Dalbar, a leading financial services market research firm in the US, recently conducted a study to determine how small investors have fared over the years compared to the stock market as a whole.
In fact, it has conducted a similar research for the past 12 years, and with conclusion that has said the same story each time, which is…
Small Investors are Bad Investors!
“Small investors are losers,” says the Dalbar report, “…and have consistently underperformed the broader market on a multi-year time frame.”
Here is a chart that shows the most recent decade’s rolling 20-year returns for the average mutual fund investor in the US compared to the S&P 500 index…
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“But these numbers are for the American small investor,” you may say.
My dear friend, I’m sure the numbers for Indian investors won’t be any different!
Now, why do I say this? For two reasons:
- First, like their US counterparts, a majority of Indian equity mutual funds, after fees and expenses, have underperformed the benchmark indices over long time periods.
- Two, you know for sure how you – and other small investors around you – have moved in and out of the stock market and thus these mutual funds, thereby compounding your costs and cutting short your returns.
Over the years, thanks to your sudden excitement or sudden panic, you have hurt yourself as far as your stock market return is concerned.
Thus, I feel unfortunate to tell you this, but there are great chances that you have been a bad investor all these years!
If you have any doubt about it, I encourage you to compare your performance against that of the BSE-200 index (or any other broader index of your choice) over the past 5-10 years. You may be due for some humbling.
But if it makes you feel any better, know that you’re not alone. Most other small investors may have performed equally bad.
Another proof I have is the list of confessions drawn from my recent post where I had asked readers to list down their worst individual stock performances.
More than the actual performances, what was more enlightening was the list of mistakes readers shared associated with their losses, which follows below.
I suggest you take a print of the following text, paste it in front of you, and read it every time you are about to make an investment decision. It may save you a lot of grief in the future.
Small Investor’s Wall of Shame
Here is a list of 40 investing mistakes most investors make, which I have collated from the confessions I received in the recent post. I am sure you will associate with a lot of these…
- I, the small investor, buy stocks even when I don’t understand the underlying businesses.
- I get carried away seeing just glimpses of greatness – like low valuation and good corporate governance – and don’t look at the overall business. I act like the man with a hammer for whom everything in the world looks like a nail.
- I invest in businesses that are growing fast, but ignore that they are also burning capital consistently to achieve that growth.
- Ensuring management integrity sounds difficult, so I often avoid it. I forgot what Buffett said about energy, intelligence, and integrity (that if you don’t have the last, the first two would kill you).
- I spend a lot of time reading newspapers and watching business channels, and thus I easily get carried away by stories – especially when too many people are repeating them.
- I don’t believe brokers but I believe independent research houses that serve me readymade stock recommendations week after week. So that solves my problems of doing any independent study.
- Okay, I sometimes put blind trust on tips from broker, especially when they are for multi-bagger stocks.
- I hold on to a stock – whether it’s in profit or loss – even after I realize that buying it was a mistake. Hope has always been my great friend.
- I love the ups and downs of cyclical industries (cement, steel, etc.) despite not being an insider and despite not having deep knowledge in the same. So what if I was crushed by such cycles in the past. The future will surely be different.
- I love to throw good money after bad because I want to be consistent with my original decision. I work hard to find companies and then invest a lot of money in then. Every fall just gives me an opportunity to average down my costs. If I can average when a stock falls from 100 to 25, I will always average when it falls to 10 or even 5.
- I have read that high debt can kill a company, but I have also seen a few companies recover from their debt burden in the past…and so I don’t avoid companies with high debt to equity. I don’t understand the base rate of success of companies that have high debt.
- When I love a company’s product or service, I don’t think twice before buying its stock. I believe if a company’s product or service is good, so will be its financial performance.
- Warren Buffett is too humble to have a “too hard” basket for businesses that are complex to understand. I don’t find anything too hard for me!
- I believe a good company will always turn into a good investment. So I don’t mind paying any price if the business is good.
- I hold on to stocks that are down 80-90%. How worse can it get?
- I find it difficult to convince myself that I have made an investment mistake. After all, I rarely make mistakes!
- I often don’t remember why I bought a stock.
- I often buy a stock because a smarter investor bought it. How could he be wrong?
- IPOs? Oh I love them, and especially for their listing gains. Again, I don’t bother about the base rate of success as an IPO investor (which, in reality, sucks!).
- I only show patience when it comes to holding on to my losers…rarely otherwise.
- I love cheap stocks. Even if the business goes bankrupt, I will still get some money back.
- I believe in high conviction and high concentration. So sometimes, my best idea would form 70-80% of my portfolio.
- I have great faith that businesses that are going downhill can turn around. I know Peter Lynch said that “turnarounds rarely turn around”, but I am always hopeful.
- When I make some money in the stock market, I feel like a great stock picker. I see this as a great way to keep myself motivated.
- Some stocks that are down 80-90% are lying in my portfolio for the last 10 years. You see, I am a long term investor.
- I know that businesses that have been “reliable” for years will be reliable in the future as well, and so I can always “rely” on them.
- I have a great memory and don’t believe in having a written process. I am after all a human and will continue to make many mistakes. But I will learn from them, and that’s important.
- The beautiful anchors on business channels often lead me to buy bad stocks. But that’s a cost you must pay to watch them throughout the day.
- I often buy stocks due to peer pressure. How can people I know make quick money while I am left out?
- If a company’s promoter is doing fine today, I avoid looking into his past. People change, after all.
- I understand P&L accounts but find balance sheets confusing. By the way, who has the time to read balance sheets these days?
- So what if the stock has risen 50% from the time I sold it? I will buy it again! I don’t want to miss out on the gains like others have made in recent times.
- If a company is earning good profits, it must be earning good cash. After all, doesn’t profit equal cash?
- I am often attracted to shiny stuff that has great future potential – things like green energy, new drug, and latest technology.
- I am young and thus have too many years to cover my mistakes. So what if I lose some money now. I have enough time on my side to try out many stocks before finding the best ones.
- I am sure putting out my mistakes in the open will help me avoid making them in the future, so I felt great after confessing on Safal Niveshak.
- I read Safal Niveshak like it is a holy grail that will make me a smarter investor. I am sure of Vishal’s capabilities and thus sure that I will find my multi-baggers some day.
- I stopped doing my homework ever since I left school.
- I don’t believe in miracles, except when it is about my stock portfolio.
- I know that a fool and his money are soon parted, but I am not that fool.
Hate the Sin, Not the Sinner
You see, there’s no point splitting your hairs on what has happened in the past. But surely there’s an urgent need to throw floodlights on what you are doing as an investor, as of NOW.
It’s a time to do a reality check – whether you really want to take up stock market investing on your own, or delegate the responsibility to a fund manager and then keep your fingers crossed for the next 10 years.
Of course, there’s no point quitting the stock market at all taking this to be a casino or a place where just the big investor wins.
If you have time in your hand – and that’s your biggest edge as a small investor – there’s no better place than the stock market to create your retirement nest egg.
But there’s no point being overconfident – and that’s a big sin – on your capabilities as a stock market investor…thinking that you are much better at it than you actually are.
Please don’t treat stocks as coins in a coin-flipping contest. “If not this one, then that one!” is a dangerous mentality in the stock market.
Your odds of success will only grow if you can take time out to understand businesses, then buy only those that are good and are available at discounted prices, and behave sensibly all through this process.
Online trading has given you great powers to instantly invest whenever and wherever you want. But before you choose to use this power the next time, always remember what Spiderman said – “With great power comes great responsibility.”
You have been a bad investor. Now I hope you will become a responsible one.
All the best!