Investing and sports

The recently released SEBI investor survey results are not very different from what has been observed in the past – after banks, life insurance continues to be the next most preferred financial instrument of choice across Indians. The mass retail investor continues to ride on fear psychosis of an imminent correction and loss in value of their investments. If one analyses the overall savings and investments of most retail investors, their exposure to equity is insignificant, compared to say real estate and bank deposits.

In contrast, institutional investors, made of people, are perennially bullish on equities and hold a significant exposure to equities. Yes, institutions hold a higher exposure to real estate as well. Institutional investors benefit by seeing the big picture — their investment is based on the understanding that several businesses are likely to do well in the future, which would result in a decent return on the investment.

There is a slightly dated investor education video that was released by the SEBI a few years ago, which had people from across India sharing their views on investing in the stock markets. The underlying message in Punjabi, Tamil, Malayalam, Marathi and Bengali all pointed towards the same thing – investing in stock markets is like gambling. Over different time periods, the belief has remained so amongst various retail investors. They also believe that knowing the future value of Sensex is the key to be successful with investing in stock markets.  

I once asked market analyst Devangshu Datta on what was the most common conversation point people had with him. He confessed that for a lot of people the first question that they asked him was mostly, “Where do you see the markets going?” I think there is an obsession with the movement of Sensex for most people—investors or not. This question is similar to the other obsession of the season—what is the score, irrespective of which IPL team is playing. The question is irrelevant, because without knowing how one could benefit from investing in the stock markets, what is the point in knowing the Sensex levels?

Unlike cricket, investing is not a spectator sport. Yes, you may get the high of observing market movements, but it will not impact your fortunes until you participate. Most people get very micro-focused on predicting the outcomes of the Sensex movement, than participating in the process that drives the Sensex—investing in equities. So, checking the Sensex levels is not only irrelevant, it is meaningless until you are participating in equities that impact the variation of the index.

Skill development

In case of cricket, timing the bat to the ball for effective outcome is important. I think this lesson is overly relied upon by investors who tend to give undue importance to market timing. It is a different matter that this has nothing to do with their savings and investment objectives. In contrast, large institutional investors stay focused and keep an eye on cash in hand to invest, redeploy or simply redeem investments to meet their investment objectives.

In their fixation for capital protection, retail investors let their money idle by doing nothing, in wait for the right time. The rising Sensex, as is the case now, induces them to take a rash decision and put in their savings in lump sum, a move that risks their capital and is something not in sync with their objectives. If the markets correct, they curse their ill-luck or reinforce the belief that investing is like gambling. Those waiting for a correction, keep waiting for further correction, and further reinforcing their belief that there is money to lose when investing. They tend to do nothing.

It pays to be in the market, deploying what one has, rather than wait without purpose. In a spectator sport like cricket, you lose nothing (unless you are betting) when the team you support wins or loses. Emotions are charged depending on the twists and turns in a cricket match, but your finances are not impacted.

Develop skills to participate in stock markets actively than be a bystander who can narrate incidents of market rise and falls and notional gains as much as losses, but being never involved in any of this with your money. It may do some good to your ego and strengthen your disbelief in investing—but it will not help you build wealth, something that you could if you had taken part in the investment journey.

Rather than try doing everything themselves, it will be prudent for investors to invest through mutual funds. They are institutions that manage money and they have all the necessary proof in being better off at managing money than most individuals. Yet, investors are reluctant to make the choice and in their indecision between do-it-yourself and professional managers, their money lies unutilised. So, will the Sensex touch 35,000 points? As long as your money is not in the markets, the question is irrelevant and so is the answer to it.

Our other obsession after cricket is films and I am sure a lot of you would have seen 3 Idiots at some point in time. You may remember the scenic Ladakh towards the end of the film, and die-hard Aamir Khan fans would recollect his parting dialogue; “Kamyab Hone Ke Liye Nahi Kabil Hone Ke Liye Padho Kamyabhi Jhak.. Mar Ke Piche Ayegi.” I urge you all to take a leaf out of this one line when investing in stock markets. Participate in it with a few basic concepts and facts such as investing is not gambling and that you should invest with an objective and time for the investment. Invest regularly and chances of achieving the financial goal by investing are very high.

Ironically, the rising asset base of mutual funds, increasing number of SIP folios and monthly average SIP contributions are all going up and a clear contrast is visible in the markets. In each of its segments—real estate, private equity, new issues and secondary equity—institutional investors are bullish, holding a dominant share, and increasing their exposure. Retail investors, on the other hand, fear a correction almost every day. The so-called equity cult is restricted to the large cities. Many retail portfolios still do not have significant equity allocation.

Several investors across the country are yet to even step in, if one looks at the penetration ratios for equity as well as mutual funds. There are at least three reasons why retail participation is still too low in what the world sees as a market of opportunity. First, several investors see the stock markets as a risky gamble, and think the key is to know the future Sensex level. The first question asked after my talks to groups of investors has always been, “So, where do you see the markets going?” There is a near national obsession with the Sensex.

But is it really relevant to the investor? I do not recall a single situation in which an investor has been keen to know how best to benefit from a soaring Sensex. Institutional investors benefit by seeing the big picture—their investment is based on the understanding that several businesses are likely to do well going forward, which would result in a decent return on the investment. Retail investors miss the opportunity by being too micro-focused on predicting the outcomes, rather than participating in the process. In making an allocation in a retail portfolio to equity, the Sensex level is actually an irrelevant variable.

Second, retail investors give disproportionate importance to market timing. This approach is not in tune with their capital, cash flows and objectives.

Institutional investors managing others’ money need to keep an eye on cash flows and competition. Even then, several large investors refrain from market timing because seasoned players understand the futility of trying it. But retail investors are stuck on timing. Most have investible surpluses that arise every month from their incomes, like their money to grow over time, and do not like to risk their capital. But their investment style is at loggerheads with these objectives. They let their money lie in wait for the right time, invest a large sum at a given time in one investment, and expose their capital to risk.

Several are awaiting a market correction before they can invest, and I know from observing investor behaviour that the correction will not bring the money in either, as they would fear further losses. It pays to be in the market, deploying what one has, rather than wait without purpose.

Third, institutional investors have the benefit of a large capital base and higher agility to deploy their strategies. They also have investment expertise at hand. Retail investors are unable to replicate these approaches. Several believe that the complexity of the markets is beyond them, and stay away. Some try their own strategies and have a mixed fare of success and failure. Investment management is a specialised job and requires experience and expertise.

Rather than trying to replicate and reinvent the wheel, it is possible today to buy into mutual funds, portfolio management services and private equity. Investors are reluctant to make these choices and in their indecision between do-it-yourself and professional managers, their money lies unutilised.

If I were to say that the Sensex will reach 25,000 points, does it mean anything to someone whose money is not in the market? Are we overdoing it by behaving as if all that we have will have to be staked on that one number, at one point in time? The river will run its course, anyway, and we need to decide our boats, our speeds and our goals. To borrow from D. Blocher, “Investing is not a spectator sport.”

nk@outlookindia.com