Interesting information of beahviour of small investors in Capital market during one of the biggest bull runs in Indian history

DEVANGSHU DATTA

This is an edited version of a very interesting article written by Devangshu Datta in Business Standard. It goes on show that even in one of the greatest bull market in India, 98% of the retail investors lose money in Stock market. So what is important is discipline and knowledge.

The Indian School of Business (ISB) has done a study mining data from the National Stock Exchange (NSE) to understand how retail investors think and operate. This exercise was massive in scope with the ISB tracking the trading habits and portfolios of 24.6 lakh retail investors who operated in the secondary market between January 2005 and June 2006.  During this period, the Sensex and the Nifty gained 60 per cent. It was the  middle of the biggest bull run in Indian history. The bull market continued till January 2008. There was no big correction and the uptrend was broad with advances outnumbering declines across the entire market.

The sample tracked by ISB made about 140 crore trades with a total value of about Rs 37,00,000 crore (Rs 37 lakh crore) on the NSE. This included about 98 % of all equity trades. In value-terms, the retail segment accounted for around 36 per cent of the market value of all equity trades. The losses for retail investors over this period amounted to about Rs 8,400 crore, net of brokerage, taxes, etc.

That’s right! During the biggest bull market in history, retail as a group made net losses. Since equities are zero-sum, they passed on their profits to institutions. During that particular period, a simple strategy of buy and hold on almost anything should, on balance, have produced profits. Yet retail investors consistently bought and sold the wrong stocks at the wrong time. They sold winners early, and they held onto losses in what is called the disposition effect in behavioral economics. Disposition led to another well-documented phenomenon – over-confidence. When retail investors make money, they get over-confident and trade too frequently and also take unacceptable risks.

http://www.business-standard.com/india/news/study-your-errors/494248/