For quite some time have been trying to understand and figure out whether the retail investor can ever make money from the market. There are some queries which if unanswered, clearly imply the retail investor being disadvantaged in the share market, clearly indicating lack of market efficiency...
1. Insider information. This can never be done away with. The top level executives of businesses 'know the score' and will make some market moves in advance based on this information. This 'score' can be the organisation's results or regulatory changes of the government. Not in the USA, Not in India. And contrary to what many believe, post the Rajat Gupta episode, this problem exists at the same scale in all places where a share market functions. The fundamental human is the same everywhere with the same shortcomings.
2. Skill lacunae - executives generally have some management education, and brokers have 'connections', which may not be the case for the retail investor. Most investors may not have heard of a PESTEL or five-forces or Porter, more so in India where the average level of education is lower that other developed nations, where markets function. Even of those investors, aware of PESTEL, FIVE FORCES, PORTER,
it is impossible that a large number of investors have access to the resources which give the information necessary for using these techniques.
3.Technology - Banks, brokers have systems which raise alerts on changes monitored in seconds, in some cases even faster. Some of these entities have also implemented alogrithmic trading (AROUND 73 % ON NYSE)
, which apart from an exceptional case, the retail investor would not have access to.
4. Concerns of the share brokers, bankers is usually expressed to regulators, many times with sufficient co-ordination with other brokers, banks, making it impossible for the regulator to ignore.
On the other hand the problems of the investor are something that the regulators have to really keep an sharp eye out for, a task which in itself is difficult.Combined with the ability of the politicians to influence decision making, which way this is going is well, generally clear.
5. Assuming that you have had a good run so far, it does not take long for a decision taken by the management, something like a change in the fundamental strategy or structure of the company (separating / adding entities especially related ones impacting profitability or sustainibility). So a decision making which is absolutely NOT in the hand of the retail investor is the final factor which I see.
Rationally, these points make one think that investing in the share market may not be an intelligent decision !
P.S. I am very open and interested in hearing counter-points to above..
1. Insider information. This can never be done away with. The top level executives of businesses 'know the score' and will make some market moves in advance based on this information. This 'score' can be the organisation's results or regulatory changes of the government. Not in the USA, Not in India. And contrary to what many believe, post the Rajat Gupta episode, this problem exists at the same scale in all places where a share market functions. The fundamental human is the same everywhere with the same shortcomings.
2. Skill lacunae - executives generally have some management education, and brokers have 'connections', which may not be the case for the retail investor. Most investors may not have heard of a PESTEL or five-forces or Porter, more so in India where the average level of education is lower that other developed nations, where markets function. Even of those investors, aware of PESTEL, FIVE FORCES, PORTER,
it is impossible that a large number of investors have access to the resources which give the information necessary for using these techniques.
4. Concerns of the share brokers, bankers is usually expressed to regulators, many times with sufficient co-ordination with other brokers, banks, making it impossible for the regulator to ignore.
On the other hand the problems of the investor are something that the regulators have to really keep an sharp eye out for, a task which in itself is difficult.Combined with the ability of the politicians to influence decision making, which way this is going is well, generally clear.
5. Assuming that you have had a good run so far, it does not take long for a decision taken by the management, something like a change in the fundamental strategy or structure of the company (separating / adding entities especially related ones impacting profitability or sustainibility). So a decision making which is absolutely NOT in the hand of the retail investor is the final factor which I see.
Rationally, these points make one think that investing in the share market may not be an intelligent decision !
P.S. I am very open and interested in hearing counter-points to above..
Comments