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In 1980, if you bought only 100 shares in Wipro, you would be holding 9.6 million shares today. Their worth: A whopping Rs 472.32 crore (Rs 492 a share on May 22). We are not even including the dividends the company has paid over three decades.
This has happened due to several stock splits and bonuses over 34 years. The share price of Wipro in 1980 could not be ascertained because both the company and Bloomberg did not have this data but anyone who stayed invested in the stock would have gained astronomically simply because of the rise in the number of shares.
On the other hand, an investor in Kingfisher Airlines' stock at Rs 50 in January 2011 would be sitting on a 96 per cent loss, as the share is trading at Rs 2. In 2011, there were 11 per cent retail investors (investment of less than Rs 1 lakh each) in the company. Today, the number of retail investors in the company is over 50 per cent.
These two contrasting stories highlight the plight of the retail investor in the stock market. On the one hand, only a handful make serious money because they lack the discipline. On the other hand, they are unable to exit even from a company like Kingfisher by booking losses.
The problem
Retail investors often complain they have not made money in the stock market. Though the BSE exchange's sensitive index, or Sensex, is at an all-time high of 24,000-pus and the National Stock Exchange's benchmark Nifty is sitting pretty at 7,200 points, few retail investors can say they have made serious money.
There is a reason for this - they never stay invested in a good fund or stock. Even if one looks at mutual funds (MFs), Reliance Growth Fund has risen over 60 times in 19 years. Last week, the scheme's net asset value rose to Rs 600 lakh. If someone had invested Rs 1 lakh in the new fund offer of the scheme, he would be sitting on Rs 60 lakh today.
Fund managers support the idea of MFs being more for retail investors. "Retail investors should not invest directly in stocks. They should take the MF route more because the cost is barely two-three per cent annually. And, they should treat equities as a core asset instead of another asset class. Indians don't sell gold or real estate easily but they are quick to sell equities," says Pankaj Murarka, head (equity), Axis MF.
Navneet Munot, chief investment officer, SBI MF, feels there is either only despair or euphoria for retail investors. As a result, they try to time the market and get driven by a short-term or medium-term perspective. So, when the markets rise, they are the last ones to enter. When the market falls, they are the first ones to exit. And, if they cannot exit because of a sharp drop, as in 2008-09 when the Sensex dipped to 8,000 points, they sell at each rise. For instance, in the past few years, each time the market scaled new highs, fund houses felt redemption pressure. A little over 12 million folios have been closed since March 2009.
Fund managers say it was primarily due to the fact that the Sensex hit 21,000 points in January 2008 and then, crossed it in December 2010 before the recent rally took the benchmark indices to a new high of over 24,000. "Minor profits were booked at each rise instead of staying invested for the long haul," says a fund manager.
But in April when the bull rally started, fund houses saw 400,000 new folios in pure equity schemes, according to data from the Securities and Exchange Board of India. As Murarka puts it: "Investors are now coming in because they are feeling left out."
Clearly, the enthusiasm is because of the prospect of a new high, not because they want to make long-term money. Yet, they forget that while brokerage houses such as Citibank, Deutsche Bank and Bank of America Merrill Lynch are setting new targets of 26,000-28,000 by December, investing now would only mean an upside of 15 per cent - not substantial if you are looking at really good returns. Says Hemant Rustagi, chief executive, WiseInvest: "Retail investors keep entering and exiting at all the wrong times. Their approach is more about protecting the downside than increasing the upside."
Moral
The lesson: If invested in a good stock or fund, don't redeem when things are bad or for a small profit.
On the other hand, Kingfisher Airlines stopped its prime operations - flying - 18 months ago. Its third quarter results showed the company in deep red. But retail investors in its shares never exited the scrip. Says an investment banker: "The retail investor find it very difficult to exit stocks at a loss. Today, when there is little value in the company, investors are still stuck because there is no exit route." Even the Rs 2 valuation seems more like notional value. No one might even buy the shares for that price.
The lesson: If you have invested in a company that is not doing well and has stopped operations, it is better to exit, preferably at the first sign of trouble, instead of hanging around. More important, don't try to buy and average out costs in companies that are not doing well.
Of course, one can always say that judging in hindsight is easy. Still, as Warren Buffett says: "Time is a friend of the wonderful business, the enemy of the mediocre." Ask the same question before buying any stock or fund - will it stand the test of time?
