Educating Investors

Wealth Destruction Study4 min read

More than 95% of retail investors lose money in the stock market

Stock Markets are perceived to be money makers for the common man but did you know that 95% of retail investors actually lose money instead of compounding wealth. These are shocking stats which a retail investor will realise only after he has lost money. The major reason that financial inclusion and penetration of equity investing in India has not taken off is because retail investors actually end up losing money and this needs to be changed. Because if done right, stock markets can be a game changer. Firstly, investors are not picking good quality businesses, secondly, they aren’t patiently holding them to see the magic of compounding. If you get these 2 things right, you can create massive wealth to secure your future. 

To better analyse why retail investors end up burning money in stocks we conducted a Wealth Destruction Study. After some rigorous number crunching, the facts stunned us. There are lesser than 20% stocks that actually beat the 15% expected returns required in equities. Also, a whopping 55% of companies actually generate negative returns. Shocked right! As an investor you just want to make money more than what a FD will give you. But you end up losing much more since 70% of companies never beat FD returns. All these stats point out to one conclusion – “Less than 1 out of 5 stocks actually generate the return to justify the risk of equity.”

You must be wondering how to recognize wealth destructors? The divergence between shareholders owning wealth creators and destroyers is massive and this gap can be reduced only by conscious quality picking. If you look at the FMCG large cap Hindustan Unilever, it is owned by a mere 4 Lakh shareholders. Colgate and Dabur are owned by only 2 Lakh shareholders each. While such quality businesses have within 5 Lakh shareholders, companies which are under the burden of massive debt and have difficulty in repaying their creditors such as Reliance Power have over 31 Lakh shareholders. Suzlon too has around 10 Lakh shareholders. This proves that wealth destructors have a much larger shareholder base than the wealth creating companies.

Elimination can be another method to avoid wealth destructors. Investors should check for these 5 factors – Businesses with low ROE, moderate ROE but poor free cash flows, lumpy or unpredictable cashflows and large discretionary products, commoditized businesses and overpriced businesses while picking stocks. If companies fall in the above category they should be avoided. Only then a common investor can exceed the 20% mark to earn the expected required return. But unfortunately, there are a handful few who do a good job at appropriate stock picking. Even mutual funds sometimes become extremely aggressive and buy a lot of companies in their funds. The idea can be to diversify the risks in a portfolio but the same can be achieved through lesser number of quality companies. Stock selection is extremely tricky and is an art with a success rate of less than 20%. And investors are at a serious disadvantage when they focus on quantity over quality.

Another revelation from the Wealth Creation study is that retail investors tend to sell stocks too soon either because they are loss making or because they feel that the stock will fall now that it has given decent returns. The average holding period for most companies is below 2 years. For example, from 2011- 2020, Jubilant Foodworks has delivered a consistent CAGR return of 20% but the average holding time frame for investors is a mere 1.99 years. If an investor had held it for the entire 10 years he would have made 422% today in absolute terms compared to a 2 year return of 110%. This is the power of compounding which investors tend to miss out on by selling a stock early. Holding wealth creators for a number of years will ensure you make sound returns while riding the bull curve of the stock.

“The rich invest in time, the poor invest in money” – Warren Buffett.. If you as an investor follow these 2 rules – pick quality and patiently hold the stocks, you will definitely create immense wealth. And StockBasket is one product which follows both these ideologies. It contains companies which are fundamentally strong with a high margin of safety to enable investors compound their capital invested. Wait no more, invest in StockBasket to safeguard your future by being among the few investors who make the 15% returns in stocks.

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