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.
