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The cliché of a ‘foolish’ retail investor is one who gets excited by bull markets and buy stocks at higher and higher prices. He then regrets his actions when markets start falling, often selling shares at losses or exiting the stock market completely. The reality of retail investors in India is different. Retail investors get attracted to falling stocks rather than rising ones and accumulate more of these as their prices fall. This can cause them to do badly, even in a bull market.

Financial year 2021 was undoubtedly a bull market with the Nifty rising by a strong 19%. However, in that time period, the companies which saw the highest growth in retail shareholding were the ones which saw heavy declines in prices.

An analysis by Anish Teli of QED Capital Advisors LLP looked at retail ownership change in companies whose stock prices rose from 31 March 2021 to 31 March 2022. Such companies saw just a 6% increase in retail shareholding in FY 2021. On the other hand, companies whose stock prices declined in the same period saw a 24% growth in retail shareholding.

This analysis is further accentuated if we look at the list of stocks where retail investors grew their holding by more than 10%. Among such stocks where retail shareholding rose, the top five are Hathaway Cable and Datacom Ltd, Amara Raja Batteries, Dilip Buildcon, Dhani Services and Mahanagar Gas Ltd respectively. These stocks fell in the period in question – March 2021 to March 2022 by an average of 41%.

 

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“The mentality of retail investors is essentially driven by anchoring. A stock that was once 500 seems like a bargain at 50. This argument often drowns out considerations of why the stock has fallen. Retail investors buy it like a lottery ticket—a huge payoff for what looks like a cheap down payment. In reality, this is akin to catching falling knives. Companies with corporate governance issues or those in declining sectors often feature in such lists of retail buys," said Teli.

The post-pandemic era saw a huge surge of first-time investors in stock markets around the world.

In the US, some of these investors were famously attracted by ‘meme’ stocks like Gamestop and AMC.

In India as well, the number of monthly demat account openings rose from 4 lakh in FY 20 to 12 lakh in FY 21 and a whopping 26 lakh in FY 22. Among such investors, ‘buy low sell high’ seems to be the reigning mantra. However, paying attention to what you are ‘buying low’ is equally important.

“There are usually good reasons for a stock to fall and you may not be able to immediately know them or understand them. Averaging down or SIP type investing works with index funds or diversified well managed mutual funds. It does not work with stocks. For stocks, you need to do your homework," Teli added.

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