Driving Away Retail Investors - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 8 September 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
A worrying statistic for the Indian equity markets is the fall in the participation of retail investors in the market. The volume of retail turnover in the equity markets is at its lowest levels since 2005. It peaked in 2009, and has seen sharp declines since.

This is despite the fact that markets have performed very well since 2009. Since its lows made in 2009, the markets have gone up close to 100% in the last three years. Normally, rising markets are associated with greater retail investor participation in the markets. But as markets have been going up, retail investors have been getting out.

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The lower participation rate for retail investors is not unique to Indian markets. Markets in the US and Europe are witnessing the same phenomenon. While the stock markets have risen significantly over the last three years, retail investor participation has taken a dive.

So what is driving away retail investors? One interesting feature about stock markets over the last three years is that market sentiment has not matched actual performance. What this means is that while the markets have been doing well, sentiment is the exact opposite; i.e. it is near all time lows.

Most of the financial headlines over the last few years have talked about the crisis that we are going through, or the crisis is soon due to arrive. We are constantly living in a climate of fear, whereby we believe that a full-blown crisis is just around the corner.

For example, I read an article in the news this week that talked about how Greece was likely to leave the Eurozone very soon, and how this could cause mayhem on the markets. Six months ago, the same thing was in the news. In 2011, the same thing was in the news. Likewise for 2010 and 2009.

It is not just Greece. The whole Eurozone is about to be thrown into crisis. The Indian economy is paralyzed and is grinding to a halt. The US is going to default and the dollar is going to implode. I could go on, but you get the point. All we hear about is how everything is about to get a whole lot worse.

So, it is really not a surprise that retail investors are losing confidence the market. We're so focused on speculative headlines in the press, that we forget to look at the facts. The facts are that the market has been very strong over the last three years, and that a crisis is no more likely today than it was 1, 2, or 3 years ago.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

Disclaimer:
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8 Responses to "Driving Away Retail Investors"

shaheen mohmad ashraf

Sep 14, 2012

Mr asad this article of yours reminded me of film sholay , ur article is exactly like amithab bachans role acting as middleman for his friend ,he heighlits all the evil habits of his friend and then says MOSI MERA ITNA SAMJANA PER BE AAP NAHI SAMJI.MR assad u heighlited all the fears and apprehensions of retail investors and all negativ news round the globe and then like amitabh says markets have been strong

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RK77

Sep 11, 2012

The investors do not trust the market managers - the big brokers, the famous analysts who speak on TV and mislead gullible investors to buy or sell based on the agenda set by their rich clients. Markets are manipulated is now common knowledge. The portfolio managers only take out their fee and so do the Fund Managers. Investment is based on trust. Trust has to be earned. Trust has been lost and therefore small investors have moved out of Mutual Funds and are also reluctant to invest directly in equity. Direct investments based on professional advice given by Equitymaster has given better returns than any mutual fund in the last 3 years.

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Gaurav

Sep 10, 2012

I must say that I am surprised & disappointed by Assad's extremely simplistic views on the Equity Market.
There are important Fundamental problems with the Equity Market, and without addressing these, there is every chance that the markets will implode at some point of time.
I am far more enthused by Bill Bonner's advise "Buy gold on dips, sell stocks on rallies" and smart investors are doing this.

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Christopher

Sep 10, 2012

I may sound simplistic but Mutual funds also have played a part in driving away retail investors. Many people put money into them without really knowing what they are getting into and when they under preform are scared away for good. All the more, when they realize its all equities it scares them even more.The common people urgently need basic Equity understanding not just to trade and make money but to invest with Value in mind.

Like (1)

B S MURTHY

Sep 9, 2012

It is appreciable that the retail investors are becoming slowly wiser in understanding the market movements vis-a-vis the the scams and frauds committed by the politicians, failure of RBI in controlling inflation, failure of mutual funds, Dirty FOREX games played by FIIs. Lakhs of companies floated after independence have faced quick mortality. Only a few thousands are remaining in the market. Unstable government policies including the interest rates add fuel to the fire to the corporate mortality. No wise retail investor can dare to risk his hard earned money into the sinking / broken boats.
The present indices shown by the NSE/BSE itself is a big fraud because the companies' list get modified according to the whims and fancies of the Exchange Management.
When Japan Yen value has appreciated over the last 65 years, our Rupee value has diminished its intrinsic value by more than 99%.

Like (1)

umesh Sharma

Sep 9, 2012

One of the reasons why the retail investor is shying away from the equity market is that the reliability factor is missing.Now institutional Investors with huge funds at their disposal go on buying spree and the rates spiral upwards.At a particular point they dump the whole built up stock and the prices crash They of course make a profit but small investors burn their fingers.In respect of IPOs there is no effective control over the manipulative tendencies of the management and the investor suffers due to steep fall in the prices of shares subscribed by him.This has naturally made them more hesitant.The market is highly volatile and there is no guarantee that the stocks invested will retain their market worth not withstanding their intrinsic qualities.SEBI has to be more alert and vigilant in preventing unscrupulous elements from cashing on the gullibility of small investors.The IPOs must provide for compulsory repurchase of IPO shares of small investors by promoters for a limited period of up to next balance sheet date.This will create confidence of some sorts in small investors.Similarly the running companies must have some co relation between dividends paid and pay packages etc given to the top executives of the company.they should not be allowed to eat the cream and deprive the ordinary share holders a decent return on their investment

Like (1)

Clifton Gonsalves

Sep 9, 2012

Retail investors are wisely not venturing in to stock markets during these uncertain years. You may already know, but still I will tell you why.
1. Indian Stock Market Index is still lower than Jan 2008 highs.
2. Returns over 3 years wrt 2009 lows do not represent the true picture. Returns over 4 , 5, 6 years will give a clearer picture which is not at all rosy when compared to 3 year returns
3. The current index is just because of quantitative easing ( FII inflows ) and not due to any strong fundamentals.
4. Currently Bear sentiment is much higher than bull sentiment
5. World debt at an all time high is still not being addressed.
6. Global correction is due - it should have happenend in 2008 - 2010 but differed due to QE's
7. In view of this uncertain financial climate - return of capital is more important than return on capital and hence gold, FDs and debt funds look more attractive
8. Most of retail investors ( post 2008 meltdown) have already ( wisely ) parked their funds in gold ,FD, real estate

Like (1)

Kuldeep

Sep 9, 2012

Things are bad Asad. Printing money and kicking the can down the road is not the solution. Retail investors are all aware that when that happens they will be the only ones who lose their money. Large institutional investors pull out much before the crash. They have insider information that the retail investor lacks. Till you create a level playing field, retail investors are wise enough to stay out.

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