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Retail investors – Catching Falling Knives?
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“Markets can remain irrational longer than you can remain solvent” ― John Maynard Keynes

Human being is irrational but when this irrationality is at the cost of one’s hard earned individual saving, this make us a worry a bit.

In the past we have observed that retail investors (According to SEBI - A retail investor is an individual investor whose subscription to securities is of a value less than Rs. 2 lakh) are best examples who represent irrationality in the market.

We collected past our quarter’s retail shareholding of three fractured stocks of India.

Retail Holding

Q1 FY 2018

Q2 FY 2018

Q3 FY 3018

Q4 FY 2018

%Change

JETAIRWAYS

7.50

9.82

9.96

11.42

52%

IL&FSENGG

7.96

8.36

9.28

9.31

17%

DHFL

7.15

11.77

16.62

21.55

201%

 

The % change from Q1 FY19 to Q4FY19 in retail holding has been significant in DHFL, Yes Bank and Jet Airways. Now if we analyze their price drop, we can spot the irrationality.

Stock Prices

From 1st Apr 2018

To 31st March 2019

%Change

JETAIRWAYS

601.25

268.8

-55%

IL&FSENGG

30.15

8.8

-71%

DHFL

523.05

150.25

-71%


The % change from Q1 FY19 to Q4FY19 in there stock prices has been significant in DHFL, Jet Airway and IL&FS Engineering and Construction Co. They have tried to catch falling knives.

Now if we say with falling price their holding increased on quarterly basis, we will be clearer of this irrationality.

Jet

IL&FSENGG

DHFL

It is one of the great mysteries of retail player’s participation in the market why they display such a behavior without paying much attention towards underlying business or uncovering of management fraud.  Any stock investment should have three main criterion:

(a) Suitable risk/reward to generate optimum returns.

(b) Management should be work efficiently, honestly and effectively to generate wealth for minority shareholders

(c) Risk minimization in case the investment thesis turns out to be incorrect.

As Buffet famously said once - The turnaround company seldom turn. This is also true for companies which see significant price erosion in market cycles. History has shown that over 65% of the stocks bought at the top of bull market takes on an average 36 months to recover to their cost price. Timing the right stock is critical.

In the end, we should remember - Market does not hate or like any stock. It rewards handsomely only those who can pick market cycles better than others. The efforts in finding the right cycle and right stock is what differentiates an excellent investor from an average investor.

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