Highly fluctuating stock indices Lessons for retail investor – Part II By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

October 13, 2015 | Posted by bobbysrinivasan << back to blog

Student: Can we continue this conversation?

Professor: Yes, of course. This is similar to Arjuna giving up on the war and requests Lord Krishna to help him to make a decision whether to fight a war with his cousins. Let me try,

The people engaged in trading in the Indian stock market could be broadly classified in to the following categories (This is my own classification)

Occasional trader: He has money available. He wants to see prices drop and then he will buy it. He is looking for value.

Frequent trader: This guy is restless. Every now and then he will make an entry in to the market. He will have a target price to sell. He will compare the previous lows and highs.

Day trader: This is a bunch of people who use the stock market as a gambling casino. They want a few thousand rupees from the market every day. This is always a dissatisfied dream for most of them.

Retail investor: This is a naïve person. He tells himself that he will stay in the market for long and retreats when the market drops say 10% in a single day. He panics and forgets all his fundamentals.

Long term investor: He is a Warren Buffet type. He has a plan to build a portfolio for ever. He will keep buying stocks as when he feels comfortable with the price and availability of liquidity. He is a sure winner in almost every market except Japan where the market index Nikkei is nearly half of what it was 1989.

Foreign Institutional Investor: Our fair weather friends. He is a very shrewd trader. He does extensive macro-economic analysis. He will invariably be the first one to buy and exit the market quickly when conditions are not favourable for him. He is always looking for ways and means to improve his performance in the market.

Local pension funds and foreign pension funds: I have no idea about the size of their involvement. But regardless they are big players in the market.

Mutual funds: They are very large and can have a big say in the price discovery process.

The important thing is to know all these players come with different size budgets and have highly differential capabilities to handle a crisis. Obviously the most hurt is the small time and budget investor who have no idea of where the crisis is coming from and cannot fathom the impact of algorithmic trading.

The important message is here for the small budget investor. Nothing works in his favour. Studies show that 8 out of 10 loose money not because they don’t know what they are doing, but they have absolutely no idea of how the big time trader can overwhelm them by creating volatility.

Student: Are specifically saying that the Indian equity market is not for small budget investor?

Professor: I am not saying that. Stock markets always move up over a long period of time. But having said that there may be many days on which the volatility will scare the retail investor. The simplest solution is to put the money in a high growth stock and industry and wait your time which may be take say 10 years. In 2003 when Dr. Singh took over as India’s PM the Sensex was 3800. Today after reaching 30000 it is now around 26000. An excellent performance indeed but in 2008 during the sub-prime crisis Sensex index dropped from 21000 to 8000 in a year’s time. The question is will you survive this volatility. Perhaps you alone can answer that.

Student: Thanks, Professor.

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