There are no shortcuts to making money, especially in the stock market
4 min read . Updated: 17 Aug 2020, 10:47 PM ISTIt takes years of dedicated learning to understand the basics of investment
Companies have been losing crores of rupees. Socioeconomic stress is being reported from different parts of the country as well as the world. Yet, the stock markets seem to be doing well. If you find this bizarre, you are not alone. And you may be in good company too. This question has puzzled seasoned investment professionals and multiple experts around the world.
Studies show that in the short term, stocks ignore business reality and swing rather randomly between optimism and pessimism. This makes investing in the stock market difficult. Buying stocks when the price is low and selling when the price is high, is hard. Finding the right stocks to buy is even harder. But all this has not deterred new investors from flocking to the stock market. India’s top brokerages reported up to 300% jump in new accounts. Published data suggests that the average daily turnover has been rising for the last three months like never before. Further, oddly, retail and high net-worth individuals’ share in this turnover has been rising. On the other hand, institutional investors’ or the experienced investors’ share has been falling.
India is not alone in this recent retail upsurge. The craze to “make money" in the stock market is sweeping across many parts of the developed world. An increasingly diverse combination of bold newbies are flocking to the markets. From retirees, sportspeople, retailers to police personnel, the allure of stocks is touching multiple sections of the society.
I don’t know about you but as I scroll down on popular news websites, I see at least two separate pictures and headlines of housewives making money. Here is one headline that stands out: “Mumbai Millionaire Mom Exposes How to Make Lakhs Per Month from Home". As I click through the link, I find that this “news" article shares the story (with pictures) of a happy family. The “mom" in the story takes a couple of online classes on trading and eventually, over a year, earns ₹58 lakh (plus)! Such stories are the perfect bait to get people on the stock market band wagon. Add to this a massive push via a plethora of “get rich" webinars offered for “free" on TV news and social media channels.
In addition to the marketing blitzkrieg, the retail stock rush is driven by some other important factors as well. Ease of opening brokerage accounts and sleek mobile interfaces stand out. Above all, thanks to work from home, free from the clutches of the boss, the extra time is being used by some to scoop stocks. There is one other vital consideration. Governmental and central bank support in not letting the stock market go down.
In the aftermath of the 2008 financial crisis, governments and central banks acted in a coordinated manner for reviving businesses. But in doing so they unleashed one of their most powerful arsenals: in a way, printing money, aka quantitative easing. The central banks created new money to buy assets. A part of this newly created money found itself in the stock markets, which kept rising.
In response to covid-19, the world’s leading central banks are back at it again. Central banks have launched brand new quantitative easing programs. The intent is to support businesses and the society but the secondary effects, so far, are similar to the story that played out post 2008: a stock market that not only did not go down but that kept rising, decoupling itself, at least in the beginning, to the underlying business reality.
Given all this, how will the new retail rush to stocks play out? Research studies show that retail investors lose out. They buy and sell based on second- or third-hand opinion. Further, expectedly, as prices collapse, many give up and exit the markets. According to the China Securities Depository and Clearing Corp., nearly a third of the country’s individual investors (20 million people), exited the Chinese markets after the 2015 market crash. The emotional and social impact of loss making experiences can be deep and lasting. Talk to somebody not in the know and check their opinion on the “stock market". Don’t be surprised if the person says: the stock market is a gamble.
The stock market, among others, is an important mechanism for providing capital to companies. Understanding how markets work, and analyzing companies and economies form a small part of the investing body of knowledge. It takes years of dedicated learning to understand the basics. Dabbling in stocks after attending day-long webinars or based on information on social media channels, chat rooms or being guided by broker recommendations is setting oneself up for trouble. Deciding to stockpick through any of these modes is being dangerously close to wild speculation. There are no shortcuts to making money, definitely not in the stock market.
Shreenivas Kunte, CFA, CIPM, director continuing education and advocacy, CFA Institute
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