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Can a retail investor make profitable investments in the stock market consistently?

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The hay-days for Indian stock Markets seem to have come back again – Positive rally for past 8 days has seen Indian markets scale peaks seen more than 30 months back.

I have been off-and-on trader in Stock Markets and most of my investments previously have been either on instincts or based on certain expert / analyst calls or on my own fundamental analysis. More often than not my investments have not yielded desired results.

This time though, my approach has been different – I will talk on it more on that a little later. First lets look at how average Indian retail investor has been investing.

The basic function of financial markets is to divert the savings into optimal investment avenues. With a steep increase in the disposable income of the individuals retail investors are supposed to make an active participation in capital markets including stock market. In a country like India, gold, real estate, Postal savings, Govt bonds continue to be the preferred investment by an average investor. Seemingly, they ignore a very important class of financial instruments – capital markets comprising of equity and derivative products.

The common notion is that retail investors generally come in when the markets near their peak, before a correction. This is once again due to lack confidence on the markets.

So, the million dollar question:

Can a retail investor ever make profitable investments in the stock market consistently?

Answering these questions requires a little insight into the analysis techniques. There are two classic theories which form the basic of any stock market investment. Fundamental and Technical. Given the scenario of inefficiency in the markets, fundamental analysis boils down to information aggregation and traditional technical analysis suffers with limitations like availability of historic data and complexity in usage.

Over years, the retail community has been banking on various experts to take their investment decisions. This includes traditional print and electronic media which gives out numerous open ended buy calls but fail to follow up and issue a sell call leaving the end user in a state of ambiguity. The scenario of RNRL recently would give us a classic illustration. When the tussle of RNRL and RIL was going on, the media had enough news to prompt a ‘buy’ on RNRL during the last week of Apr’2010, as a result, the stock went up from Rs. 61 to Rs 75 in a weeks time. However, when the court verdict was against the belief, in a single day it lost by 35% on 5th May’2010. None of the media houses which prompted a ‘buy’ came back to say ‘sell’. Similarly Satyam debacle of Jan’2008 is worth remembering .

Later we have seen professional advisory services being offered by some financial services giants. However, there exist a conflict of interest between financial services firm and the retail investor. Because, the ultimate goal of the financial services is to generate more revenues by intermediating between the investors and capital markets; While the investor is interested in multiplying his investment portfolio.

The advent of new sophisticated stock charting tools like Metastock, Spider, Advance get, which act as decision support system for the users marked a considerable increase in awareness of technical analysis. However, a major chunk of retail community is still handicapped with the knowledge of its usage.

Coming back to my experience – Like many investors, I too am not too comfortable with Technical analysis, other than some basic stuff. I am now making my investment decisions by relying less on humans, and more on algorithms to give me buy & sell signals.

To give you an example – I use Vantagetrade to give me buy and sell signals. It is a ‘ready to use’ stock analysis tool for retail investors and traders. The buy and sell signals given by them are completely automated based on proprietary  algorithms. The best part is they also alert the users about entry and exit points over email and SMS alerts to keep them informed 24/7 even while on the move.

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The success ratio of algorithmic tools like vantagetrade is much higher (atleast in my experience) than any of the previous methods I have used in stock market.

There is one thing which I would actually love to see – A platform which offers not only buy & sell signals, but also integrates it with investors trading account and automatically buys and sells when the signal arrives. A slight dis-advantage I face with tools like Vantagetrade is – by the time I act upon buy / sell signal given by them, it is too late (especially in short term trading).

The integration of trading platform with algorithmic signaling tools would be an awesome combination for retail investors like you and me. Something that will ensure that they have possibility of making consistent profitable investments.

what do you think?

  1. Anon says

    Does being entrepreneur means selling your soul also….for few pennies to Vantagetrade

  2. Altaf Rahman says

    This is a subject on which so much can be written.
    Before I start here I would like to be clear about “Retail Investor”. In hindi there is a saying “Jo safed hai woh sab dudh nahi hota”. Similarly all the people putting hteir money in stock markets are not investors. Most of them are pure greedy, without knowledge and come to stocks when they hear that people are making crores overnight and try their hand. They deserve nothing better.
    Among the millions of greedy lot, few (may be few %) who are sensible and enter market after falling in love with it. Those are the ones who never quit even after making losses time again. They are the ones who need good guidance, rules to follow and so on. For the rest its their fate. After all stock market is cash neutral game where some one looses and some one gains. What we see in market is some professionals continue to gain. So to compensate we need a constant supply of loosers. The greedy lot fit the bill.

    I am not bragging about myself but I am a great lvoer of stock markets. I have seen Harshad Mehta times. I have seen the excitement when Sensex hit four figure mark for the first time. (Let me clarify, at that time I was only active reader of financial news and predicting the stocks and their rise/falls but only active in market since last 8-10 years.

    Still I refuse to confirm to any one steady rule. So I learnet little. I follow a little of all. I look for fundamentals, I take expert opinion, I take friends recs, I trade on impulse. In the end I never beat either sensex nor experts. Cos I do things the way they should not be done. If I time the buy part correctly before rally in a stock, I miss sell timing and make loss. I never count the rupees I made. I just feel happy if the bet I made on a particular stock gave me gains and I feel pain if my bet went wrong. I do it purely for fun.

    Though as anyone can see from above, I am not a prudent player, I can atleast give some advise (on behalf of being in market for long time)

    1) I prefer that teh new people coming to market, if they want to play safe, should first invest in mututal funds where they take care of minute to minute trade decisions.
    2) Also as no one can time the market, they should go through Systemic investment.
    3) When they get the feel of the market (i.e. when tehy read in news that govt is rising export tax on iron ore, they should immediately knwo that stel mills are going up. when they see that it rained satisfactorily, many things can happen like inflation comes down, demand for gold goes up, infra structure sector goes up etc. When there are floods in brazil, expect coffee to go up)
    The live example, due to recent floods in pakistan, cotton prices in india flared this year.
    So coming to the point, when you graduate to the level of visualizing the after effects of an event, enter market on your own.
    4) When you enter market on your own, dont go beyond BSE ‘A’ stocks. Keep playing in them. They offer lot fo liquidity.
    5) While in BSE ‘A’, the priority of whome to listen should be like this.
    a) Read financial news daily in different sites / papers. Visualize the after effects. b) Cross check your visualization with professional recommendations. If they match invest.
    6) I learnt a lot from good friends that you should keep money in 60:30:10 ratio for long term:medium term:short term. (Considering you are playing safe for steady return)
    7) Always note that at the biginning of a rally and end of a rally there will be lot of fluctuation in stock prices. If you become expert by then, increase short term during this period to skim the cream of the market (at teh same time expect high loss too)

    Though I believe in all the above, as I said above, it is very difficult to stick to rules. I never did I learnt the hardway that if I followed them I would have been better off.

    These are my two paisa :)

    I wonder if govt is thinking of designing a symbol for paisa too? Like it did for rupee?

  3. Stock Market says

    Hey just gone through your post and it really seems amazing.For a successful trader an individual has to make a proper market research,timings and planed strategies.

  4. Madhav Shivpuri says

    Hi Arun,

    Good post regarding the dilemma retail investors face due to contradicting calls by so-called experts.

    Regarding your last point about linking buy-sell calls from algorthmic trading to your trading account…its what investment banks do for their prop books. I am not sure how much returns you generate through such frenzy of activity when you factor in the brokerage charges, taxes etc.

    I like fundamental analysis and prefer to stay away from the experts. Instead I constantly read the research reports posted on MoneyControl, ValueNotes for info. There are individuals (valueinvestorindia.blogspot.com) or groups (dalal-street.com) who provide fundamental research and ideas. They also post their returns so you can see if they have been successful using what they preach (http://dalaal-street.com/performance).

    I believe that retail investors like us can profit if we spend time at investing. It is not like a FD or real estate that will appreciate without efforts or active participation. What is good is that if we start young we can learn the skills over a period of time and continue to invest when we retire and grow our assets. On the other hand, if we use the automated software as a crutch then we never learn what it takes to make independent decisions and probably will be ever be a slave to a piece of software.

    Just my 2 paisa.

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