Small investors should not walk into the speculation trap

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“Most people who have been really successful in the securities markets say the same thing – that they are not smart enough to get into the market and out of it. So, they tend to remain more or less in the market at all times.” –Walter Schloss

Externalities – unintended consequences – are hugely important in financial markets. The sharp market crash in March 2020 caused by the outbreak of the pandemic Covid19, which took the Nifty to a low of 7511, and the subsequent rally which powered the Nifty to a high of 18,604 in October 2021, triggered many unintended consequences. The most significant consequence of this rally has been the explosive growth in the number of demat accounts from 4.09 crores in March 2020 to 10 crores by end 2022 and above 11 crores now. The WFH (Work From Home) arrangement necessitated by the pandemic facilitated TFH (Trade From Home). While seasoned investors were skeptical of that one-way rally, which was not supported by fundamentals, the newbie investors who mushroomed after the pandemic, merrily traded in the market. That unique one-way-rally in the market enabled the newbies to make a lot of money and many thought that trading in the stock market is an easy way to make money. Many newbies even resigned from their jobs and opted for trading in the stock market as a profession. That was a classic case of what the poet Alexander Pope called “fools rushing-in where angels fear to tread.”

The explosion in the number of demat accounts from 4.09 crores in March 2020 to 10 crores in September 2022 was like manna from heaven for the so- called ‘experts in trading’. Dozens of YouTubers arrived with ads claiming to teach ‘how to trade and make money.’ Ads like ‘Make money sitting at home’ and ‘Make Rs.10 lakhs with just Rs.1000’ popped up. One outrageous ad even showed a boy who looked like in his early teens executing an option trade and making money from that trade.

Separate the wheat from the chaff

To be fair to the new crop of YouTube influencers, it has to be said that there are many who are promoting financial literacy. There are high-quality YouTubers who are handholding the newbie investors into healthy investments. But the problem comes from two sources: One, the YouTubers who manipulate the market through the ‘pump and dump schemes’ and, two, YouTubers who attract newbies into day trading and trading in derivatives through their trading courses. ‘Pump and dump’ manipulation involves pumping the stock prices of some low-grade companies by spreading false news like a possible takeover and later dumping the stock at higher prices. Recently, SEBI banned the Bollywood actor Arshad Warsi and his wife from the securities market for pump and dump manipulation.

A major trap into which many newbies are walking into is the ‘trading as a profession’ trap being set up by some of the new crop of YouTubers. Some are targeting women through claims that women can earn a regular income sitting at home and doing day trading and trading in derivatives. Many small investors who have mushroomed during the last three years are walking into this trap. Most of them have already lost heavily and many are set to lose unless they realize the mistake and stop day trading and trading in derivatives.

Learnings from history

From my experience in the market since 1985, I can say the following with conviction: One, it is possible to earn excellent returns from the market, in the long-term, through disciplined systematic investment in high quality stocks/mutual funds. Two, the vast majority of retail investors don’t get good returns from the market because they invest in cheap low-grade stocks. They don’t invest based on research; instead, they go by market tips. Three, the vast majority of traders lose money in reckless overtrading in the market.

SEBI study finds that 89 percent of traders lose money

A recent SEBI study found that 89 percent of individual traders in the equity F &O segment lost money in FY22 with average loss of Rs 1.1 lakhs. Only one out of ten traders made profits with an average profit of Rs 1.5 lakhs in FY22. The number of traders had exploded to 45.2 lakhs in FY22 from 7.1 lakhs in FY 2019. The SEBI study only confirmed what was known to the market all along. The founder CEO of India’s largest discount broker with millions of customers had gone on record that 95 percent of traders lose money. Out of the 5 percent that makes money only 1 percent get returns beating fixed income returns. This has been the case in the past and will continue to be the scenario in future too. If the newbies in the market realise this early, it would be good for them.

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Investment speculation trap

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