The Hindu Business Line : Nothing learnt from past market crashes?

As the stock market seemed to move within a bottomless pit last week, many small investors in different parts of the country have had their fingers badly burnt.

Rasheeda Bhagat

If you thought that sharp, swift and vicious falls in the stock market that wipe out almost the entire portfolios of many small traders/investors and deal a body blow on others, would teach them a lesson or two about the pitfalls of speculating in the equity market, you’d be wrong.

Time and again, during the scams of the past and irrational behaviour of the markets during periods such as May 2004, when the equity market got the jitters at the very thought of a non-BJP led alliance at the Centre, we’ve seen the smaller players in the market getting decimated. Some of them are mercilessly thrown out of the circle of this investment instrument; they enter with what is a substantial sum in their scheme of things — from Rs 50,000 to a few lakhs — and leave virtually empty handed.

This time around too, as the market seemed to move within a bottomless pit last week, many small investors in different parts of the country have got their fingers badly burnt. The most horrendous stories are yet to come out in full force, and everybody in the market will tell you that while people boast at parties or suburban train journeys about the huge pile of money they have made in the stock market as the Sensex danced its way up to the magic 21,000 mark, lips get locked when investors/traders lose huge amounts of money.

Shaken, but calm

“People only like to show off about their gains made from the market; but nobody likes to admit that he has to be taken for a ride by better and smarter investors… because every rupee lost in the market by one is gained by somebody else,” says a former member of the Madras Stock Exchange and a long-time savvy investor, Mr Mahendra Shah.

A long-term investor — an original allottee in Reliance Industries IPO at Rs 10 (he bought 300 and has held on to them) — has learned that patience does pay in the stock market. “Last Tuesday as the market hit the 10 per cent filter within a minute, I decided to just sit by and watch. I would have liked to pick up RIL at Rs 2,200, but did not get a chance to do it. I hold fundamentally-sound companies so the thought of panic selling didn’t even occur to me.”

Mr Shah was not the only one in Chennai to sit aside and watch “the crackers bursting in the market”. Ms Yasmin Lehry, another long-term investor and an LIC agent, who sometimes “gets the urge to tweak my portfolio”, admits to being “a little dazed, as I saw the profits disappearing from my investments. But I remained calm and decided I was not going to sell a single stock at those crazy prices.”

She is invested in stocks such as L&T, RIL, Voltas, Sail, Jaiprakash Industries, RPL and RNRL, and says, “Luckily, only the previous day, when the market had another steep fall, I had met an LIC mutual fund manager who was in Chennai to make a presentation on a new fund offering from LIC. I had discussed with him the implications of that fall and he had said the long term picture on Indian equity had not changed.”

Ms Lehry said that though her head “spun for a little while as she sat before her computer”, she soon picked up courage to ask her broker to buy some good shares. “But he is very conservative and told me that if you have extra money to burn, give it to me, why throw it away in the market on such days. I wish he had allowed me to buy,” she muses.

But everybody in the market does not have such liquidity. Another investor, who lost all his profits in just three days said, “Fortunately I had kept away from the temptation to dabble in the F&O market. People who used to trade in futures with my broker were badly mauled in this fall. As the broker warned them that he will close their positions at those terribly low levels if they didn’t move the required margins into their accounts, they went running to Sowcarpet — a Chennai area where North Indian moneylenders do give risky loans at steep interest rates — to get some money, but even that door was closed on Tuesday.”

He personally knows traders who lost a few lakhs in a matter of a week and says: “They will not be able to invest again because they came from middle-class backgrounds.”

Unnecessary hype

Mr A. K. Narayan, President of Tamil Nadu Investors Association, blames the crash and lost fortunes on the “unnecessary hype that was created on India’s GDP growth rate and huge FII inflows. As unusually high profits came in, people were made to believe that the Indian stock market could only go up. So they forgot that swift and sharp corrections do occur in equity markets.”

The real disasters, he says, were seen in the F&O segment. “Retail investors thought this segment was an easy tool to make big money with small margins. Investors should understand that this is only a hedging mechanism.”

Mr Narayan says investors hurt terribly in this crash included those who had tried to leverage blue chips held by them in the cash market “such as RIL, SBI, L&T, etc” to pay for their margins in the futures segment. When the market crashed, brokers sold off these scrips to make good the margins.

He adds that the hype and excess speculation in scrips such as Reliance Petroleum and RNRL — “rumours were circulating that these would go up to Rs 300-350 levels” — saw some investors suffer huge losses. A retired senior government officer who had bought four lots of RPL (1,675 shares) at Rs 290. He had rolled over the positions over two months but as the scrip crashed, it was impossible for him to hold on any longer. “He lost about Rs 7 lakh and had to divert money from his liquid mutual funds to pay the broker.” Another investor, who has taken VRS from a bank got caught in IFCI; “again, a lot of hype was created over that stock too. He bought a lot (7,875 shares) at Rs 101. Luckily, he got out of his position at Rs 80 before this crash, but he lost about Rs 1.65 lakh in only one scrip,” adds Mr Narayan.

His advice to investors, who want to enter the market at these levels: “Put in a little money into good companies and plan to remain invested for the long term. The next big event will be the Budget and even that might give a good opportunity, so keep some money in hand. For those who have no discipline, or time to monitor the markets, please invest in mutual funds because their fund managers are much better equipped to contain losses during falls.”

Mr Narayan also suggests that it is time the government allowed “a little bit of PF money – say, 5-10 per cent – to be invested in equity. When Calpers and other foreign pension funds can come and invest in our markets, and make good profits… LIC is also making smart money in the stock market… why should our PF funds not benefit from the Indian stock markets?”

Wounded brokers

According to market players in Mumbai, many brokers too have got badly hurt in the arbitrage game they play through traders. The arbitragers make money by leveraging on the difference in the prices of the same scrip in the NSE and the BSE, as well as in the cash and derivatives segments. “When the market was going up and everybody was making money, this segment thrived and brokers have a share in the profits that arbitragers make. So everybody was happy and when money comes in, traders forget that this is a hedging mechanism and throwing all caution to the winds, kept open positions. When the market crashed last week, in three or 4 sessions these players, as well as the brokers with whom they were trading, lost profits made in a year in just four days,” said an equity analyst in Mumbai.

He said this was one of the reasons why many brokers’ terminals were shut down as they owed money to the exchanges. “Slowly more stories of distress are coming out. Traders who owe money to brokers are absconding, their mobiles are switched off, they are not to be found at home, etc.”

In Chennai, heavy amounts were lost by retail investors in volatile scrips such RNRL, Sterlite Industries, Essar Oil and RPL, all in the F&O segment. “Even those who used to play the Nifty futures, keeping a margin of Rs 25,000 in hand, lost Rs 1 lakh in two days when the Nifty crashed. Such people have not, and cannot, return to the market,” said a broker in Chennai.

(Response may be sent to rasheeda@thehindu.co.in)

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