Thursday, January 26, 2006

Why India is not yet a mature market and will not be for a long time.

The stock markets are on a roll right now with Sensex touching 9700 yesterday. Everyone talks of "Sensex touching 10000", "huge earnings growth", "India's time has arrived" etc. Among all this hype and hoopla, what has been conveniently ignored is that there is very little retail participation in the markets. I read somewhere that only 2% of the total retail (house hold) savings are invested in stocks.

The reasons for this is not difficult to find. In my opinion, there are mainly two reasons:

  1. Ignorance of what a stock is, what it represents and how the market operates. Well, the ignorance is not limited stocks alone – it extends to almost all avenues of investment.
  2. A lack of true information – fundamental research, latest company information and basic tools that will help an investor.
A case in the point is my futile search for a reliable stock screen. All the ones I saw were either too restricted or had old data – often wrong data. I’m willing to pay for a good one but they are just not available.

It is only when the world of investment – be it stocks or mutual funds (Real estate, government bonds, gold and bank deposits do not count – we Indian’s “invest” too much in them) is made accessible to common man thorough proper investment education and there are reliable channels of information will the retail participation in the markets grow.

6 comments:

Shankar said...

hi prasanth, stock screen would be a function of your style of investing. Now there are 3 classes of people - a growth investor, a day trader and a value investor

1. A growth investor wil need info on company fundamentals, industry growth, future P/E ratios etc.

2. A day trader will rely on technical charts which is rather easy. log onto www.bseindia.com

3. A value investor is at a privilege. He just needs annual reports of the company to decide. log onto www.sebiedifar.nic.in for annual reports/announcements and financial statements of all companies.

Read extensively and u can beat any stcok screen.

Warm Regards
Shankar

Value Investor said...

Hi Shankar,

The utility of a stock screen lies in its ability to screen out companies that don't fit certain criteria. This allows the value investor to concentrate their efforts on a small fraction of the large universe of available stocks (~6000, they say). This, in turn, saves a lot of (tiring!) effort and frustration -- instead of searching for a needle in a haystack, we only need to search in a bucket of hay, so to speak.

While EDIFAR is pretty good as a source of information, it is a source of all information. It would only be useful once we know which company we are interested in, not in finding out which company we should be interested in.

I guess Prashanth is looking for a screen that would help him reduce the number of companies he needs to look up in (say) EDIFAR from around 6000 to around (say) 200 or so.

I myself use a manual method to do the first level of filtering, and use Yahoo's portfolios to keep a watch on the filtrate. Only when one of the stocks comes below my target price do I do a detailed value analysis to see if it is actually worth at that price.

Regards,
Value Investor

Sreenath Vemulapalli said...

Prashanth,

Very interesting point you made regarding retail investment in the Indian stock market.

I'm from the US where household savings is in the negative territory (seriously). I've read that China is above 20%, and I'm sure India is in the same territory.

US retail investors, especially in the last 10 years after going through the Tech boom and now wading through the Real Estate bubble have built an appetite for investing (speculation maybe a better word) amongst retail investors.

I'm sure as the investments and growth continue to flood into India and China, lifelong habits and mindset for the common man regarding money and investments will change.

I've noted during my schooling that there were a lot of Indians coming to the US for studies - but usually focused on Science, Engineering and Computers. Lately, there are a lot of MBA students. I think this is a symtom of a systemic changes in thinking. China is similar - they are now getting past the mentality framed for them by Communism and are finding themselves motivated by capitalist tendencies.

On the whole, I suspect that this is a longterm journey and will also be a function of these markets making themselves accessible (marketing, regulations?) to the retail investor in addition to what you have mentioned. One more thought - as the black market in India gets increasingly regulated in India it might be likely that more of this money moves over into stocks...does that sound plausible?

Good post and interesting thoughts. Keep up the good work. I look forward to reading your thoughts.

Prasanth said...

Hi Sreenath,

retail participation in the markets as i pointed out is very low but IMHO, will grow as people become more aware of the diff investment opportunities. As for black market getting more and more regulated, bound to happen but i think most of the money will go to buying gold - you just have to see it to believe Indian's affinity to Gold !!.

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