Are stock markets safe for retail investors

The Beginnings ...

I think this question had been reverbating in the minds of the retail investors for long time and this had been discussed in umpteen number of forums. I am not sure if those discussions changed the attitude of the investors towards markets or their participation in the market. I used to be an avid reader of markets and investment advice from investment gurus in my college days. Still I for one stayed away from market for a long time. Primarily I didnt have enough funds to set apart for the investments in stocks.

Now a month ago, after lot of after thought, I decided to go and experiment there. The Indian market is already in its life time high. Some 20-30 % appreciation in the last 2 months. Nothing deterring me, as if some kind of vision impressed upon me that this market will fly forever.

Now that I am in the market it suddenly poses several confusing set of options. Options of When to invest, which sector to invest, what should be my strategy, how do I make use of the daily / weekly fluctuation for a further returns, which news will have what impact, did the minister really mean that and so on.. Add to these confusion, you will find a bevy of fund managers appearing and giving 'street preaches' on whether it will rain today or tmorrow. Everyone of them seemed to be very serious in their analysis and pretty committed. What worries me is the bewildering mismatch between each ones predictions on the market. With so many faces on the screen on the chances of rain and thunder, you literally find it difficult to make out between the expert talking right now and the expert who was preaching five minutes ago.

I dont know if the situation looks funny. But I know its very serious (look at me sitting baffled with a marketwatch window opened with some 15 shares blinking its prices and volumes). It all points to the fact that no market behave based on fundamentals alone. In a highly volatile market thats a great worry for a retail investor. He is harm strung with flood of infoporn or lack of critical data. He has much less clue of who is investing and why he is investing. Is it an FII or an MF.

Grey Matter...

The point I want to raise is the apparent information arbitrage happening in the stock markets. The large fund managers are privy to lot of information and grapewine which retail investor will not have any access to. For the retail investors policy makers are celebrities sitting somewhere in Nariman Point or New York or New Delhi. The proximity something the fund managers can use to judge the circumstances and to find out who is making the move.

This realisation, as it sets in, will surely discourage the retail investor to put any his money into market on his own. An investor will be more happy investing his funds with a mutual fund than to spend long hours chugging through the information and try to make sense of the market and then fail on that.

Now look at the size of the transactions which is handled by a fund manager. Again the transactions can come very much orchestrated from the large investors, of which the retail investor will have no clue. The miniscule funds he handle can not make any changes to the price level or trend. While the size factor seems to be very acceptable, worrying factor is the orchestrated nature of share price movements. Its surely is an after effect of information arbitrage.

Then comes the third issue of the expansive roles played by fund managers in todays connected economies. As fund managers extend their reach to markets world wide and operates on a global scale the foriegn funds flowing into any economy is anyones guess (yes, you have a number, but you dont know if he is a real investor or just parking his funds here as a safe haven). How long those funds stay in those economies then depends on host of reasons ranging from eerthquake in antartic to car explosion in Bagdad. Every thing, every trend seems to have an impact on the equity market. It could be inflation in UK, Fed rates in US, consumer spending in Texas or real estate price crash in Hong Kong. Can the retail investor keep track of such events while doing his primary job (I guess none of these retail investors earn their bread from stock markets). Can he assess the impact on the stock market he is involved in?

The consoling factor should be a good regulatory structure. But there too, you have issues of being a regulator. Firstly, no matter how good the regulation is, there is room for collusion and inside trading. Secondly, look at the time the regulator takes to respond to unwelcome tendencies in the market. There will be long deliberations on whether to intervene or let the market take its own course. But the blow to a retail investor could be quiet severe in that timeframe...

Where am I heading...

I am still experimenting and would like to go ahead with that. At the moment I feel that the retail investor can not afford to be in the trading. His bet is to research and select the best companies he would like to go with and leave the macro factors to settle in the long run.