Personal Finance Musing 19: The Baby is Born
PERSONAL FINANCE MUSING 19
INDIVIDUAL STOCK PICKING IS A LOSER’S GAME- II
The baby is born. My book, “Musings of a (financially) illiterate father- a common investor’s guide to wealth creation and retention is live now. The book has been specially written to teach the alchemy of wealth creation and retention to our children-they deserve to learn it. Please support this mission of financial literacy by reading and recommending this book- have a glimpse.
The book continues to generate positive reviews- sample this. Surendra Pal, veteran film, and TV actor has more than three decades of acting experience behind him. He is well known for his roles in films like “Jodha Akbar”, “Lakshya” and “Airlift”. However, his iconic depiction of “Dronacharya” in serial “Mahabharat” and “Prajapati Daksh” in serial “Devon Ke Dev Mahadev” has endeared him to millions of viewers.
Financially savvy, he has the knack to spot a good investment from miles. He was graceful enough to read the book and give it thumbs up with the following blurb.
“Gem of a book on investing essentials: I wish I had read it in my youth.”
It is heartening to hear the bold confession of a reputed film and TV personality about naiveté in matters of personal finance which most of us suffer from. We learn about personal finance by trial and error- like I did. I am sanguine that this book will provide a clear roadmap for investing to many common investors.
Let us return to our topic of direct stock picking which I described as a “loser’s game” in my last post.
The rise and rise of Indian Stock market especially in last 25 years is the story of which dreams are made of. BSE Sensex has gifted a CAGR of 16.5% to its investors since its inception in 1986, which means that it is doubling Investor’s money every 4.5 years or so. Truly phenomenal indeed, but then why am I trying to dissuade you from investing in Stock Market? What actually I am trying to deter you from is direct stock picking or dabbling in Individual stocks which can best be described as the Loser’s Game.
Let me further qualify my argument. The 16.5% CAGR is not uniform to all the listed companies of Sensex (around 5500) - few have given returns in excess of this figure while some have gone bust- remember the case study of “Vakrangee Ltd” in our last post? Also, not all the shares of these profit-making companies are available for general public meaning that bulk of the profit generated by these companies is kept by the promoters themselves, to the tune of nearly 51%. It doesn’t mean that the common investors like you and me have access to the remainder of 49% of the pie (called as free float). Around 40% of this free float equity is held by foreign institutional investors (FIIs)[1]. Domestic institutional investors (DIIs), which mainly comprise insurance companies, banks, and mutual funds, own about 20 percent of the free float. The common investor holds only one-third of the free float.
Sample some more facts- Millions of traders (approximately 10 Million) trade about 10 Billion stocks in a day over 44 stock exchanges in the world. High- Frequency Trading (HFT) takes place meaning that 50-70% of the trades are generated by high- speed machines. What is the Implication for a common investor?
“It takes only half a second to click your mouse to complete your trade order. In that short time the big boys with the supercomputers will have bought and sold thousands of the shares of the same stock hundreds of times over, making micro profits with each transaction.-----One HFT firm spent a quarter of a billion dollars to straighten the fiber-optic cables between Chicago and New York to shave 1.4 milliseconds off its transmission time”[2].
The price of stocks, to a large extent, is thus determined by these “big fish”. After all, the stock price is a function of demand and supply. The prices rise when there is excess demand and vice versa. The big players, by their bulk buying and selling, can create fluctuations in stock prices. The ironical thing is that the common investor will never know that thousands or lacs of stocks have already been bought by others at much lower prices earlier and if the big players decide to sell these stocks, the prices may crash, causing serious financial loss to the common investor.
This brings me to the next point to support my argument. If a stockbroker really knew that the price of a particular stock is going to rise why would he tell it to anyone?
“He would quit his job, borrow to the hilt, purchase as much of the stock as he could and then go to the beach”[3].
The same holds true for the magazines/newsletters/internet sites who keep on giving you “Hot Tips” about particular stocks and their price movement over next week to six months. Don’t pay any heed to these; they all are out to fleece you of your hard earned money.
Now consider what chances do you stand as a common investor to compete against such a highly rigged system? It is best to avoid individual stock picking and take the Equity exposure via the Mutual Fund route, about which I have deliberated at length in my book.
Still not convinced? Sample this quote from Rakesh Jhunjhunwala, described by India Today magazine as the "pin-up boy of the current bull run” and by The Economic Times as "Pied Piper of Indian bourses”. As per Forbes, he is the 50th richest person in India, with a net worth of USD 3 billion (as of June 1, 2018)[4].
“This stock market is like a buffet! There are so many dishes to eat. I would not advise anybody who is not a professional investor to try and invest himself. Investing is a complex procedure and requires a lot of professional help and monitoring. The best way is to use mutual funds via SIPs”[5].
Hope I have been able to convince you not to trade in direct stocks but instead take equity exposure via the mutual funds’ route. Incidentally, I have devoted a large chunk of my book towards the tenets of mutual fund investing- both debt and equity.
My book is currently available on Amazon, Flipkart, Infibeam and Notion press as a paperback, the eBook version, including Kindle, should be ready in another week. I will keep you updated in my next post. The link to go to the book is provided below.
For now, enjoy your Sunday while reading my book- you have earned it.
[2] Robbins Tony, Money Master the Game.
[3] Bernstein William, Four Pillars of Investing.
[4] https://en.wikipedia.org/wiki/Rakesh_Jhunjhunwala. Accessed on 05 July 2018.
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