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.
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?