Heard from the herd!!

True to form, markets have once again cocked a snook at the talking heads on TV
and rallied more than most had expected. Not only did Mr. Markets con the sages
they also had the high-on-information-low-on-savvy individual traders bet on the
wrong side of the markets yet again. What amazes me is the predictability of the
retail investor being wrong. Why does he get it wrong invariably and with such
amazing regularity?
Retail traders (calling them investors would be a great disservice to Rakesh
Jhunjhunwala!..) may live in different parts of the country or the world, cheer for
different IPL teams, get their latest market gossip from reading a broadsheet in
gujarati or scanning the pages of an ET or Business Standard, they some how
have a telepathic connection that mysteriously makes them all think the same
way about the markets. It seems like their brains are hardwired to react to market
movements in a particular and predictable manner and make similar bets based
on their shared sentiment.
Little wonder, therefore, that they have such an impeccable record of losing
money, not only when markets crash like they did in 2006 and 2008 but also
when they rally. Traders lost big time when markets opened locked up in a circuit
freeze after the election results came out in May this year. So what is in their DNA
that predisposes him to have such an awful luck with stocks?
A typical retail trader finds a sense of security in betting against the prevailing
market trend. If markets have rallied for a while selling short seems like a safe
thing to do, just like after a stock has fallen some you start hearing ‘valuations
have started looking compelling’ and you know that that must have caught the
retail traders’ ears and given the perpetual contrarian they are buying would seem
like a no-brainer to them. So retail traders are incorrigible contrarians and that
explains to some extent their secret of being so consistent with losses- not a
mean feat, by the way!
After burning his fingers playing the contrarian the retail trader almost always
succumbs to the market juggernaut and switches sides. Unfortunately he never
finds courage to get onto the hurtling bandwagon and will wait for it to slow
down. Slow down it does and inevitably turns course right then, now that a new
set of passengers are on board. So, they have a serious issue with timing.
Now that access to market information is incredibly easy thanks to the internet
and the TV, you would expect traders to fare better, hoping that information
asymmetry would be reduced. But that is clearly not the case, retail traders got
trumped again proving that the problem runs deeper than not having access to
information.
So what chance does someone have of making money in the markets if long term
odds clearly are stacked against the retail trader? The answer to that would be to
think what you would normally do and then do the exact opposite. Strange, though
it may sound, this is all that one has to do! Bet against yourself and you end up
betting against the herd!
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