Well, there is no doubt that world came to a total standstill with the onset of Coronavirus. The source of the virus still remains debatable but we do know the source of this new class of investors called Robinhood investors.
This is something not specific to me and I am sure you could relate. As soon as the lockdown started, you stopped going out, stopped eating out. There are no new movies to watch, no sports around for betting. In short, the pandemic helped us draw a clear line between what is necessary and we used to think was necessary.
Apart from this, in order to save the economy, government too pushed additional liquidity in the market. Of the multiple measures they took, I will discuss the one that may have impacted salaried class the most. Smt. Nirmala Sitharaman, as a part of 20,000 crore stimulus decided to bring down the PF contribution limit to zero for a period of 3 months. It was your money being given to you only, just that it increased your in hand salary.
Which now brings me to my next question. What did you do with all that extra money in your hand? I am sure all the avenues of exorbitant spending were shut down by SARS nCov2.
So if your answer is that you resorted to investing in equity share market, I have a good news and a bad news for you. Good news is that you can take pride in the fact that you finally decided to put that money of yours to some good use. Bad news is that almost everyone did it. So for the ones who may feel that they took one heck of a decision: you did, but everyone else did that too.
Coming back to what is Robinhood? Well there is an app developed in US, that lets you trade in the market with zero commission and minimum charges. That app broke all past records of registrations when the lockdown began in US. No surprises for guessing, that app is called Robinhood and hence the new class of Robinhood Investors.
India saw a similar trajectory in growth of number of investors trading in direct share market. Had this nomenclature been done in Indian parlance, this new class would’ve been called the “Zerodhian Investors“. Yes, even Zerodha saw a peak in new registrations during this period.
Impact on equity markets
With first timers flooding the market, the recovery post crash of March’20 was the fastest ever recorded in the history. Yup. That was the smallest bear run we have ever had after such a big dip. Analysts across the country were skeptical that this might be a relief rally (a temporary bull run to consolidate) but never had they been so wrong before. A new hope was infused in the market by the virtue of Robinhood Investors.
This is supposed to be good right? These investors, single handedly, took the herculean task of revival and successfully completed it? Not exactly.. So because these investors had little to no experience of the market, many of them tried to invest in stocks on the basis of hunch. Hence, entire range was overvalued and in overbought zone.
Imagine you go to buy a McDonalds burger. The burger costs 40 bucks and because of the grim situation, no body is buying it. But, all of a sudden everyone wants a piece of it. Since the McDonalds cannot afford to meet the demands, the price has now gone to 80 bucks. So, the valuation of the burger is not fair any more. It had to be 40 bucks if not 30 due to pandemic.
Apart from overvaluation, this class of investors have never seen markets bottoming up in their journey. It is a mentality that even if the market falls, they will bounce back the way they did in April/May.
Equity markets are not a bad investment tool at all. But, in my experience, it is not something that you can do part time. It is a full time chore requiring 8 hours a day commitment like our regular jobs.
If you are a Robinhood as discussed above, you may want to get started with the ABC of stock markets as I have heard it is not a easy place to be in. Fund managers are paid massive sums of money for some reason only.
For this very reason, I use Mutual funds for getting exposed to equity markets. I use stocks only when some attractive IPO is coming up or in some large caps.
Mutual Fund? IPO? Yes, stay tuned for upcoming posts on that.
Until next time..