The fortunes of the Indian market maybe driven by FII inflows, but do foreign investors make the same mistake as most retail investors i.e. buying high and selling low? Here is the evidence over the last five years. The first of a three-part series shows how FIIs investment crests near market peaks
Well, here is the thing. The FIIs, smart guys, act exactly like you and me, retail investors. They suffer from the same syndrome as we do after watching massive rallies unfold—the sense that the train is leaving the station, and that we have to get in anyhow. They have the knack for rushing in with huge buy orders well after a massive rally; they invest within 5% of the market peak. Time after time. Don’t believe it? Well, how about looking at the other instances FII investments that were more than January 2013? Were such large infusions followed by a rising, stagnant or a declining market?
These were hardly the times to be wildly bullish. The FIIs invested over Rs36,800 crore—the highest two-month investment ever—in September 2010 and October 2010. Two and half years after that the Sensex is actually down!
A massive FII inflow of nearly Rs33,000 crore had come in when the Sensex was well-above the 19,000 mark during these two months. Almost six months later, Sensex return is near zero. We do not know whether the Sensex will regain its January peak and keep rising. What we know for sure that for the third time in three years, the maximum investment came in after the market had run up sharply from the lows. Time is running out for this peak investment to earn smart returns.
In the second part of the article we will look at how FIIs, like retail investors chase market rallies and while the third part will examine the behaviour of FIIs in the exact opposite situation described in this article, namely panic selling at market lows.
Inside story of the National Stock Exchange’s amazing success, leading to hubris, regulatory capture and algo scam
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This will be followed by a
"correction" a word that is tossed about by "experts" when the sellers of the above category in para (1) may return back to the market and buy his/her blue chip companies.
And when IPOs come, watch out and buy when they hit the market, as past track records show that you can get them cheaper,later!
For the time being, please do not experiment - with your hard saved money and, certainly, do not borrow to invest, just because your self-styled expert broker advises you to do so.
Oh, yes, just remember, it is YOUR money, and on every transaction the broker will make a buck or two, whether you make or go broke!
The rise in the sensex currently is artifically created to fool retail investors.
No need to reconsider any option,investors also shd stay far far away from mutual funds.
This is the wrong time to buy equities totally wrong time from retail investors point of view.
We must also remember that these FIIs are "aided" by a bunch of "highly qualified, experienced Indian executives (er.. most of these guys have changed several jobs) who claim to know the "pulse" of the market and all such complimentary words. We must also bear in mind that any amount of money that comes into the market will still have to chase the existing quantum of shares available. So, this is simple economics of too much money chasing too few shares, resulting in high prices. When one big FII sells, panic sets in and others follow, resulting in a bloodbath!
In the end FIIs/DIIs play with others money, brokerage/charges matter. Isn't it?
2)Play with other people’s money? Not sure if the tightly regulated investment management industry can be described as ‘playing’ with other people’s money.
The investment management industry because of its inherent complexities & contradictions becomes a soft target for hurling criticism – and in good measure unwarranted criticism. So much so that even a harmless simple two part series meant for sharing knowledge and experience attracts attention to brokerages /charges.
If you think the profession carries disproportionate rewards, the law does not stop anyone from being a part of the fraternity. Please join and help fellow citizens in investing their hard earned savings.
Then there are patient FIIs who buy and hold. They do not have a mandate to perform in the short term. These FII can hold ITC for 15 years without making a single trade. Often these FII work for wealthy European Family Offices who like to buy and hold high dividend yielding stocks with sound corporate governance.
Also noteworthy is that FIIs always price their profit in dollars which means that a rise in the rupee and the sensex together may eat into the profit which is why FIIs sell at times when the sensex is high - it is because the rupee has fallen which triggered the stop loss. It's not only a sensex issue, it is also a forex issue for the FII.
This means that DII (domestic capital) and FIIs can do a buy and sell in a rising sensex which baffles analysts. Sometimes 2 FIIs buy and sell during a rising sensex because one reports profits in dollars and the other reports profits to shareholders in japanese yen!
http://nareshnayak.wordpress.com
Nice food-for-thought article Mr Basu.
Suketu