Last week, a retail investor walked away with listing day gains of over 70% in an initial public offering (IPO) of one of the lesser-known companies. A short-term capital gains tax of 20% was hardly a deterrent. After all, returns of over 50% post-tax in a single day will keep anyone interested in this party — till it lasts, of course. No wonder companies are in a hurry. With fund-raising plans of Rs 50,000 crore in the next couple of months, there will be ample opportunity for those who missed a blockbuster IPO like Bajaj Housing Finance. In such times, when SWOT analyses, management quality, and other important factors take a backseat, regulators find themselves in a Catch-22 situation. While a rising stock market bolsters the belief that the economy is on a sound footing, there is a lurking fear that if things start going wrong, investor appetite might disappear in a flash. And it could take years, or even a decade, for investors to muster enough confidence to regain their risk-ability.
The best regulators can do during this phase is to keep on making investors aware about the perils of going overboard. In that context, the Securities and Exchange Board of India needs to be lauded. In the past couple of years, it has been coming out with data-driven studies highlighting the behaviour of IPO and derivatives market investors. The data, which was from FY23 till December FY24, revealed that 54% investors, excluding anchor investors, sold their allotted shares in the IPO in the very first week. More importantly, 67.6% retail investors (by value) exited in the first week with profits of over 20%, but 23.3% sold even if they were in losses. The regulator has also consistently harped on about the pain points and tried to instill some kind of sanity among investors — something that wasn’t done earlier probably due to the absence of technology to capture credible data.
Of course, market gurus like the late Parag Parikh have always been in the forefront when it comes to warning investors about the perils of aggressive investing. For example, in his 2009 book, he wrote that during the internet bubble (dot-com boom) in the 1990s, 74 firms were listed. Fifteen years later, less than 50% survived. A similar story played out in 2006-2007 when infrastructure, including real estate stocks, saw unrealistic valuations. Investors with huge exposure to these stocks couldn’t find an exit for almost a decade or even more. It seems that once in every 10-15 years, an inexhaustible bull run grips the Indian stock market that offers even the reckless an opportunity to make pots of money.
But such good times seldom last. This bull run has already entered its fifth year, and some investment experts believe that the rally could lose its steam sooner than later. As Nikhil Kamath, CEO and founder, Zerodha, pointed out in the company’s business update on Wednesday, there is a risk of the bull run ending any time. It would be a good time for retail investors to take stock of their market exposure and, perhaps, move part of their money into more reliable asset classes. Better still, they should keep in mind George Soros’ evergreen quote on investing and trading: “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”