The stock market game and the retail investors predicament


The rule regarding stake holding of promoters of listed private sector companies to reduce their holdings to 76 percent by end June 2013 seemed to have had a big impact on the ownership of stocks. The following table for 975 listed companies will provide some input in this regard.

Percentage held

                                Sept 2010                       Sept 2011         Sept 2012                            Sept 2013

Promoters              55.2                                        54                52.4                                        50.4

Foreign instns        15.0                                        15.4             17.1                                        19.0

Domestic instns      9.0                                         9.5               9.8                                          9.4

Retail investors        8.2                                         8.6              8.7                                          8.1

Note

  1. The table shows that what the promoters sold foreign institutions bought
  2. Retail investors holding has not changed a bit. It stays put at around 8 percent

There are several reasons as to why the promoters unloaded their stocks

  1. While some promoters shed stakes to comply with the minimum public holding rules, others sold for different reasons
  2. Example:

(1)    Suzlon energy promoters sold shares to pay debt.

(2)    Gitangali Gems were pledged by the promoters to meet their liquidity needs.

(3)    Kingfisher airlines had massive debts and so they exchanged debt with their share holdings. This way they reduced their debt

The question now is about the shares picked up by the retail investors from the promoters. How well did they fare? Ans: mixed bag

The stock FIIs picked up from promoters did better than those picked up by retail investors. A good 67 percent of the retail investors added holdings have lost value in the past year. Example: Geodesic, a stock dumped by the promoters, their stake dropped from 25 percent to 10 percent. The retail investors picked it up and their holdings jumped from 32 percent to 55 percent. The stock dropped 85 percent in value

So what is the lesson learnt? Go with the FIIs. They know the game

FIIs bought stocks worth 3.98536 trillion rupees from Sept 2008 through 2013. They earned an average 143 percent gain over these years. In this period Sensex rose 51 percent and Nifty by a mere 46 percent.

FIIs bought pharma, health care and FMCG, a defensive strategy while the retail investors and domestic counterparts sold these sectors. Thus they missed out big time

FIIs for example picked up Ajanta Pharma IPCA labs, NATCO pharma, Lupin and Torrent which all made hefty gains

A detailed analysis was done in a article titled “Fishing for stocks go with the FIIs” by Ms. V. Nalinakanthi in Business line dated 27th October. The data and analysis shows the superior performance of the FIIs in the various sectors of the Indian stock market.

There can be several reasons, beside luck for such superior performance. Some of the reasons could be

  1. Asymmetric information: The retail investor’s track record shows that 8 out of 10 loose money in the market. Their decision making is totally warped because of inadequate data support
  2. The FIIs are well equipped with both data and analysis which helped them to pick winners
  3. The FIIs have money power and they can ride over short term looses and wait until the profit is available to them
  4. The retail investor is emotionally unsuited to this market and its volatility. The Indian stock markets are extremely volatile
  5. Finally we as retail investor are also told wrongly that investment is for a long term. We neither have the patience nor the conviction to stay in the game we will always enter and exit at the wrong time

Who is buying in the Indian stock market currently? You guessed it right. It is the FIIs and who is selling the domestic institutional investor? The data will clarify this

In crores of rupees

FII                                           DII

Jan 13                                    22.245                                   (17614)

Feb                                        22.123                                   (8818)

Mar                                        11660                                    (7872)

April                                       5145                                       (2701)

June                                      (10530)                                 8420

July                                        (5909)                                   (1541)

August                                  (6200)                                   6285

September                         12633                                    (9.30)

October                               13260                                    (8235)

FIIs have also become bottom pickers and invested in stocks that are beaten down and have made money handsomely. Some of their recent holdings and their performances are as follows

Index                                                                    % of Return                        Since Sept 1 to Oct 25

BSE capital Goods                                            24.14

BSE Banker                                                         19.69

BE Auto                                                                15.19

BSE power                                                          11.92

BSE Metal                                                            11.76

Sensex                                                                 (9.52)

 

FIIs net investment so far this year is nearly 85000 crores and sensex has risen 6 percent. They stayed away during June, July, August, September and pulled out Rs 22639 crore

This confirms the belief that the FIIs are good in predicting the stock price movements. As they say “do what the romans do”. The message for the retail investors “don’t go against the FIIs and stay the course with them”. Happy trading.

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