Beware of wealth destroyers during bearish market situation

Everyone talks about wealth creators as they are the most popular and invariably get celebrated with bold headlines.

Published: 07th October 2019 09:44 AM  |   Last Updated: 07th October 2019 09:44 AM   |  A+A-

Bombay Stock Exchange

The Bombay Stock Exchange (BSE) logo is seen at the BSE building in Mumbai. (File | Reuters)

MUMBAI: Everyone talks about wealth creators as they are the most popular and invariably get celebrated with bold headlines. But, it is only in the bearish market situation that one turns attention towards wealth destroyers. Equities are risky and this is the first word of caution. 

In addition, for every one stock that makes money, there could be ten-stocks that are laggards. According to a recent study on ‘Wealth Destruction’, less than one out of five stocks generate the return expected from equities to justify the risk taken.

Further, Samco’s Wealth Destruction Study released last week showed 80 per cent of stocks do not beat the average 15 per cent returns expected from equities and less than 20 per cent of stocks actually beat expected return required from equities. In the last one year, when markets have gone down, though the benchmark indices Sensex and Nifty were not reflecting the deep cut broader indices such as NSE 500 would show that out of 500 stocks 370 stocks had negative returns, it said.

During such bearish phases, risk aversion sets in and investors tend to move away from equities. Perhaps, that is a time to sit and study where and how the investments went awry and get ready for the next phase of investments with clear do’s and don’ts.

There is no insights into the retail investor behaviour, as to why they chose certain stocks over others - interest, faith in promoters, low price or price to earnings valuation, affordability etc., the study pointed out. However, it showed that there was a “wide variance in number of retail investors holding wealth destructors versus wealth creators”. 

In last one year, there have been defaulters, those who have gone into insolvency and bankruptcy resolution like Cox & Kings, Jet Airways, whose stocks have fallen between 85 and 95 per cent in one year. It is not always possible to pick 100 per cent wealth creators, but a careful study, close follow up of balance sheets, news and finances can at least help investors to cut their losses, and identify the potential wealth destroyers, it said.

What can be done to avoid such loss of wealth? The answer is turn to basic investment principles. Quality of management and governance, return on equity, dividend payouts, debt to equity ratio, cash flows, business cycles, commodity cycles, and every parameter you can find in the classic texts.

Rank your stocks against the select parameters, have a target, keep a strict stop loss. Or else turn to experts for guidance, because business cycles are getting shorter, information flows far swifter for an amateur retail investor to keep track of. Apply caution even in that, because past performance is not a guarantee for future returns. 


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