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The stock market is often likened to a Las Vegas casino, and with good reason. Everybody enters a casino with the confidence that they have the will power to fold early should things go south. But everyone who exits the casino learns that almost nobody has this will power. You either win or you lose, but the lure of going all-in is strong at every table. If not all-in, you end up going at least up to your neck.

Most of India’s retail investors fall in this category of having the false sense of rationality in their investment decisions. What else can explain the current high spirits of India’s equity indices even though a bunch of indicators do not speak highly of its economy anymore? The GDP growth itself has slowed and is expected to be lower than FY24. Credit growth has decelerated, exports are at an ugly turn and the employment narrative is not as optimistic as official data paints it to be. Even the soaring indirect tax collections must be taken with a bag of salt as this column points out.

But the most telling of them is the fact that eight out of ten futures and options traders make losses. Still this segment is going all guns blazing in terms of volume even today. Institutional investors are a savvy lot and a notch above them are the promoters selling stake in their companies through initial public offers and pocketing a nauseatingly high level of gains through cranked up valuations by an overindulgent market.

So, is the retail investor doomed to be the optimist that ends up holding the baby? We need not be.

Not everyone that exits a Vegas casino is in tears, some are exuberant. They were perhaps probabilistic and took bets after working out the risks in favour and against. This sublime piece by Tim Harford in FT, free to read for Moneycontrol subscribers, explains what being probabilistic is. Being aware of probabilities gives an investor confidence to be contrarian during times of extreme one way movements in the market.

Betting on a policy rate cut by the US Federal Reserve or even by the Reserve Bank of India is not such a daunting task when we look at data and figure out the odds of them coming true. Unfortunately, Indian retail investors are ignoring all the red flags in the economy right now believing that big gains are waiting for them even at exalted valuations.

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Even analysts are split in their expectations from the RBI. Those at Nomura believe that the central bank can announce the first rate cut next month citing a clutch of data that dispels the notion that inflation is still at an uncomfortable level. Barclays economists do not see a rate cut until December while those at Citigroup forecast a hawkish RBI to go for the chop only next fiscal year.

If analysts are split, what can retail investors do?

If we do not have the tools to arrive at probabilities, we can guess them. That is why geopolitical analysts can only make an educated guess.  As Harford writes, “Sometimes, we have a good idea of the risks we face, and sometimes, we don’t have a clue.” During clueless times, “We should all be asking ourselves what we know, what we don’t and how we plan to fill the gap in our knowledge.”

One such gap will be filled for the US rate cut punters later today by the non-farm payroll data. Employment is the critical metric that the Fed tracks closely in taking decisions. If the jobs data turns out to be robust, the odds of a rate cut dim and vice-versa. Back here, we will have the retail inflation data due next week which could give us an opportunity to either change or cement our bets on the RBI’s rate cut probability.

While the equity market still looks to be high on hope, there are sections that show investors are recalculating their probabilities. The sharp correction in shares of public sector companies over the past month is a sign that investors noticed the underperformance of these companies and found valuations to be bloated. As this column states , the phase of speculative investment based on narratives is firmly behind us.

Investors must also assess data while picking up IPO stocks. Twelve IPOs will vie for attention next week, one of them is Bajaj Housing Finance. While we wrote that the lender needs more than a successful IPO to become the most valuable housing finance company, a look at the housing loan market should give enough insights to take a view. Our Chart of the Day shows that home loans were the slowest segment to grow among retail lending in FY24.

It is said that casinos are meant to shut the outside world to the players and hence, do not let the sunlight in. Once you enter, you never know whether it is day or night until you step out. Ergo, it pays to step out to breathe and look at other things to diversify. One such asset that wins the diversification argument every time is gold. Ananya Roy lays out the probability of the yellow metal’s trajectory here.

Meanwhile, for those inside the stock market casino, calculate the probabilities but also beware that some risks blindside us all.

Investing insights from our research team

Fiem Industries is on track to better its financial numbers

Weekly Tactical Pick: Why this chemical stock warrants attention, post consolidation?

KIMS: Why are we turning optimistic on this healthcare stock?

What else are we reading? 

Decoding Economics: Will China’s 'overcapacity' lead to a flood of exports, hurting other countries?

More easing in store for bond yields in medium term

Can globalisation survive the US-China rift? (republished from the FT)

We are all capitalists now (republished from the FT)

Who will protect the privacy of retail customers?

OPEC+ delays oil output hike kicking the can down a very uphill road

China’s wasted coal stockpiles could power the US

Ta-ta Vistara: With Air India-Vistara merger, it's curtains for the popular brand

Personal Finance

Bank-backed AMCs top commission payments to distributors in FY24

Technical Picks: AU Small Finance Bank, HDFC Bank, Brigade Enterprises, Vodafone Idea futures

We have relaunched the Technical Picks section with a new look and features such as updation of calls and tracking performance. Do check it out and give your feedback.

Aparna Iyer
Moneycontrol Pro