Why 'yeh dil maange more' cannot be a formula for stock market investing

One of my lazy pleasures in life is visiting bookstores and leisurely browsing through books. And I did a lot of that on a recent visit to the United Kingdom. From the Blackwell’s Bookshop in Oxford, perhaps the biggest bookshop I have ever been to, to the London Review Bookshop in London and the Blackwell’s Bookshop in Edinburg, which possibly have the best curation of books of all the bookshops that I have ever been to. The other bookshops I loved were the Daunt Bookshop in Marylebone, London, the Foyles Bookshop at Charing Cross, the Waterstones at Piccadilly Circus and the Hatchards, also at Piccadilly Circus.

What’s true about my reset when it comes to books and bookstores is also true about many retail investors in India, primarily those who invest in stocks in direct and indirect form. The returns generated by investing in stocks have been so phenomenal over the last four and a half years that it has reset the expectations of retail investors who have invested in stocks and who want to invest in stocks.

This can be seen from the amount of money flowing into stocks in recent months. Take the case of the money that has flown into equity mutual funds (MFs) during 2024-25, the current financial year. From April to July, the latest data available, equity MFs have seen net inflows of ₹1.31 lakh crore. If this pace continues, then equity MFs are likely to end up seeing a net investment of more than ₹3.9 lakh crore during the financial year. In 2023-24, equity MFs, which invest a bulk of the money they collect in stocks, had seen net inflows of ₹1.84 lakh crore, the highest ever during a financial year.

Or take the example of the total amount of money that is chasing small firms coming up with Initial Public Offerings (IPOs). Recently, Boss Packaging Solutions, a Gujarat based company which was looking to raise ₹8 crore through its IPO, saw a subscription of 127 times. This was after a Delhi based two-wheeler dealer saw its IPO subscribed 400 times.

Clearly, investors are expecting humongous returns from investing in stocks, given the pace at which they are investing money in them. Indeed, the kind of money chasing stocks is just scary given that many things in life, including stock prices, regress to the mean. Or to put it more simply, extreme outcomes are followed by more moderate ones.

Now, from April 2020 to 5 September, the Nifty 500 index, a very broad representative of stock prices in India, has given a huge return of a little under 32% per year. Other indices have given an even higher return. Take the case of Nifty Smallcap 100 index, which has given a return of a little under 47% per year during the period.

These are extremely high returns which have reset investor expectations when it comes to the returns they hope to earn by investing in stocks. This explains the huge amount of money flowing into stocks. But there is regression to the mean to contend with.

So, what kind of investors should generally expect from investing in stocks? If we look at the Nifty 500 index, we have data going as far back as April 1995. Between then and now, stocks which have constituted this index, have given a return of a little over 12% per year. To this if we add a dividend yield of around 1%, the returns work out to around 13% per year.

Indeed, anyone looking to build a substantial amount of wealth by investing in stocks, directly or indirectly, and who has a daily job to contend with, should be working with such kind of return expectations. Of course, given that there are no guarantees, a return expectation of 10-11% per year makes even more sense. Now, one can punt in stocks in the short-term, and make a few thousand here, and a few lakh there, but what the history of investing in stocks clearly shows us is that very few have grown rich doing that. Genuine wealth is built by investing and staying invested in stocks and equity MFs over the decades. Now try saying that to two in five investors in equity MFs who stay invested for less than two years. So, how is any wealth going to be built? The heart may want more quickly, but investing at the end of the day is more a game of patience than what the heart wants.