Why Retail Investors Lose Money in the Stock Market

If i ask Retail Investors, How many of you lost money in the stock market?. I can guarantee that out of ten retail investors; eight will say YES. In my opinion, Rest Two are lucky enough to invest in RIGHT STOCKS :). The experience of my readers is quite shocking sometimes. Here i would like to clarify that i am counting Retail Investors who generated returns less that FD returns as a loss to the investor. For simplicity purpose, i will quote the examples of Mutual Funds that is perceived to be safest by the Retail Investors. During one of the discussion, i cited the example of few stocks, and my blog reader told me that stock selection of the said investor was wrong.  Therefore, for the comparison purpose, a mutual fund is the right choice. The best performing equity mutual fund delivered 6% return in 2015 i.e. Axis Long Term Equity. On the other hand, big boys like HDFC Equity & HDFC Top 200 delivered a return of -5% and -6% respectively. Last year stock market broke the mutual fund myth that mutual funds cannot give negative returns. Please note that these two funds have highest AUM among all equity mutual funds.

Retail Investors are always caught unaware in the stock market. On the contrary, in 2015 the no of retail investors equity portfolios increased. The AUM grew by 21% and as per estimate approx 30 lakh new retail investors joined the bandwagon. When market is moving down, and new retail investors are pouring money, what will you conclude?. I am not expert but as a layman, i will conclude that new retail investors are scapegoats who provided an EXIT route to some big fishes in the market.

Before i proceed, i would like to share imp point. Whenever i write any post on Mutual Funds, i receive nasty comments and inputs from my friends who are Mutual Fund distributors or Advisers. I am not perturbed by such threats. Abusing or threatening me will not serve any purpose. For all my posts, there is a comment section. If any of my friends feels that information shared by me in this post is wrong, please feel free to post it in the comment section. I accept and appreciate criticism, but it should be factual, not an emotional outburst. I will be more than happy to correct my posts. I only moderate comments that are abusive in nature. The objective of this blog is only to create awareness and educating retail investors. Let’s argue and counter argue based on facts and then reader decide what is right and what is wrong. A healthy discussion is always welcome.

Why Retail Investors Lose Money in the Stock Market?

1. Lack of Information: Stock Market is predominantly Sentiment and NEWS driven. During my investment, i observed the stock movement of more than 50 stocks continuously for a year and so. My conclusion was retail investors are the last one to know about the news/sentiments. As i keep highlighting that retail investors enter when the PARTY is already over. I will share more details in next point on Wrong Timing.

Recently, one of the pharma company received US FDA warning, and the stock tumbled 15%. The big operators already knew this information in advance. It is not my conclusion, but you can check comments on online forums. The common conclusion of retail investors is that there was definite inside information to the big fishes. As usual, Retail Investors were caught unaware and lost huge money.

If you study the pattern of this stock, you will observe that there was consistent selling few days before the news broke out. Only a couple of months back stock touched 52 week high. Within 12 weeks it tumbled from 52 week high to 52 week low. There were rumors in the market that one of the largest institutional investors sold entire holding just before news broke out. They again bought when stock tumbled. All these are rumors but may be correct. There is NO SMOKE without FIRE.

The point i am trying to make is that to make money in the stock market; the retail investors should have level playing field. Retail Investors cannot compete with big operators i.e. access to RIGHT Information. This information is required to buy or sell the stock. Else retail investors will always be the scapegoat in this game.

2. Wrong Timing: I always share that timing of entry and exit is critical to making money in stock market. Let’s accept the fact that retail investors cannot give direction to the market. As we have seen in 2015 also that despite aggressive position taken by retail investors, markets delivered negative returns.

The investors have to think smartly. It is a vicious circle. By wrong timing, i mean to say that whether you are entering at a time when big fishes are about to exit. As a human psychology, the entry point of retail investors coincides with the exit point of big operators. The reason being market can get direction only from big operators. Assuming market bottomed out, and big players decide to pull up the market. At this point, the confidence level of retail investors is at rock bottom. They will not invest at this point. Now big operators will start pumping money, and the market will start moving up. The confidence level of small investors will start building up. The time trust is built, the market will be at high PE level or peak, and it’s time for big operators to book profit. At this point, retail investors start investing money in equity that provide an exit route to big operators. It happened in 2015, and it always happen.

3. Analysts: I will not name, but there is a very famous and award winning stock analyst. I observed he had a huge fan following. The investors take contrarian calls to his call on a particular stock. I tried, and it works. When he tell BUY, investors will SELL & vice versa. I am not kidding. I feel as an investor, taking contrarian call against analysts view is more beneficial. You may check the stocks like Axis Bank, ONGC, ICICI Bank, SBI, Coal India, etc. with most consensus BUY rating tumbled in the market.

I am not concluding but based on a conclusion from online forums, these so called Analysts provide EXIT to big operators by giving BUY call. A big operator cannot EXIT overnight. He has significant holdings and if he sell there should be buyers. From where to bring these buyers or scapegoats. Large no of analysts will give BUY call, and their followers will start buying. If you observed, there were large no of BUY calls on ICICI Bank with a target of 400+. The volumes are HIGH and are one of the most active stock from quite some time. At the same time, stock value is going down consistently. It can be safely assumed that some big fishes are exiting the stock. Retail investors might be buying based on BUY Calls.

Words of Wisdom: The nitty gritty of the stock market is too complicated to understand. Some time back one of the websites MoneyLife posted an article on manipulation in NSE to select market participants (read Big Operators). The NSE filed 100 Cr court case against MoneyLife. The court dismissed the suit and fined NSE 50 lakh. Can we conclude, the dismissal of a suit by the court means what MoneyLife published was correct.

Recently SEBI banned 27 entities from markets for fraudulent trade. This news was not covered extensively. Reason being, the confidence of retail investors, should not shake. Moreover, if they move out of the stock market then how will big operators will make money. Hope retail investors understood the words of wisdom :).

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