On 23rd August, Nitin Kamath, the founder and CEO of Zerodha, now one of India’s largest stock broking firms wrote a highly unusual blog post. In it, he said that 2 lakh people out of the 7 lakh who have demat accounts with Zerodha, hold Yes Bank stock. Yes Bank has fallen 84.75% over the past year. Not all of Zerodha’s clients bought the stock exactly a year ago. However Kamath says that his clients are collectively sitting on an unrealised loss of over 59% in the stock. Another 1.25 lakh investors hold Ashok Leyland with loss of 40% and over 1 lakh people hold Tata Motors with over 51% loss, he adds.
Many of the clients ‘averaged down’ or bought more shares as the stock fell. 1.96 lakh of Zerodha’s clients who currently hold Yes Bank have bought the stock on an average at least 4 different times, mostly on the way down, the blog post says. “There are many times where averaging down might have worked, but the issue with this strategy of averaging down is that one bad trade is enough to wipe out all previous earnings and more," Kamath says.
A senior SEBI registered investment advisor, who declined to be named argued that this was too simplistic. A mere price decline over a one year period does not automatically mean that the retail behaviour was bad, he said.
However Kamath’s blog post does not end there. In a chart embedded in the blog post, he documents how more and more investors piled into Yes Bank stock even as it kept falling. According to a chart put out by him, 23,681 clients held Yes Bank at the end of August 2018. This number jumped to 58,908 around mid-September after the stock saw a sharp fall. By the end of August 2019, the number of clients holding the stock had soared to an astonishing 196,417. Are these clients ‘buying low’ in order to ‘sell high’ on some future date? Kamath says that this is a myth. Instead he says that the ‘the optimal way to trade is to buy stocks that are doing well and sell them higher as they grow’. Unfortunately, retail stock investors time and again have demonstrated that they do not follow this advice. Their shareholding in wealth-destroyers such as Jet Airways has jumped with every successive decline in the stock price as Mint shows here .
The aforementioned advisor however questioned the role of stock brokers themselves in furthering retail trading in stocks and derivatives. He also contended that stock brokers should release details of their proprietary trades given the large volume of information they possess about client and client accounts. “A broker telling retail investors how badly they have done after inducing them to trade is adding salt to their wounds," he said.
However there is one exception to the ‘Great Indian Retail Tragedy’ – and that is the retail investors who have patiently been investing in Mutual Funds via Systematic Investment Plans. An SIP invests a fixed amount in a mutual fund each month and makes no attempt to catch dud stocks as they fall. Monthly SIPs have held steady at roughly ₹8,000 crore since December even as the market gyrated wildly.
The worst performing open ended mutual fund over the past year, UTI Transportation and Logistics Fund is down 32.61% compared to the 84% drop in Yes Bank. Some might see even this 32.61% fall as alarming, but they should note that the fund in question only has Assets under Management (AUM) of ₹1,186 crores, a tiny fraction of ₹6.84 trillion in open ended equity funds at the end of July 2019. To put this into perspective – around 28% of direct stock investors in Zerodha hold Yes Bank while only 0.2% of mutual fund investors hold UTI Transportation and Logistics Fund.
At the end of June 2018, retail investors held 6.27% of Yes Bank stock while mutual funds held 11.56%. Shift forward to June 2019 and retail investors now hold 18.72% compared to just 6.59% by mutual funds. Fund investors have fared better than their direct stock counterparts in more ways than one.