Markets
Dear retail investor, here is how to account for politics in your investing
Summary
- On a net basis, the difference between the expected and real Lok Sabha results made no difference to the Sensex. Nonetheless, a market level aggregate hides more than it reveals. Keep reading.
Mumbai: On 31 May, which was a Friday, the BSE Sensex—India’s most popular stock market index—closed at a little over 73,961 points, a little lower than the then all-time high of 75,418 reached on 23 May. When the stock market opened again on 3 June, a Monday, after the weekend, the Sensex rallied to reach a new all-time high of around 76,469.
What happened in between? The seventh and the last phase of the Lok Sabha elections happened on 1 June, which was a Saturday. After the elections ended, the TV channels released their respective exit polls. Almost all exit polls gave the Bharatiya Janata Party (BJP) led National Democratic Alliance (NDA) 350-400 seats in the Lok Sabha—which was much more than required for a clear majority of 272 seats.
The stock market investors have been in love with the idea of the BJP-led NDA governing the country again. So, once the market opened again on 3 June, the investors celebrated and stock prices rallied and the BSE Sensex ended the day at a new all-time high of 76,469—a jump of more than 2,507 points or 3.4% from Friday's close (31 May).
Nonetheless, the exit polls turned out to be all wrong. And when the market opened on 4 June, it quickly started to adjust. At one point, the Sensex touched 70,234, more than 8% lower than 3 June’s close. It closed the day at 72,079 down 5.7%. And then things changed again. By Friday, 7 June, it had recovered all the losses and closed at a new all-time high of a little over 76,693 points.
On a net basis, nothing really has changed. The Sensex on 7 June was 1.7% higher than its 23 May high. Nonetheless, a lot has happened in between and that has important lessons, especially for retail investors. Or to put it slightly differently, how does one account for politics while investing?
Why Worry?
On a net basis, the difference between the expected Lok Sabha results and the real Lok Sabha results has made no real difference to the Sensex. Nonetheless, a market level aggregate hides more than it reveals. While the BSE Sensex has made up for the difference, the BSE PSU Index on 7 June closed at 8.8% lower than its all-time high of 3 June. Many retail investors who had bet big on the stocks of public sector units (PSU) in the run up to the election results, are sitting on losses, or have seen their gains wiped out.
Also, anecdotal evidence suggests that many investors bought at high levels on 3 June and sold on 4 June. Typically, they sold out of PSUs and bought fast moving consumer goods stocks, which were already selling at high valuations, in the process driving their valuations even higher. Also, many bet on financial derivatives and lost money. Of course, there is a flip side to this as well—investors who bought on 4 June are sitting on profits now.
In fact, data shows that from 4 June to 6 June, the retail investors remained net buyers. Take a look at chart titled ‘savvy investors’, which makes for a very interesting reading. It plots the net buying/selling carried out by retail investors from 3 June to 6 June.
The chart shows that retail investors net sold stocks worth ₹8,588 crore on 3 June, the day the market rallied. Then they net bought stocks worth ₹21,179 crore on 4 June, the day the market fell. And then they bought a little more over the next two days. So, the point here being that retail investors managed to sell high and buy low, an investor’s dream.
Now, the trouble as mentioned earlier is that the aggregate figures hide a lot. The definition of retail investor here is quite loose. It includes high networth individuals (HNIs), and family offices, which manage thousands of crores of money for the richest of the rich. So, the word retail here doesn’t exactly mean the small retail investor.
Given this, it’s possible that HNIs and family offices, who have money lying around, may have done the bulk of the selling on 3 June and bought the dip on 4 June. Of course, to be able to say this with total confidence one needs a breakdown of this aggregate data and that’s not available in the public domain.
But there’s a way of getting into some more detail. We can look at mutual fund buying and selling data in chart titled ‘costly ways’ and try building a clearer picture.
So, what does the chart tell us? On 3 June when the stock market rallied, mutual funds net bought stocks worth ₹3,073 crore. On 4 June when the stock market fell, mutual funds net sold stocks worth ₹6,249 crore. Over the next two days, as the market rallied again, mutual funds net bought stocks worth more than ₹7,000 crore.
Now, what does this tell us? It tells us that at an aggregate level, mutual funds sold at low levels and bought at high levels, the worst possible way to go about investing. Mutual funds largely invest money they collect from genuine retail investors, not definitional ones. Data from the Association of Mutual Funds—the mutual fund lobby—shows that as of March 2024, the average investment of a retail investor in mutual funds stood at ₹84,178.
So, what do the two charts, together, tell us? They tell us that exit polls going wrong would have cost many retail investors. And that’s worrying.
Storytelling
People in the business of managing other people’s money (OPM)—fund managers and chief executive officers of mutual funds, portfolio management schemes, insurance companies and foreign institutions investors, and stock brokers—excel at storytelling. Or as Morgan Housel writes in Same As Ever: “There is too much information in the world for everyone to calmly sift through the data, looking for the most rational, most correct answer. People are busy and emotional, and a good story is always more powerful and persuasive than ice-cold statistics."
Some OPM wallahs are forced to indulge in storytelling to drive investments into their funds, given that regulations don’t allow many of them to talk about specific stocks. In the last few months, storytelling by OPM wallahs peaked, with some of them very openly saying that abki baar char sau paar, was the most important factor impacting the stock market. This was an easy way of cashing in on the prevailing political sentiment of many individuals. Or as Housel puts it: “Stories get diverse people to focus attention on a single point."
Talking about the overall economy and the investment opportunities that it will generate, can get quite complicated, and that doesn’t really sell with the retail investor. But a slogan—which has captured the prevailing emotion of many or at least the OPM wallahs thought so—does. And the story was sold.
And this was one reason why many retail investors invested big time on 3 June, both in stocks and financial derivatives, and then sold on 4 June, ending up holding the wrong end of the stick. Or they sold what they had owned before 3 June on 4 June. If they had just ignored all the noise and continued doing what they were, they would have ended up better off at the end of the week.
The Politics of Investing
As voters, we all have our political beliefs, but mixing that with our investment strategy isn’t always the best way to go about things. A stock market is too complex a being. It might be influenced by just one story in the short-term, but ultimately, it does go back to giving the current and the expected future earnings of companies the most importance. And that’s a factor that needs to be kept in mind, irrespective whether the OPM wallahs remember it or not.
As the American writer F. Scott Fitzgerald put it in The Crack Up: “The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function." Now, how does this apply here?
Supporting a political party is one thing, at the same time, one does need to keep in mind that the party can lose or the fact that it won’t win by as much as the noise suggests.
And once this clarity exists, a few things need to be done. First, trying to punt a good amount of money on one political result or to try to earn money through financial derivatives on the basis of one outcome, is something that can be avoided.
Second, it needs to be kept in mind that markets may bounce back even when they don’t like a political outcome. Like was the case two decades back. On 17 May 2004, it became clear that the Atal Bihari Vajpayee led NDA won’t win the Lok Sabha elections. The BSE Sensex fell by more than 11%. Two days later, it had recovered most of the losses upon the realization that governments in India rarely fiddle around with economic policy, and there is usually continuity on that front.
Something similar has happened this time around as well. Many investors who tried to trade this news must have ended up worse off. Of course, some investors must have also made money in the process.
Third, while the overall direction of the stock market has been up, it is best to remember that there are no guarantees here. The past can be like the present, but it may not be so as well or at least not consistently. So, for genuine retail investors, the diversification of investment within and across asset classes remains the most important rule of investing, however boring this might sound. Money should be spread across asset classes—stocks, mutual funds, gold, fixed deposits etc.
Fourth, the situation in the stock market is never as good or as bad as it is made out to be. This essentially stems from the fact that the financial media likes to report ups and downs in absolute points and not in percentages.
On 3 June, when the Sensex rallied 2,507 points, the headline in the media was that it had seen the highest single day gain. The gain in percentage terms was 3.4%, which was the 214th highest single day gain for the Sensex, looking at data going as far back as April 1979. Of course, a 3.4% gain in a single day is pretty good. It’s more than the annual rental yield on real estate across large parts of India.
Now, look at the fall of 4,390 points on 4 June. Again, the media led with the highest fall headline. In percentage terms—which is the right way to look at it—the fall of more than 5.7% was the 41st highest single day fall for the Sensex. Of course, this was a big fall—a fair comparison being that the after tax returns on a one year fixed deposit were wiped out in a single day—but it wasn’t as big a fall as it was made out to be.
Finally, big money in stocks is only made by staying invested, not by getting in and getting out depending on the prevailing story. But the sad part is that more than 41% of retail investors hold on to their equity mutual fund investment for up to just two years. And that’s not good enough to be able to make serious money from stocks—directly or indirectly—suggesting that investing is more psychological than financial.
Vivek Kaul is the author of Bad Money.
