I am doing research work for last three years on capital market and have travelled to 21 important commercial cities of Northeastern states and found various interesting facts about the behaviour of household investors. For the last 15 years, I came across several household investors who lost their bread and butter due to poor information about stocks. Traditionally, we the Indian people are also great followers and so, always go by what others say without any homework. Many household investors even do not know about the basics of stock market investment. Household investors are financially illiterate and maximum of them end up it gambling. We should understand that speculation is an integral part of stock market activities and scam also a part and partial of stock market.

If we look into the history of stock market then we know scam takes place frequently after every boom or bull run. During the first decade of liberalisation ie, 1991 to 2001, there were 10 big scam and 10 small scam and it is estimated that Rs 50,000 crore of household investor’s savings got lost and locked for an indefinite period. Thus, it is high time that household investors should also play safe and know the rules of the game.

For most investors who are into stocks, just about any kind of investment advice seems to be welcoming. They want to know what stocks foreign institutional investments (FIIs), mutual funds and other investors are buying; they track the most actively traded stocks and the top gainers everyday; they devour magazines that provide lists of top buys. With every market boom, recommendatory newsletters mushroom and invariably fold up when the bull run ends. Likewise, on TV channels for investors, the most popular spot is the one that puts out brokers’ top picks. As if this information overload wasn’t enough, investors use every available opportunity to ask ‘experts’ for recommendations. Discount experts’ wisdom; you’re on your own while taking an investment call because it is your hard earned money.

Do household investors exhibit such independence in their decision-making? Sadly, no. Both, economists who study markets and psychologists who study investor's behaviour agree that investors are prone to ‘herding’. They buy what the others are buying. That creates a degree of social comfort and saves the cost of independent research. That is why investors will almost never buy low and sell high. To do so, one has to buy when there are no other buyers and sell when others are actually buying. Which is also why ‘value investing’ is a tough strategy. For all our admiration of Warren Buffett, we need to see if we have the courage to buy a stock that is unglamorous, low profile, going at a price that shows no evidence of investor interest. We will wonder about lost opportunities to invest when the market looks up again but at the ground level it is in, we simply will not stick our necks out to invest, because we don’t see them experts buying as well.

The problem of household investors is not only confined to big cities but spreads across the country. In Northeastern states, situation is not at all encouraging. Media should play more responsible role in creating awareness among household investors. We have to educate our household investors and for this purpose investors camp should be organised by the regulators / depositary participants / brokers / sub-brokers / TV channels etc at regular intervals. Camps should be organised in holidays and in those places where it can be easily accessible and comfortable for household investors and maximum can take advantage of it. Organising investors camp at reputed hotels did not serve the purpose.

Investors should be aware that it takes nearly 10 long years for sensex to reach from 1000 (July 25, 1990) to 6000 level (February 11, 2000) and more than five years to reach 7000 level (June 20, 2005), but in 2005 it gain 30 per cent to reach its next level of 9000 (November 28, 2005), in 2006 it gain more than 50 per cent to reach 14000 (December 5, 2006) level and in 2007 it again gain 45 per cent to cross 20000 (October 29, 2007) level. Thus, investors should have gained handsomely in the last three years. But in 2008, till now, Sensex corrected 50 per cent from the top 21,207 (January 2008) and provide a good buying opportunity for all household investors, if they have funds and faith in fundamentally good stock. The crash has unnerved investors who till few months back were enjoying handsome profits due to dream bull run of Indian stock market from 2005 to 2007. The questions rankling all household investors now are: Where is the bottom? How much pain left? Whether there will be more bloodbaths on Dalal Street? Overall, the market is likely to taste new medium-term lows and unless there is sudden increase funds flow from the foreign investors.

Traditionally, we have been mainly investing our money in banks and post offices and have been quite satisfied with eight to 10 per cent return. But in stock market, many stocks provide monthly return of 20 per cent in 2006 and 2007 and then we are very happy and expecting same will happen year after year. In 2008, when Sensex was 9975 as on October 17, 2008, many household investors lost their money and many of them never return to the market and those who are still holding their portfolio value declined by 70 per cent to 80 per cent, they have no option but to wait patiently for two to three year time frame, if they have some fund they can average out some of the stock for early exit in good rally. Before buying any stock, do at least some homework regarding background of companies like we do before our daughter’s marriage.

Many of us make the mistake of either holding stocks too long or exit in a hurry. If one takes a wrong decision, there is always a risk of missing out on good rallies in the market or getting out too early, thus missing out potential gains. While making an investment plan, it is essential to consider certain key factors like one’s current financial situation, investment objectives, attitude towards risk and time horizon. As far as possible avoid day trading, as it will give more pain than gain.

I always advise investors to look at companies' earnings rather than market capitalisation. My advice to investors is to be stock-specific in stock selection and buy at decline. Many good stocks are now available below there book value. They should stay invested in the market for the next two years to make good gain because there is going to be major inflow of funds into the market as the global scenario is still such that the opportunities for institutional investors are few and far between. FIIs still find India more attractive than other emerging markets of world. You may either love FII or hate those but you can’t ignore them. FII is crucial to Indian stock market and going by what we observe in the current market scenario, they could decide the course of Indian equity market and even our regulators are also trying to pave the way.

I firmly believe 'an informed investor is a safe investor', and we should work together for a “healthy investor and wealthy capital market.”

Think long term and be happy. Best is yet to come.