1 - Pattern of Retail Investor in India in Beaten down Stocks
key Excerpts (Emphasis Ours)
1 - We notice Retail Investors shareholding goes up dramatically in a stock which falls 50-70% sharply in a very short amount of time.
2 - But the same behavior is not replicated in companies which fall 50-70% over 2 years. The increasing participation happens only when prices drop sharply.
3 - One reason is the above stocks continue to be in the news stories on a daily basis and create an association towards those companies and impulsive buying by individual investors. The adage buying low also indirectly bears on investor minds as to “Aur Kitna Ghirega”
4 - We all love to buy a known product 50-60-70-80% lower than MRP. Its a great feeling.
5 - The above pattern has been repeated over & Over again in stocks which once famous crashed suddenly like Yes Bank, Kingfisher, Jet airways, Unitech, Vakrangee, Pharma Names after 2012-2014 rally etc. The retail shareholding suddenly doubles /triples after sudden fall both the shareholders and number of shares they own/shareholding % in the company.
6 - The funny thing is the retail shareholding keeps on increasing even after the news around company shutting down or going to bankruptcy is coming on a daily basis.
6 - Now consider this scenario.
a) A stock is at 250 today was at 100 just a year ago. It fits all your investment criteria and see an opportunity of stock going to 1000 in 3-4 years.
b) A stock is at 50 today and was at 100 a year ago. It fits all your investment criteria and see an opportunity of stock going to 200 in 3-4 years.
Which one would you buy?
Generally the first reaction would be to prefer a stock at 50 as it has fallen in price and we are CHEAPOS!! even though return expectation is same.
“The market does not care for your Buy Price or the Highest Price of the stock. “
There has been decent correlation between probability of wealth destruction and shareholding pattern of <1 lakh shareholder.
Few steps to observe this pattern
List down all companies and their shareholding pattern from 2012 to 2018 for shareholders who hold <1 Lakh rupee share on an annual basis
Get rid of outlier companies and companies with less than 100 crore market capitalization at the time of study
From 2015 to 2018, for every year find top 5 percentile of companies or companies with spike of more than 10% (anyone) which showed highest increase/shift in <1 Lakh rupee retail shareholding and create a list of such companies
Find from the year this major spike in retail shareholding started till December 2018, what has been return of this portfolio.
Some excellent observations based on above analysis
Between 2015 to 2018, total 74 companies came in this bucket and results are mind blowing as well as portfolio blowing. In terms of holding period:
13% of these companies have been held for 4 years
41% of these companies have been held for 3 years
19% of these companies have been held for 2 years
27% of these companies have been held for 1 years
The Outcome of holding the above stocks would have been as follows:
42% of these companies led to a minimum wealth destruction of 75% in 1 to 3-year period on absolute basis.
26% of these companies led to wealth destruction of 50-75% within 1 to 3-year period on absolute basis.
18% of these companies led to wealth destruction of 25-50% within 1 to 3-year period on absolute basis.
5% of these companies led to wealth destruction of 0-25% within 1 to 3-year period on absolute basis.
Only 9% of these companies led to any kind of wealth creation within 1 to 3-year period on absolute basis.
This kind of resonates with never catch a falling knife and being contrarian does not mean buying anything which is cheap.
The intent is not to label each of these companies as fraud or wealth destroyers but just to understand probabilities of success or failure on a generic basis. It could be possible that few years down the line some of these companies recover.