Dear ‘mature’ retail investor, you are the profit opportunity for others

Economic success does not always translate into stock market gains.
Economic success does not always translate into stock market gains.

Summary

  • The mature retail investor understood that pandemic or not, cheap money was going to drive the markets non-stop.

Its been 30 years since I have been tracking the stock markets. And during this period, perhaps there have been about four instances when the retail investor has been labelled as ‘mature’. It happened during the telecom-media-tech boom of the late 1990s. The retail investor was apparently mature enough to understand that the world had changed, and the new economy was here. The big boom of the mid-2000s. The mature retail investor learned that the way to make money was leverage. The small-cap and mid-cap melt-up post 2014. This time around, the mature retail investor bet it all on the power of the smid (small- and mid-cap) stocks to generate life changing returns. The pandemic rally that started in April 2020. The mature retail investor understood that pandemic or not, cheap money was going to drive the markets non-stop.

Now, you know where I am going with this. Each of these episodes ended with the mature retail investor losing their shirts. With the benefit of hindsight, we know:

First, new economy or not, one should never overpay for an investment. Second, leverage is akin to poison. Third, smids can collapse, totally. Fourth, there’s nothing like a non-stop rally.

This brings me to the present. We are in the middle of a massive bull market. And once again the retail investor has been labelled as mature. But this time it’s different.

What we have today is a New India story, played with leverage, and doubly charged with a focus on small and mid-caps. And of course, the unshaken belief that this is going to be a non-stop decade long run. It is as if all the learnings over the last few decades have been discarded.

The question is how does this end for you, dear mature retail investor. Well, no one can say for sure. But history suggests that if you are not careful with your money you could be in for some trouble. But then you probably know that. Yet, you also probably believe that this time it’s truly different. Well, that’s a sentiment that one cannot fight off. Perhaps it may help to think of this in a different way. You are the profit opportunity for someone else.

Today, mutual funds are pushing unnecessary systematic investment plans (SIPs) onto you. And if not that, sectoral/thematic funds. Brokers are enticing you with levered products, and fast trading calls. Fund managers are launching exotic portfolio management service (PMS) and alternative investment fund (AIF) schemes to tap into some hidden opportunity. And so on and so forth. For these ‘sellers’ to make a profit, they need to keep selling you something. And for you to keep buying, the story needs to keep becoming even more enticing. And this is exactly what’s happening today.

The India story, strong as it may be, has, generally speaking, translated into something else when it comes to the stock markets. And this sets you up for nasty surprises from time to time.

So, what can you do to ensure you don’t end up being someone’s lunch? First, and by all means, believe in the India story. Be optimistic in fact. But when you are investing money in stocks, be cautiously optimistic. Economic success does not always translate into stock market gains. Just see what transpired in China. Second, when investing in stocks, be sure to never overpay. Investing in an insanely valued stock, hoping someone will be willing to pay an even higher valuation (the greater fool theory) in the future may not be the best investment approach. So be patient. If you need motivation, remember, Warren Buffett is sitting on $150 billion plus, waiting for opportunities.

Third, the idea that smids can make you rich, and the large caps cannot, well, is just a whole lot of humbug. So, don’t fall for that. And if you think leverage can help you multiply your money, well, you have an even larger problem that needs to be addressed!

Fourth, there’s nothing like a non-stop rally. So, at all times, be sure you are well diversified across asset classes.

Finally, and perhaps herein lies the biggest secret to success, have a healthy scepticism when it comes to investment ideas. This will help you deal, at least to some extent, with all the “selling" you are encountering day in and day out.

In conclusion, it’s sad that the mature retail investor is once again being led down a path that often does not end well. One can only irrationally hope that this time around it going to be different.

Rahul Goel is the former CEO of Equitymaster.

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