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Small investors have no business to be in the stock market

My 75-year-old father was in town recently. One day he called me aside, and said, "I have created a fixed deposit in my bank worth Rs 50,000 in a joint account favouring you and your brother. But do me a favour. Give me half the interest you earn. It will take care of your mother's monthly medical bills."

My immediate reaction was, "Papa, don't be silly! We don't need the fixed deposit. You should invest it in your and mummy's name!"

Papa shook his head, and said, "I already have some FDs in your mother's and my names. I am not sure how long I will live. I know you and your brother do not need the money now. But the FD will be a good investment in case there is an emergency."

"In that case, why don't you give us cash?" I quipped.

"Don't be foolish," he said, "I know you will spend it."

"But maybe I can invest it in the stock market and earn a higher interest!" I persisted.

"Shut up. The stock market is not for us to invest in. Bank fixed deposits are safer."

I shut up.

When my father retired from government service he earned Rs 7,000 per month. He sent his children to school, married off his daughter, bought a flat, and has been a frequent traveler to his relatives and children for the past 20 years.

Before you have ideas, let me confess: my father is an upright man. In my 35 years I have never ever seen or heard him borrowing a penny.

Two years ago, when my sister shifted her home to another city, my father went on a shopping spree. He bought a new television set, a grinder, washing machine and refrigerator -- all in a year -- to lead life afresh with my mother, away from his children.

Some years ago he had followed a popular trend and invested some of his precious savings as fixed deposits in a couple of "nidhi" firms or non-banking finance companies. He gained handsomely a higher rate of interest. With his earnings he invested further until one day many of the NBFCs went broke.

That was the closest he came to speculation. His investments to date comprise FDs in nationalised banks and a little bit of gold.

My father calls himself a small investor. And he never plays the stock market.

Which is why I can't understand what people mean when they now say that the small investor should be protected.

If you are a small investor, then you have no business to be in the stock market. Period. If you do play the markets, it is at your own risk. I am amazed at people's foolishness when I read statements such as "I lost my entire savings in the stock market", or "I had saved 2 lakh for my daughter's wedding and had bought shares of Zee and HFCL…" And I hang my head in shame at the media which thinks that it is everyone but the small investor to be blamed for the state of the market.

How can you be so foolish to put your entire savings in the stock market? What do you know about HFCL's management to buy the stock at Rs 1,500?

On the other hand, what happened to those who bought Infosys at Rs 5,000 and sold it at Rs 9,000 and made a handsome profit of it before it crashed to its current level of 3900s?

When you make a profit, it is solely because of your cleverness.

But when you fail miserably you blame the regulators, brokers, cartels, the economy, Nasdaq, the grazing cow…everyone but your own foolishness!

I am all for taking cudgels on behalf of the small investors who lose their money when they are cheated, like the thousands of investors who put their savings in the co-operative banks only to be defrauded by the management. Here the case is simple. The government wants to use your savings for which they have set up banks which offer you a promised interest rate. The government through the banks says it will honour its commitment. When it doesn't you are cheated and can sue it.

But in the stock market who gives a commitment on returns? Not the promoter, broker or the regulatory authority. So then what business does the small investor have in dabbling with stocks?

The stock market by definition is a gamble. No one, including Ketan Parekh or your favourite journalist, has a clue as to how it will perform exactly. This is because the market moves less on fundamentals (quality of product, management, demand, market share, etc). and more on perception. Ketan Parekh perceived media companies would do well. So he bought them lock, stock and barrel. Share prices zoomed. Newspapers and magazines wrote about how 25 year-old directors were millionaires. And soon enough everybody was clamouring for media stocks. All that was based on perception.

What are the fundamentals of the media companies operating in the market? If you don't know the answer to that one you shouldn't be holding their stock.

Apart from your ignorance of how the market operates, you also have to deal with the pathetic state of disclosures and utter lack of transparency. Have you ever read in detail the fine print in the IPO form? If you did, why did you invest in Cyberspace Infosys, or Visie Cyber Tech or Tips Industries?

If you are one of those investing in the secondary markets ask yourself this: Are you investing in Pentamedia because everybody seems to be investing in it or are you investing because you think the slowdown in the tech companies will not hit its bottomline?

You may wish to be a small investor, but are you smart enough?

One relatively safer way to dabble in the markets is by investing in mutual funds which invest in the market. Here again there is a risk though it is lessened by one factor -- hopefully, the mutual fund managers know their fundamentals more than you do! But then again it makes sense to invest in the mutual fund for a long term (say three years) rather than for short terms.

For instance, last year if you had invested in equity funds for a three year period, on an average you would have netted about 20 per cent returns. If you had instead invested on a one year period your would have earned a negative return of about 25 per cent!

Moral: If you are small, don't invest for a short term. Stay there put for at least three years.

But how many of you would like to swallow this bitter truth? Anything less than 50 per cent is not sexy in the stock market. Small investors want to make a quick buck. No one wants to hold stocks for five years. Life these days means not just more. It means now.

A major part of this nonsensical Save The Small Investor campaign has been created by the media. The media loves to create hype. When the so-called dotcom boom took place the most prominent news items was about how people were getting rich overnight.Did you read anywhere, amidst all this ESOP, venture capital worshipping hoopla a headline saying: 'Hey, where's your revenue model?'

Ditto with the stock market. When the market boomed the focus of the media was which company was creating the maximum number of millionaires or what was next on Ketan Parekh's favourite list. The message was simple: Listen everybody is making money so why don't you?

It is a fact that when markets boom the sales of financial newspapers and magazines, viewerships of television channels, and the hits of financial web sites (including this one) zoom.

When the market crashes, you lose readers and viewers.

So what do you do? Talk about the fate of small investors, hoping that they will continue to read and watch you.

Give me a break.

Money

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