Can a retail investor make profitable

investments in the stock market

consistently?
by Arun Prabhudesai

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The hay-days for Indian stock Markets seem to have come back again – Positive rally for
past 8 days has seen Indian markets scale peaks seen more than 30 months back.

I have been off-and-on trader in Stock Markets and most of my investments previously
have been either on instincts or based on certain expert / analyst calls or on my own
fundamental analysis. More often than not my investments have not yielded desired
results.

This time though, my approach has been different – I will talk on it more on that a little
later. First lets look at how average Indian retail investor has been investing.

The basic function of financial markets is to divert the savings into optimal investment
avenues. With a steep increase in the disposable income of the individuals retail investors
are supposed to make an active participation in capital markets including stock market. In
a country like India, gold, real estate, Postal savings, Govt bonds continue to be the
preferred investment by an average investor. Seemingly, they ignore a very important
class of financial instruments – capital markets comprising of equity and derivative
products.

The common notion is that retail investors generally come in when the markets near their
peak, before a correction. This is once again due to lack confidence on the markets.

So, the million dollar question:

Can a retail investor ever make profitable investments in the stock market
consistently?

Answering these questions requires a little insight into the analysis techniques. There are
two classic theories which form the basic of any stock market investment. Fundamental
and Technical. Given the scenario of inefficiency in the markets, fundamental analysis
boils down to information aggregation and traditional technical analysis suffers with
limitations like availability of historic data and complexity in usage.

Over years, the retail community has been banking on various experts to take their
investment decisions. This includes traditional print and electronic media which gives out
numerous open ended buy calls but fail to follow up and issue a sell call leaving the end
user in a state of ambiguity. The scenario of RNRL recently would give us a classic
illustration. When the tussle of RNRL and RIL was going on, the media had enough news
to prompt a ‘buy’ on RNRL during the last week of Apr’2010, as a result, the stock went
up from Rs. 61 to Rs 75 in a weeks time. However, when the court verdict was against
the belief, in a single day it lost by 35% on 5th May’2010. None of the media houses
which prompted a ‘buy’ came back to say ‘sell’. Similarly Satyam debacle of Jan’2008 is
worth remembering .

Later we have seen professional advisory services being offered by some financial
services giants. However, there exist a conflict of interest between financial services firm
and the retail investor. Because, the ultimate goal of the financial services is to generate
more revenues by intermediating between the investors and capital markets; While the
investor is interested in multiplying his investment portfolio.

The advent of new sophisticated stock charting tools like Metastock, Spider, Advance
get, which act as decision support system for the users marked a considerable increase in
awareness of technical analysis. However, a major chunk of retail community is still
handicapped with the knowledge of its usage.

Coming back to my experience – Like many investors, I too am not too comfortable with
Technical analysis, other than some basic stuff. I am now making my investment
decisions by relying less on humans, and more on algorithms to give me buy & sell
signals.

To give you an example – I use Vantagetrade to give me buy and sell signals. It is a
‘ready to use’ stock analysis tool for retail investors and traders. The buy and sell signals
given by them are completely automated based on proprietary algorithms. The best part
is they also alert the users about entry and exit points over email and SMS alerts to keep
them informed 24/7 even while on the move.

The success ratio of algorithmic tools like vantagetrade is much higher (atleast in my
experience) than any of the previous methods I have used in stock market.

There is one thing which I would actually love to see – A platform which offers not
only buy & sell signals, but also integrates it with investors trading account and
automatically buys and sells when the signal arrives. A slight dis-advantage I face with
tools like Vantagetrade is – by the time I act upon buy / sell signal given by them, it is too
late (especially in short term trading).
The integration of trading platform with algorithmic signaling tools would be an
awesome combination for retail investors like you and me. Something that will ensure
that they have possibility of making consistent profitable investments.

what do you think?

India hikes interest rate more than

expected
Published: Thursday, 16 Sep 2010 | 6:51 AM ET
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MUMBAI, India - India's central bank raised a key interest rate more than expected
Thursday — its fifth rate hike this year — as it continues its fight against high inflation.

The Reserve Bank of India raised the repo rate — at which it makes short-term loans to
commercial banks — by a quarter percentage point to 6 percent with immediate effect. It
raised the reverse repo rate — the rate at which it borrows from commercial banks — by
an unexpected half percentage point to 5 percent.

Economists had expected quarter point hikes in both rates, which still remain below pre-
crisis levels.

"The magnitude has been steeper than expectations," said Yes Bank chief economist
Shubhada Rao.

"Even the tone remains more hawkish than we were anticipating. Inflation as a concern
remains the most dominant policy focus."

She expects the bank to hike rates again, by a quarter point, when it meets in November.

"Inflation remains the dominant concern," the Reserve Bank said in a statement.
"Essentially, inflation rates have reached a plateau, but are likely to remain at
unacceptably high levels for some months."

It's not just the price of food — which was hit by a poor harvest and rose 14 percent in
August — that is costly. The bank said two-thirds of August's 8.5 percent inflation was
driven by nonfood products. The bank would like to see prices rising in line with
historical norms of 5 to 5.5 percent.

From April to June, average monthly inflation was 10.6 percent.

Over the same period, the economy grew 8.8 percent — an indication, the bank said, that
India's recovery is consolidating and resuming pre-crisis growth rates.

Surging industrial production of 13.8 percent in July, along with good prospects in the
service sector and in agriculture, thanks to strong rains, all point to "sustained growth,"
the bank said.

The bank said it has been concerned that real interest rates in India are negative, thanks to
loose monetary policy and high inflation. This has been a drag on bank deposit growth as
savers look for higher returns elsewhere, it said.

Commercial banks are India's most important source of corporate financing, as the
corporate bond market is thin.

"If bank credit is not to become a constraint to growth, real rates need to move in the
direction of encouraging bank deposits," the Reserve Bank said.

It also said that Europe's "remarkable resilience" and a resurgent China have emboldened
global investors to continue to put their money in emerging markets like India, allaying
earlier fears about India's widening trade and current account deficits.

"Should the global situation stabilize, it will help contain volatility in capital flows. But
the flip side of that will be the possible firming of commodity prices and consequent
inflationary pressures," the bank said.