The other day a friend of mine lamented that he had lost about Rs 3 lakh in small cap stocks. An entrepreneur spoke in despair about the loss he suffered in small cap stocks, the amount he didn’t
divulge. There are a couple of my friends who used to follow my column in Corporate Ethos and always talked about their value investments that would benefit them in the long run.
I have seen day traders who sit laboriously in front of the terminals hoping to spread their nets at the right time for some good catch. Most people give up sooner or later in despair.
Not many have a clue about how stock markets work and that could be the reason why seasoned players such as Porinchu Veliyathu saw his expectations going awry when he had to admit to clients that he was baffled by the unusual sell off in small and mid-cap stocks a few months ago. Even company top brass always refuse to comment on share price movements but will be willing to talk at length about the company financials and ratios that may sound Greek and Latin to most of us!
If you look at the history of the stock markets in India, it is not unusual to find alternating periods of
boom and bust which are not necessarily related to market fundamentals or the domestic or global economic trends. The Harshad Mehta scam, the dot com boom and bust and now the crash of mid cap and small cap stocks are some among them.
Just as a citizen of India enjoys constitutional rights and in turn has responsibilities to the nation,
investors as a class need to think of themselves as having some constituitional rights but more
importantly accompanying responsibilities.
The Companies Act and Securities Exchange Board of India (SEBI) recognises a category called
shareholder whose liability is limited to the extent of his holding in the company. Once he has paid up the capital, he or she is not accountable for what is happening in the company but they have the right to vote in Annual General Meetings (AGMs). The extent of the shareholding is a deciding factor
for any individual or company to get a place in the Director Board.
Philosophy of the stock markets and investing
The stock markets exist because listed shares have to be bought and sold. The two main beneficiaries in these are corporate bodies such as National Stock Exchange and Bombay Stock Exchange with the latter being a listed entity itelf. Then you have large number of brokerages that make money (margins or commission) when their clients buy or sell a stock. Then ofcourse there are depository service providers,registrars and so on.
For the stock market, ie. the exchanges and brokers, the more the number of transactions that happen the more is their income. It is very important for the research outfits and brokers to create some hype now and then around some industry or business so that more investors jump in expecting to make a quick buck. However, any hype cannot last long. It will end when the major
players make sufficient gains and hapless investors lose as much.
But then this is a ‘zero sum game’ ie. A’s gain is B’s loss. Don’t expect to be on the winning part of the
Just as in any other industry, stock market hasn’t been immune from disruptions created by new technologies- discount broking by Zerodha or algo trading that executes large trades within seconds.
It is here that your philosophy of investing is very important. If your investment is just for the sake of
making a quick buck, you are likely to overlook many aspects of a company and have a herd mentality because others are lapping those shares. The stock exchanges also overlooked the
fundamentals of many companies which came for listing until SEBI tightened the rules making it a bit difficult for fundamentally weak companies to get through listing procedures. As a shareholder, your responsibility is much above that of a common man. Each of your decision counts in the market just as every voter’s vote counts in an election. If your investments are value driven rather than money driven, the outcome would be far better in the long run as no amount of hype can be sustained beyond a short duration.
After reading the book Ohariyilude Engane Nettam Koyyam (How to reap gains in Share Market) by Porinju Veliyathu published 12 years ago, I felt if investors used the book to understand the stock market intricacies and invested rather than tracking his portfolio, the outcome would have been