The Charge of the Light Brigade - The Honest Truth By Ajit Dayal

The Charge of the Light Brigade

30 NOVEMBER 2015

While the star show in calendar year 2014 was the election of Prime Minister Modi and the dumping of the Congress onto the corruption-ridden side roads of the Indian political landscape, the fascinating side show has been the return of the retail Indian investor into the stock markets. After having shunned Indian stock markets since the Lehman bankruptcy, the retail investor is back - with a ferocity and vengeance that would make a cyclone seem like a light breeze.

Table 1: YTD locals in massive overdrive: Local buying supporting Indian stocks.
  Net Foreign Activity
(US$ m)
Net Local Fund Activity
(US$ m)
(US$ m)
Change in S&P BSE-30 TRI in that Period (% USD)
CY 2003 6,628 106 6,734 +86.5%
CY 2004 8,669 -258 8,411 +20.5%
CY 2005 10,707 3,037 13,744 +40.2%
CY 2006 8,106 3,411 11,517 +51.6%
CY 2007 17,655 1,694 19,349 +67.0%
CY 2008 -11,974 3,326 -8,649 -60.8%
CY 2009 17,458 -1,191 16,267 +90.3%
CY 2010 29,362 -6,118 23,244 +24.4%
CY 2011 -358 1,278 920 -35.7%
CY 2012 24,372 -3,894 20,479 +24.1%
CY 2013 20,101 -3,728 16,373 -1.9%
CY 2014 16,116 3,893 20,009 +29.2%
Cumulative 146,842 1,556 148,398 +648.1%
Oct-15 1,023 450 1,473 +2.5%
YTD 2015 4,684 8,978 13,662 -5.1%

Source:; CDSL

For the 12-year period between 2003 and 2014, the waves of love/hate and greed/fear flows into the Indian stock markets by local investors via mutual funds resulted in net cumulative sales of USD 7.4 billion. Contrast this with the USD 142.2 billion of net cumulative purchases by Foreign Institutional Investors (now re-classified as Foreign Portfolio Investors).

The Indian stock markets gained +502% in USD terms (S&P BSE-30 Index) over this same time 12-year time period. This suggests that the foreigners made profits from the evolution and growth of the Indian stock markets while the local Indian investor - badly advised by their financial intermediaries and the mutual fund managers who dominate the media? - probably had little benefit from the surge in stock prices. Mutual funds who are busy spending money on branding themselves and giving the investors the bills to pay in the name of "investor education" should pause and introspect: are Indian investors dumb or were the local investors so trusting that they have been persistently mis-led by the local army of wealth managers to buy at the top? A salesman knows that it is easy to sell what is hot. A great advisor would probably take more of a cautious view and warn his client of the pitfalls of investing in rising markets. Both set of investors - the FPI and local - were given the identical opportunity to buy into the Indian stock markets. The behaviour pattern and outcomes are radically different.

Magical, Mystery Tour

With Modi's mesmerising win and all the Build India, Clean India, and Make in India campaigns replacing the photographs of Sonia Gandhi and Rahul Gandhi in PSU ads, the Indian retail investors have got back their mojo. But manhood can come with a price. A passionate decision - if not balanced by logic - can result in a poor result.

Table 2: Locals see the first losses. The Billion Dollar Month Club has a warning message to it for those buying the India Reform Story.
Month Net Foreign Activity
(US$ m)
Net Local Fund Activity
(US$ m)
Index gain/loss 12 months later
(in USD)
Index gain/loss 24 months later
(in USD)
Mar-06 +1,504 +1,008 +18.6% +54.8%
May-06 -1,602 +1,738 +59.4% +72.1%
Aug-07 -1,899 +999 -11.1% -14.3%
Jan-08 -3,304 +1,953 -57.1% -21.3%
Aug-14 +887 +1,146 -10.0% To be seen
Dec-14 +192 +1,120 To be seen but so far not good To be seen

Source: SEBI Data, Bloomberg, Quantum Advisors

There have been 6 instances in the past when local investors pumped in USD 1 billion into the stock markets in any given month. But - looking forward one year and two years out in the future - did that investment make money or lose money?

When measured in US Dollars (to equate with the returns of the FPI), it would seem that investing was a great decision in two instances (March 2006 and May 2006). In three instances, it has been a bad decision over a one year period and in two instances it has been a bad decision over a 2-year period. As more data comes in over time, we will know the outcome. But, what is important to note is that: just because the locals are buying does not mean they will be right. They may make money or they may lose money. It could go either way.

Part of the reason for the flows into stock markets from local investors may also be lack of investment alternatives: real estate has been a flop, gold has been a dud, and fixed deposit rates are coming down. Since individuals do not look at "real interest rates" (the difference between the FD rate and the inflation rate as reported by the government), they feel that a 7% FD is not as good as the 8.5% FD that was on offer a year ago.

With fewer alternative investment options, investors are vulnerable. This is when the dream merchants begin to weave their magic. Research analysts are armed with CFAs, MBAs, and ample media time. They have spun a story. After being on the verge of losing their jobs or having to face the torture of reduced bonuses in the year 2013, the financial services industry has been given a lifeline by the election of the BJP in May, 2014. With soaring markets and soaring SIPs, why would they wish to caution investors against any future problems?

Graph 1: Earnings Estimates ramped up on a Modi victory: then deflated to accept reality!

A BJP victory looked certain after the disastrous interview that Rahul Gandhi gave to Arnab Goswami on January 27, 2014. As the election polls began to reflect this trend, research analysts began ramping up their estimates of company earnings. Egged on the story that a Gujarat Model would be adopted across a flourishing India, in one mystical leap of faith the analysts raised their estimates for earnings of the BSE-30 Index by +20% in March, 2014. They maintained that lie for the rest of the year - till they had to swallow their pride in December 2014 and accept the lower reported earnings for Calendar Year 2014. This forced them to also lower their estimates for earnings for CY 2015.

By February 2015, the nashaa over the budget of February 2015 - and to keep pace with the rising share prices ahead of the first full budget of the BJP government - encouraged the research analysts to dream on. They spiked the earnings estimates for CY 2015 again and released optimistic numbers for CY 2016 estimated earnings. Again, as time went by, these estimates were (and still are) being reduced.

Even a dream merchant - whether with a CFA or an MBA - has to accept reality. They can either say they are "wrong" (believe me, estimating earnings is difficult and I have been wrong many, many times!) or they can sell the dream forward: to CY 2017....This is exactly what they are doing!

The future is always brighter.....

It may may not...

Invest in share markets, but buy cautiously.

For those investors who have been rushing headlong into the stock markets, some words of advice:

  1. You must own equity, a lot more than the average Indian household has today; Indian households are - on average - dramatically underweight stocks;
  2. Stocks are a great place to invest for the long run: but the level at which you buy will determine whether you make no money, little money, or a lot of money!
  3. So enter prudently, be rational, don't trust the dream merchants;
  4. An SIP - and every mathematical, lazy solution - works only as long as it works. While a regular pattern of investing is good, tweaking that pattern to decrease or increase investments can be sensible: but you must know when to do so! Not easy! This is what a good financial advisor must do. However, with the financial services industry geared towards making targets and meeting near-term commissions, please select your advisor for his advice on your portfolio, not his advice based on his/her potential commission! Not easy!

Indian stocks will do well: I am a big believer in this. That is my dream story! 😊

But a few lines from the poem by Alfred, Lord Tennyson (where you are the soldier and the big financial firms are the "someone") may be good to read:

"Forward, the Light Brigade!"
Was there a man dismayed?
Not though the soldier knew
Someone had blundered.
Theirs not to make reply,
Theirs not to reason why,
Theirs but to do and die.
Into the valley of Death
Rode the six hundred.

Stay hopeful, be optimistic, love life - but be rational! 😊

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund and Quantum Equity Fund of Funds Quantum Gold Fund
Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% in total in both; Maybe 20% in QLTEF and 60% in QEFOF 20% Keep aside money to meet your expenses for 6 months to 2 years
Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"
Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site.

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1 Responses to "The Charge of the Light Brigade"

vidhata Bhide

Dec 2, 2015

Sir, couldn't agree more with you on this, "Stocks are a great place to invest for the long run: but the level at which you buy will determine whether you make no money, little money, or a lot of money!"

I think, irrespective of good market conditions or bad market conditions; markets will always offer bargains. It's upto investors, which one they should pick and the ones they should avoid.

Sir, I sincerely believe (I might be wrong); Indian fund managers need to understand the shift in the psyche of investors that move the markets. For example, after the dramatic fall of 2008; companies with good corporate governance and transparent managements started coming in lime light. FMCG companies were not cheap even then but they became more expensive. (I think when arriving at value, we shouldn't ignore the simple demand-supply economics). I am certainly not the proponent of "trend is your friend" philosophy. It's just that, the rule of staying with "value" shouldn't ignore demand-supply equation. Where to stop is a challenge, Dotcom boom can't be justified by any logic. A company at 100 PE can't continue to generate continuous returns for long. Such extremes should be avoided.

Sir, it really hurts when we come across something like, "retail investors don't make money in stock markets."
Greedy advisers are to be blamed without even a slightest of doubt; but fund managers are equally responsible for being extremely ordinary in their effort, on most of the occasions.

I have observed that, they invariably buy stocks from within these baskets. 1) Expensive stocks having considerable weight in the index 2) expensive stocks with more exaggerated growth prospects 3) cheap stocks with fussy managements. This combination does well only when markets rise as a whole. Any market (as a whole is not re-rated every now and then. they got to be extremely selective. Instead, they are too concerned about beating the index. They hardly think like businessmen; they rent stocks, more often. In this process, first-time investors never get encouraging results on their first investment.

This is where mutual funds start losing them.

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