The sad odyssey of a retail investor

The fact that equities are the best returning asset class over long periods is well known. If you are a well-informed equity investor with a long-term orientation, decent vintage, and some level of maturity, you would know what I mean. The biggest wealth globally has been created in the equity markets – either through direct concentrated single-stock ownership (by entrepreneurs) or by owning a portfolio of stocks directly or through some sort of mutually managed funds. The data is hard to refute – the fact is that equity indices have compounded handsomely (read: beaten risk-free rate by a decent margin) over long periods. Sure, it is painful in short bursts and brings gut-wrenching moments every few years, which sometimes can test the patience of the most resilient investors. But stretch the time intervals and make sure that you survive the painful periods – i.e. don’t blow up speculating or with leverage and you are likely to come out winning over time. It saddens me to know that so many retail investors lose money in the markets or do not add to their capital over long periods. Infact, while time is the friend of a patient long-term investor, it becomes the enemy of the typical speculative market timing retail trader. Invariably, she arrives late to the party, often when a bull market is at its fiercest and will buy high, only to sell lower as the euphoria subsides. Some quick buck is made in a few trades only to be given up in larger speculative bets. There are several reasons why such an investor (sorry: speculator is the right word) loses money and is unlikely to ever appreciate the power of long-term equity investing. Equity investing is not their main activity but something done on the side to keep oneself entertained. It’s like you put in a hard day of work in your main business and then go out for a few drinks later in the evening. Some go gambling to entertain themselves and hope to get lucky. Even if they do – the casino never allows you to re-invest and grow your capital. Infact, very few go to the casino, the vast majority come to the stock market. They think by putting in a few random trades they will multiply and further their riches. Never happens – the wise ones at least do not commit of a lot of their core business capital knowing it’s a loser’s game. The foolish ones (which are sizable in number I have come to realize) almost always do. Return expectations are unrealistic – because they extract a small share of surplus profits from their main business, I suspect they think of it as free money which has option value – if the trade works, they make a hefty return for no real effort. This never works – they seldom make big money as they never do the large size trades – for where do they have the research, conviction, judgment, and context to back the truck on a single or a few ideas. Even if they do get lucky (like during the post-COVID run-up), the profits are re-invested in more speculative bets only to be lost soon after. Over time, thus, except for the entertainment value of speculating, they don’t grow or rather, often destroy their capital. Then they turn up at social events and say how no one makes money in the markets and it’s all fixed by some higher-up folks who control the flow of money. Notably, this does not stop them from barking up numerous trees (read: those with an opinion on the market) at every social gathering. Over time, they develop hard-nosed opinions about the markets and people who work full time in them. They think it’s all a conspiracy – ‘this bunch of insiders who print money yet never allow the part times to make any spoils’. Worst yet, what amazes me is that a lot of these folks are successful businesspersons in their right – in whatever they have created over time with a lot of hard work, and homework and have refined their craft over long periods. But when they come to the market – they become cowboys on a rampage with no process, lacking all discipline and letting their animal instincts take over. Of course the market is a mean machine and simply waits to make headless chickens out of them. And it does it again, and again. The more sophisticated and patient investor (retail or institutional) simply gains overtime at their expense. This headless chicken speculator also defies a cardinal route of investing – willingness to admit to mistakes, question counter-evidence and learn/adapt every single day. Someone should sit down with them and do the math on the opportunity cost of not having regularly invested in some large mutual fund rather than having speculated in the market. The problem is that – they will never want to do that – for that will take away from them their side pleasure of rampant gambling where they one day hope to beat the market.