Behind the Curve

Stock markets across the world pride themselves as being models of perfect market. They provide a platform for large number of buyers and sellers, abundant liquidity, minimal transaction costs and diversified investment opportunities. All the ingredients of a perfect market, except a mechanism for uniform distribution of information. And this ingredient is privy to a few ‘informed’ participants before it is available to the world at large. This problem exists the world over, and though authorities try to crack down on it, it is very difficult to prove.

Let’s take the case of the Indian stock markets. It has given spectacular returns to investors over a period of time. However, the focus has been only on the top 100 liquid companies. The general perception is that they are safer. Liquidity does provide a safety net, and larger companies are scrutinized to a greater degree. Thus retail investor interest is justified.

Historically, retail investors have always been the last to latch on to any up move. The ‘smart money’ with the professional research moves in first. Let me not question the quality of research or raise any flags on the means in which these investments are made. The general perception of retail investors has been that they have been behind the curve in spotting an opportunity. This could be true for a host of reasons, lack of risk appetite, liquidity, investment horizon, low information availability etc. An important element to this feeling is that information always seems to trickle to retail last. I am not suggesting that having insider information is the only way to make money, but it certainly is the easiest. The average individual on the street only reads about corporate actions on the news, well after the impact of the action is built into the price. This only aggravates that feeling of missing out. This is compounded when he discovers someone known has capitalized on price movement due to news. It is a sentiment one cannot avoid.

The key here would be focus on your own investment strategy, detach yourself emotionally from news driven activity and do some research. Obviously, this is easier said than done.