10 Lakh Crores of Investor wealth lost after the Budget 2018. Really??

After the 2018 budget, the rising stock market went into correction mode. This long-awaited correction was triggered by the budget proposal to re-introduce Long-Term Capital Gains tax.

Media frenzy created fear and confusion in the minds of retail investors, resulting in panic selling. In parallel, global events like the Russian elections and Saudi Aramco IPO, the world’s largest IPO, supported the fall. Now crude oil prices need to stay at high levels for both these events to sail through. This worry took the markets further down, so more sell-off is likely.

Now the media says 10 lakh crores of investor wealth is lost in 5 days. This fuels the fears of the already confused investors. Is it true that so much wealth was actually lost? If so, who made the gains?

In the stock markets, when there is a higher value on a company’s stocks or the index, it is true that the whole asset is valued at that price. If all the owners offer to sell at the highest price, there is zero possibility that everyone will get that price. As sell offers pour in, supply increases and price declines. Price decline continues till the supply slows down and demand increases. Then the price starts to move up again. If the sentiment becomes stronger and builds more confidence, then the market moves past the previous high leading to an even higher value for the total asset.

Wealth gets created because of the confidence people have in the company or the economy. Wealth gets eroded when many of them conclude that their expectations are met and begin to move out.

So, only if we sell and move out of the investment can we lock the high price. If a person is waiting without participating in selling and realizing the gains, it means his confidence level is high, and he wants to achieve an even higher price.

Just calling out the highest level reached, not taking the action to exit and saying wealth is lost when prices move down does not have a meaning. The reason why you did not sell was that your confidence in the company or economy continues to be strong. If it remains strong, be invested to exit at a higher price.

The other approach is flawed wherein you stay invested when the market is moving up and when prices decline due to selling by others, you get worried and take a decision to sell at the available price. At this stage complaining that you lost your wealth is not the right way to approach this asset.

If you are participating in the stock market with commitment and confidence, hold on till suitable conditions prevail. If the situation changes and shakes your confidence, then take a stand to move out either with available profits or even at a loss. Again, you need to understand the conditions and take action.

In reality, wealth is not lost. It was only a notional value. When a group of investors decides to move out, the prices drop bringing down the notional value. At all times we will have some set of investors wanting to exit for various reasons and that is market dynamics.

Be invested as long as your confidence in the stock or the market is intact. Exit when your goal is reached, or the conditions change, altering your view and confidence levels. Once we are investing with this clarity, ups and downs in the market will not disturb us or make us take a decision midway to exit.

So, when markets come down in value, no one loses any physical money, it is only the notional value that comes down. Stay invested with your confidence and objective and you will get rewarded adequately.

LTCG Brings Selling Pressure To The Markets

Our markets have been waiting for a correction since long. The market is scaling peaks since April 2017 on the back of two truths –

  1. The strong flow of retail money coming into the markets
  2. Government intervention in every possible way to keep the positive mood in the market.

Now the much awaited Long-Term Capital Gains Tax (LTCG) coming back at 10% has triggered the sell buttons. In one way it is a sign of relief. Investors were haunted by fears that a correction will take away weak hands in the market and move out weaker stocks from managed portfolios. It is required once in a while to cleanse portfolios too. Like servicing our vehicles after periods of use, a review and cleaning help to put things in a condition to move on further.

The reaction to the LTCG tax is disturbing. The proposal to grandfather gains made till 31st Jan 2017 and tax the income from there off has driven many to think of immediately selling their long-term holdings before 31st March 2018 to claim tax exemption and then re-invest. These are actions that mature fund managers or fund houses would not take because they know that there is no benefit, and only adds more accounting effort.

Retail investors, thinking that they are smart, are going ahead with selling their holdings. Most of the times, after they sell, prices will drop further, and they will get comfortable with their decision, deciding to wait and get in at a better price later. Why they want to buy again? The stocks they hold are good ones, so they want to be invested. Only that, they do not want to pay tax on the gains.

The savings will be 10% of whatever gains they have made so far. While what will happen later is that, in the bargain to time the market, they will miss the next move and probably not buy again or take entry at higher levels. In both ways, they will only end up losing more, leaving the government and brokers with more income. And all these efforts are only possible for the next two months, after that, markets are going to be there, and there will be profits to be made, on which taxes must be paid.

Such kind of immature moves are the reasons why retail investors are always losers and professionals are consistently gainers.