Personal Finance Musing 18: Individual Stock Picking is a Loser's Game- a Case Study
PERSONAL FINANCE
MUSING 18
INDIVIDUAL STOCK
PICKING IS A LOSER’S GAME- I
A CASE STUDY
I will once again begin this post with my
impassioned plea - please keep sharing these posts with your near and dear ones
for these are a run up to my book, “Musings
of a (financially) illiterate father”, going to be in your hands in the first week of August. The book has been
specially written to teach the alchemy of wealth creation and retention to our
children. They deserve to learn it.
I had mentioned in my last post that I had sent
across my book draft/excerpts to many eminent personalities belonging to a
cross-section of the society. Since my book is meant for a common investor like
you and me, it was important for me to get the feedback regarding the utility
of the book as a hands-on personal finance guide. Due to their busy schedules,
many didn't respond but to my good fortune, few took the pains to go through
the book draft/excerpts and responded very positively. Beginning this post, I
will present before you one such comment each week.
Hussaine
Kesury, an alumnus of SVKM's Narsee Monjee Institute of
Management Studies (NMIMS) is the Chief
Category Officer (CCO) of Pepperfry.com, the online furniture giant. He has
nearly two-decade rich experience in the financial sector. His previous
assignments include Marketing Manager
(Auto Loans) at ICICI Bank, Senior Manager - Product Management at Tata AIG
Life Insurance, and Head - International Marketing at E bay. So, when
Hussaine talks on financial matters, people listen and this is what he has
to say about the book, “Musings of a (financially) Illiterate Father”.
“As the popular adage goes, "Money isn't
everything but happiness alone can't keep out the rain." So,
financial security in the age of inflation is paramount. And as one grows older
it becomes imperative to build strong financial assets and plan for the future.
But there is no school where one can learn where to
invest. Anand Saxena’s paperback- “Musings of a (financially) illiterate
father” offers a hands-on experience with simple illustrations on how one can
manage personal finances. A simple outlook on the complex web of personal
finance one can easily ace that skill through his myriad experiences.
A must-read for any Indian, especially the youth who
can learn simple tricks to get their finances in shape. I would
recommend every person to read this book once in his lifetime for
learning and implementing wealth creation in day-to-day life.
I wish him the very Best”.
I must admit that Hussaine has been very magnanimous
in his praise for the book but these words of encouragement from a financial
sector powerhouse mean a lot to me as an author. But, for now, let's get to the
topic of this week's musing.
Most financial experts agree, and
rightly so, that equity investing is the path towards long-term wealth
creation. Whenever we think of equity investing stock market pops to our mind
since this is the place where trading of shares takes place. We in India have
two stock exchanges, the Bombay Stock Exchange (BSE) which has nearly 5,500
stocks listed, and the National Stock Exchange (NSE) which has nearly 2,000
stocks listed. Before I come to the hypothesis of this series of posts i.e.
“Individual stock picking is a loser’s game”, let me go through a fascinating
case study pertaining to Vakrangee Limited. We will undertake a comparative
analysis of two 5 year periods as a 5 year period is generally construed long
term in the parlance of equity investing.
Vakrangee Limited claims to have more than 35,000 seva kendras
across 16 states offering government and non-government services. Vakrangee
takes deposits, offers loans, sells insurance, collects taxes and utility
bills, lets people apply for passports and even enroll them for the Aadhaar
biometric ID[1].
It saw a meteoric rise in the prices of its stock between 2009 and 2018 when it
grew into a 37,000 crore company. Its share value increased from Rs 1.61in Jul 2009 to Rs 63.98 on 04 July
2014, a growth of nearly 3875% in 5 years. The growth continued unabated
and reached Rs 505 as on 25 Jan 2018- a
percentage increase of 689% in 4.5 years. The company had plans to double
the number of its seva kendras to 75,000. The bull was truly galloping for
Vakrangee and the investors were enjoying the joyride.
This is where the slide commenced and
soon turned into a free fall. Vakrangee share which was trading at Rs 505 on
NSE as on 25 Jan 2018 is worth only Rs 51.85 as on 06 July 2018, a drop of nearly 90% in last 6 months.
So an investor who had bought Vakrangee shares in July 2014 has made fabulous returns of minus 2.29% in 5 years while enduring massive
volatility. To put it further into perspective, an investor who bought shares
of Vakrangee worth Rs 1 lac in July 2014 will find their value eroding to Rs
88,500 in July 2018.
Another more prudent investor who had
invested the same amount in a diversified multi-cap equity mutual fund will
have Rs 2,35,000 in his kitty by the end of this 5-year cycle. To add insult to
injury, another "risk-averse investor" (meaning who shies away from
equity exposure and hence doomed for lower returns- as per conventional wisdom)
who invested in a regular debt instrument will have Rs 1,40,000 in his kitty.
You might argue that an investor who
bought the shares at Rs 1.61 in July 2009 and held on to them till Jan 2018
would have gained phenomenally but would he have known that he must sell the
shares in Jan 2018? Is there an indicator which tells an investor when to buy
and sell a share? Absolutely not, and hence an investor who had bought Vakrangee
shares in end Jan 2018, would have suffered a 90% loss within 6 months, with no
means to know as to where the stock prices were headed next.
The amusing fact is that Vakrangee was
a darling of nearly all the financial newsletters and sites which specialize in
providing “hot tips” on a daily/weekly/ monthly basis. None, however, advised
the investors to sell off the shares before
the slide began. The “sell” advice started appearing when the slide had
turned into a free fall.
The pricing of stocks is merely a
demand and supply issue. When public sentiments are positive the buying of the
stock increases which pushes the price higher and vice versa. In the case of
Vakrangee, what would have been the reasons for this roller-coaster ride and
would the investors have been aware of these factors? These could have ranged
from bad investment decisions by Vakrangee to a fundamentally faulty business
model. An average investor would probably never know. Why should you then
invest your hard earned money into a venture about which you are clueless? You
don’t even buy vegetables and fruits without having a look.
The point I am trying to get at is
that a common investor has no means to study all the listed stocks on the BSE
and NSE (5500+2000) on a daily basis and make an informed investment decision.
He will invariably rely on his broker/newsletters/financial sites etc which in
any case will have no interest to give him the real-time news- if that was ever
possible. The news that he gets about the “hot stock” will be “suitably
delayed” to ensure that the actual profits would have been made by big players
in the intervening period. We will discuss this issue at length in our next
post.
I know that many of you would have been
successful in few of your stock pickings- if you are into share market. But if
you are honest to yourself, these successes would have been few and far between
and mostly due to Providence and not your own astute analysis. An average
investor is not equipped to carry out fundamental and technical analysis of
stocks (more than 7000 in Indian markets itself, which is barely 4% of the
global market). In one of my subsequent posts, I will cover the pitfalls of
even these analyses and the randomness of their results.
In my next post on 22 July, we will
continue with our discussion where I will provide further proof and evidence to
deter you from direct stock investing and instead take the safer and less
volatile route- via the mutual funds. As you would notice, there will be no post on 15 July due to some important personal
reasons. Incidentally, I have dealt with the all-important topic of mutual
funds (both equity and debt) extensively in my book.
For now- enjoy your Sunday. You have
earned it.
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