THE NEWBIE INVESTOR AND THE DEADLY VOLCANO

The market is trading at life time high. After experiencing the deep fall during March 2020, it’s been a smooth journey for most of the investors. Those who have shown courage to buy the dips have been rewarded handsomely. The past one year was unprecedented. Even the chaiwala on the street would have also made profits and become a market expert.

During FY21, 1.42 Cr new demat accounts were opened. This is more than three times the average of previous three FYs. This shows the huge enthusiasm among the retail investors. Additionally, 35 new IPOs were launched in 2021 and 30 more are in the pipeline. The businesses seem to be in a dying hurry to get listed as if there is no tomorrow. Be it a retail investor or a businessman, everyone want’s to have the slice of this cake and that too immediately. Instantaneous gratification is the name of the game.

Many of the small and mid cap stocks have doubled or even tripled in the past one year. The IPOs are getting listed with more than 100% premium to the issue price. This is sheer madness. Life on Dalal street doesn’t operate this way. It’s always a roller coaster ride. It is never a linear equation. It is always a complex polynomial equation with large number of unknown variables.

These newbie investors have seen unimaginable profits of 50 to 100% in just one year. This is the honeymoon period for them. Everything looks picture perfect. However, they have not yet tasted the red colour bloody market correction. I am a bit worried for these investors.

The market is always driven by greed and fear. I could sense enormous amount of greed everywhere. This is an alarming situation. And hence calls for a caution.

Most of these investors must have acted on the tips of the neighbourhood experts. It is purely by luck that they are sitting on good profits. I am afraid that this lucky charm is not going to last for ever.

Please be warned that you are sitting on a deadly volcano. It may erupt any time. It is good to enjoy the volcano from a distance. So, run away to safety before it destroys you. Here are few suggestions to avoid this:-

• If you have invested in large caps, hold on to them

• If your small and mid cap stocks are in profits, exit these and book profits

• Do not invest any additional amount now in equities

• Instead, invest in mutual funds, that too through SIP (systematic investment plan) or through STP (systematic transfer plan)

• If you are a working professional, then avoid investing on your own by the “Do It Yourself” (DIY) style

• Consult a mutual fund advisor whom you know personally and trust

Most of the times, mitigating risk is more essential than seeking returns. Defending your hard-earned money is the key to wealth creation. It is always better to be safe than sorry.

The wise old man, Warren Buffet said, “Risk comes from not knowing what you are doing”.