The Indian equity markets have been buoyant for many months now. The benchmark indices have scaled new life highs every few weeks. A lot of the initial profits in this Bull Run were made by FIIs as retail investors were absent from the markets until recently. However, the lure of quick, easy profits has brought them back into the action. With large numbers small traders entering the markets daily; it is important to ask the question: are they making money?
Well, if history is any indication, there are reasons to be worried. As per an article in Livemint, the associate director of the Centre for Analytical Finance, Indian School of Business (ISB), has highlighted the results of a recent study conducted by the B-school. They investigated the impact of trading, on the portfolios of retail investors. In other words, they wanted to find out if retail investors were making money by their trading activities. The results of the study are disturbing to say the least.
The study found that excessive retail trading leads to money being transferred from the hands of retail investors into the hands of institutional investors. Retail investors traded far more frequently than institutions and this resulted in a huge wealth transfer of the order of Rs 83.76 bn over 18 months! This mind boggling number was 0.77% of India's total savings in FY06. It's also important to note that this amount excluded brokerage and taxes. In short, they found that in a battle between patience and activity, patience won hands down. The study examined data from the past bull market (between Jan 2005 and June 2006). Thus, it holds important lesson for retail investors in the present market conditions too we believe.
In the midst of such euphoria in the markets, it is easy to forget the mistakes that one has made in the past. However, when it comes to your hard earned savings, we would like to leave you with the following quote from the legendary value investor Warren Buffett - "Sir Isaac Newton might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases."