Thundering Herd & The SMALL GUY

Mid 1900’s was a time when individual investors were the most prominent investors on wall street rather than institutions like Mutual Funds, insurance and pension funds.

Most of the large brokerages would use small time brokers to execute their orders, however it was Merrill Lynch that launched its network of financial advisors famously known as the “Thundering herd” who would execute trades directly for the investors.

However, over time as mutual funds and pension funds came into prominent, the institutional investors became the real thundering herds as they were the ones who were doing all the buying and selling.

In 1993, this is what Peter Lynch (famed fidelity Fund Manager) wrote about it:

“A sizeable faction of this Thundering Herd could even be called the Blundering Herd. I can say that with confidence, having ridden with the Blundering Herd on more occasions than I care to admit.”

Lynch goes on to say that the fact that professionals handle bulk on the money gives the individual investor an inferiority complex. However actually it improves their chance to make money if they can act contrarian to the Thundering herd.

2020 saw the return of the small guy in a big way.

In the United States it was driven by the phenomenon of Redditt and Robinhood investors bringing the hedge funds on their knees with “GameStop” and “dogecoin” investing leading the pack.

The same phenomenon that was driving retail investing in the US was seen in large numbers in India in 2020.

Sitting at home, nothing much to do, over 1 crore new investors opened broking accounts and started transacting.

Between March-20 to March 21, retail ownership of equities went up by 5.25% from 9.5% to 10%. On its own it might not seem a large increase, however considering that India’s market cap went up by 1Tn USd in 2020-21, this additional 5.25% represents over 50 Bn USD or 3.5 Lakh Crores.

Retail investors especially the new ones had a great time last year thanks to the relentless rally and earnings surprises;

See here:

Almost the entire retail participation went up in mid and small cap where they experienced 4 quarters of positive earnings surprises.

Most of retail investors got the confidence that they can now manage money better than the professionals.

Let’s go back to Peter Lynch now.

He said individuals can benefit by the herd like movement of professionals.

Since he said this most of Fund Managers have also learnt their lessons.

However, in this rally what we saw was not un-herd like behavior from individuals but actual herd like behavior.

If gamestop and dogecoin are examples in the US, PSU names ae an example in India.

Most of the business channels have an advisory section where investors are asking advisors about what to do with their stock holding.

The crucial point that comes out of these discussions is that most investors didn’t have a good understanding of reason behind what they were buying.

40% of Nifty 50 stocks under-performed the benchmark over FY-21;

Of these 40%, 30% were PSU stocks.

Investors need to pay attention to some crucial points:

  • Getting lucky in stock market is not an everyday phenomenon and individual investors need to realize this.
  • If you would not buy a house, a car or a refrigerator without due-diligence and research, should you be investing your money without understanding what you are buying
  • While last year went well, have you got the tools to assess how’s your portfolio positioned for the next year
  • What can be earnings impact on your portfolio holdings of the 2nd covid wave
  • What are the long-term prospects for the businesses that you are holding?
  • After all of this what are your returns versus the benchmark

Even a professional Fund manager cannot claim complete understanding of every business that they own, for example there are hundreds of different chemicals being manufactured, can anybody claim complete understanding.

It is said that if you didn’t know how you made money, you wouldn’t understand why you are losing it.

There are no right or wrong answers in investing, however understanding what you are getting into is crucial to understand the risk and if you are up for it.

Follow my Twitter handle @manver1974

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