium and not distruuting to the original investors .compalints to sebi are not all heard it is an organisation having enormous powers not accountable to eevn parliament and rogue regulator is havving 2000 crores in its kitty doing nothing and infact sebi was formed for educating and proteting the small investors ,which it failed to do and did not perform for the reson it was formed and it aligned with mutual fund fraud promoters making the mkt risky for simple reaosns which i am higliting
first sebi imposed periodic call aucttion notice where all fraud companies are out of it and all good companies and profit making companies nd even div paying co are inside the pcas and we investors are finding so difficult to buy or sell and for whole day we have to go on enq the brokers whetehr shares has been sold or not .when a facilty trade to trade is there what is the need for it actaullay it helps the promoters to knock off the sizable amt of shares under such scheme formulated by sebi specifically for fraud promoters who want to delist .secondly there was no application of mind on the part of sebi in fixing 10000 hares as average volume per day for a quarter since shares have face value of rs 1,rs2,rs5,rs10 and companies have diffrent share capital also nad how sebi can bring such a schemem.now sebi is promoting sme scheme for small industries and who will subscribe to these issues .since sebi is intersted in more income by way of fees ,they promote .sebi at thetime of formation informed that they will bring the cost of transaction which they have miserably failed. today i can buy 100 crores of land with voters identity card and pn card at ease thna inv in share mkt which is so risky .the index of 21000 was reached 5 years back in effect it is wash out .is there no performance audit for sebi all rules only for investors corporates mutaual funds only .till today did they contribute anything to appoint a share holder member in corporates .anything we fight sebi appoints alawyer by apying heavy fees and req the courts that caese can be heard at supreme court what will the small inv do .
then recently if you notice till now we were thinking only rogue promoters were there but now rogue professional have set it in .you can see for yourself in the case of igarashi motors case where professional md mukund and kk nohria father of dean of harvard nohria had invested in the holding co of listed co more than 20 crores by way of share capital (md)and rs 2 crores by mr nohria and when black stone paid 330 crores the above persons sold the shares in holding co og igarashi motors and md was issued pref offer of 1 crore shares at rs 65 and mr nohria bought shares in the open mkt with that money depriving the minority shareholdes of any sort of appreciation .when mr nohria chiarman stated in last agm that he will declare div at 30perecnt pay out ,and when questioned at agm recently he has nothing to say and said he will consider interim for 2013 2014 and inspite of co earned rs 10 no interim div and sebi has already been isued iwth legal notice ehow can a md be given pref offer allotment when he has sold the shares in the holding co although one is listed and holding co is listed the leetr and spirirt of the notification was not followed
i can cite so many cases .what is the point ?i am quite sure as far as my inf goes there are more than 160 companies lined up for delisting .hence how can the mkt capitalistion improve sveral foreign co want to get delisted under the blessings of sebi
rangan v 9444810000

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