The digital revolution is not that wonderful a thing for savers and investors
01-Oct-2020 •Dhirendra Kumar
'Digitally Enabled' is the typical buzz-phrase of our time. Investors are digitally enabled, that is, they can pull out their computing devices at any point and buy or sell or (one hopes) research their investments.
The businesses that serve them are also digitally enabled. A stock broker like Zerodha has come from nowhere and in just three to four years become India's largest volume stock broker. In fact, given that the Indian exchanges have some of the highest volumes in the world, Zerodha is probably pretty high on a global scale too. By the conventional way of thinking about business, it may be surprising that such a company has left established behemoths in the dust but that's actually quite normal.
Born-to-digital companies tend to do that in a lot of businesses - it would actually have been surprising if one of the old-world stockbrokers had totally transformed itself and become a digital dominator. It doesn't happen. Would you have expected some ancient bookseller - like the Higginbotham that's there on every railway platform in India - to have become an Amazon? It's a laughable idea. Others are in the queue too in the financial intermediary business, most notably Paytm Money, which starts with the apparent advantage of the brand already being present in millions of smartphones.
However, I don't really care about the businesses - my vocation is to think about the savers and investors who are using or are going to be using these services. So let's step back and ask an honest question. Is the digital era in investing a boon for equity investors or a disaster?
The digital miracle of investing is much faster and much more convenient, but is it better? This is an activity where 'better' is easy to define. Do investors have higher returns compared to the non-digital days? Do they end up with higher savings? Do they face less risk? Do they face less volatility? Do they undergo less stress? To many investors and advisors, the answer is quite self-evident.
The digital era is a sharper tool. In the hands of a skilled investor, it can be used to do much more and much better. But like any sharp tool in the hands of a novice, there are many more ways of accidentally harming oneself. Unfortunately, everyone begins as a novice and the digital era has brought with it more ways of going wrong than ever.
Because of the new way, there's an enormous amount of information flowing through, and an overwhelming feeling that all of it needs to be analysed to be a successful investor. Not just that, there's an impression that since there is so much information available, you are constantly on the verge of failing if you do not act upon it.
A good proportion of the modern, digitally enabled majority of stock investors watch the prices of their stocks continuously, eyes glued at a screen (TV or computer or phone) for any trigger on which they can act. They are focussed not just on the price, but also other bits of news about the company, the sector, the markets, the economy or indeed anything that the business channel anchors or their WhatsApp friends may decide is worth talking about on a given day. This is not a useful way of either making investments or monitoring them. There is such a thing as too much information and too much news, and it's probably just as important to know what to ignore, as it is to know what to pay attention to.
The digital businesses themselves are structured for this hyper-trading environment and indeed, their business success depends on it. Not just that, they carry the wrong message about what role investing plays in the life of an individual. Often, the idea that's promoted is that it's a way of earning extra money so that you can spend a bit more. Nothing could be further from the truth. The central part of investing is that you need to spend less. You need to deprive yourself a little bit for many years to come so that eventually you will have a lot more to spend.
For this reason, investing appeals to one kind of person but taking out your phone and quickly putting in a trading order appeals to a very different kind of person. One is digitally enabled while the other is more likely to eventually become digitally disabled.