I read a fascinating blog written by Anish Teli about an interesting phenomenon that Retail invariably loads up on High beta stocks especially with negative news around them?
A while ago Nooresh Merani also wrote on this subject.
Anish argues that the reason (one of) for this is the concept called, “Lottery Effect”.
In laymen terms, it essentially means that due to emotionally charged set-up you act according to possibility and NOT probability. We see that on Every Thursday (Weekly Expiry) where those Rs 1 options have the “possibility” of becoming 100 but a probability of less than six sigma.
Anish quoted a couple of interesting research papers exploring why human mind likes a gamble and ignores the maths in “heat of the moment”.
He shared an interesting table. I am pasting it as is.
Then he moved on to the BENEFITS of LOW VOLATILITY INVESTING and how its an ANOMALY worth exploiting.
I spoke with a couple of my friends (non stock market background) to figure out what STOCKS are they stuck in and invariably as it turned out top 02 names were YES BANK AND DHFL.
While all other factors and behavior biases mentioned in the blog and research paper hold true, my detailed interaction revealed a couple of interesting REASONS why I think this plays OUT over and Over again.
Jo dikhta hai, Wo bikta hai
These guys I spoke with did not run a screener to short-list their KACHRA. It was served to them on a platter.
I am of the opinion that Cigarette sales can be cut in half simply if all illegal vendors are abolished.
One of the reasons why in INDIA, cigarette sales are robust is because you are NEVER more than 5 minutes away from a cigarette shop.
(You know its the easiest business in town, migrate to a city, find a busy spot, capture the land, ITC provides the set-up and voila you are the owner of Asset light high ROCE business) but lets not digress.
Cocal-cola works on the same premise. I was trekking in Alchi (leh-ladakh) and guess what while there were no motor vehicles for as far as my eye could see, but there was a shop selling Coke.
These guys are not from the stock market, they are not tracking individual stocks. So, there might be end number of stocks that have fallen considerably in this correction but retail invariably loads up on the ones which are AVAILABLE. This availability provided by media.
Value Gyaan and illusion of EASY.
Another big reason why I feel retail gets rogered is market wide gyaan doing the rounds of BUYING LOW AND SELLING HIGH.
Of how Warren buffet and others did it and HOW Warren himself said IQ is not needed in this game.
BUY RIGHT and SIT TIGHT. and HOW Mr X was a nobody and because of his BUYING LOW and GRIT and PATIENCE, he is NOW financially Independent.
Of how instead of Maruti car, you should have bought its share.
Warren Buffet must be the MOST QUOTED person in the world. His AMEX trade is in the folklore now. I do not find HARD to imagine retail finding correlations between that and YES bank. Devil of-course is in the detail and unfortunately STATUS QUO ensures Nobody spends time exploring the nuances.
Its considered EASY:- That’s a BIG one. Not only is it considered easy, it is NOT EVEN treated as a full time career. When my uncle asked me so what do you do, Manish and I replied, I trade and invest in stocks.
He said, ” Yeah even i do that, but what do you really do”
You would NEVER demean any other business like stock market investing. Have you ever seen yourself asking dentist to teach you how to pluck the teeth yourself so you don’t have to come the next time. May be this is an exaggerated example but you get the drift right.
Because Retail considers this as an easy thing to do, when a DHFL and YES bank kind of OPPORTUNITY comes along, they grab it with both hands.
comments are welcome.