Month: January 2019

When I say, I trade in equities , the first question I face is “where do you get tips from ” . Or it could be “give some tips , na” . No tips, No trading; so it sounds.

Tips can mean anything . Peter Lynch says in his book; When two fund managers run into each other, may be in an office corridor, the first conversation after hello would be “hey, what are you looking at ” and the response could be “there’s something happening at General Motors ” or “may be a buy back offer at abc company…..” . That’s what fund mangers do; keep tabs on the businesses”. Tips could also mean precise directions to trade; buy ABC at 683 for 5 months period; target 790 and stop loss 627.

It is the latter connotation one is more familiar with . Everyone wants someone else to hook the fish so that you can pose with catch proudly.

I just fail to understand how such tips can work in practice. Even if seven out of ten such trades work, anyone can become a millionaire just by following these directions, precisely. There would be minor losses and major gains as the losses incurred would be just 20-30 % of the gains accrued when the target is hit.

But does it really happen ? Obviously not. Even paid advisory services , which are dime a dozen do not have the kind of hit : miss ratio that can keep you in the positive zone, leave alone make you a millionaire.

Ironically , when people find  that the system does not work, they hardly blame the method , but just attribute the losses to  bad tips or poor implementation. So, the chase for the holy grail called ‘Good Tips’ resumes.

There are people who swear by fundamental analysis and there are others who take technical analysis as Gospel Truth . The Fundamental Analysts go through earnings, past present and future, the book value , and whole host of ratios to come out with one number that would be the price target in next 12 months. As a rule the targets given by the analysts vary from -20% to + 20% with all kinds of recommendations , buy, hold or sell. Here’s one after the recent Q2 results

As for technical analysts , they pour over charts and a dozen indicators and prophesy the future course of the price movements. Here, the variance is even more pronounced. On the TV Channels, if there are three technical analysts , there are six opinions. Why six ? After all each sentence is followed by , “if this, then that ” and “having said that ….” Most of the time the second part of the opinion totally negates the first part.

This is the research based on which TV Channels provide precise directions down to a rupee for buy price and target price. Some channels make it more interesting by going for fancy formats like 20-20 after the 20-20 Cricket.

In reality about 50% of the tips would be productive, which is also the probability of flipping a coin and calling  right .

So, the question is do traders need tips at all . One can easily find 10-20 tradable stocks from any of the web sites on stocks. They give real time inputs on prevailing trends. Here’s an example

Assuming that people need the name of a stock to start with and all are not net savvy, (Though all are TV Savvy) we come to the next question; how to use these tips. Some follow it to the letter; there are others who partially follow. Then there is another class of people who take a totally contrarian call on the view that the entire herd would go in the direction of the tips while they could runaway with the booty by taking the opposite direction!

Be that as it may, in my view, most tips are only as useful as a coin unless it is insider information which is illegal anyway.

So, what’s the way out ? There are many methods to make money in the market and probably even more ways to lose money . As I see, one has to find a way that works for himself or herself. A lot depends upon the time available, money available, risk appetite , loss aversion, mental discipline, ability to focus and the state of one’s nerves. Of course some principles may be applied almost universally.

Some principles that I can think of :-

1. Fundamental Analysts tell you what to buy and Technical Analysts tell you when to buy.
2. Technical analysts’ recommendations work only for short term trades and fundamental analysis would need to be done every quarter or on occurrence of fresh inputs on the business .
3. It is better to book a small loss when the trade does not go your way, rather than wait for the loss to go bigger by which time one becomes even more reluctant to book a loss. Will power does not work in the face of bad business or bad sentiments. Yes,  sentiments are as important as the business.
4. Averaging is bad . I am surprised by many experts on TV Channels advising traders to average. Your holding a particular stock should not influence your buying decisions. If you would buy a stock irrespective of whether you are holding it or not, then sure go ahead and buy. Averaging to mean, buying more of the same stock, is no method to reduce the loss you have already incurred . The loss can be recovered through any other trade. Of course, if you are not sure of the right price for a stock, you can buy it in small lots to average. The risk and reward , both are reduced.
5. Never ever convert your short term trade to long term one or vice versa, just because the trade is not going your way in the originally intended period. For long term or short term, the type of stock and size of positions would vary a lot.
6. Money management is often overlooked. Trading is a risky activity and only solid money management can cover the huge risks inherent to trading. As I view, one needs Solid Blue chips stocks to provide stability to a portfolio, then mid and small caps to provide growth and liquid cash to exploit the opportunities and to mitigate losses in case of a crash. For example a conservative trader could have 60% in blue chips 20% in mid caps and remaining 20% in cash at any given time.
7. Mental Discipline would be the single most important factor that separates successful traders from the not so successful. Good traders book their losses when they go wrong and let the profits run when they are right. Amateur traders who are too reluctant to book losses and too eager to take home the profits end up doing exactly the opposite. They let the losses run and cut short the profits.

contd from http://sibha.online/wprandom/2019/01/03/trading-time/

As we have seen , people call themselves, long term investors, short term investors, intra-day traders, swing traders, position traders , momentum traders and what ever, depending on the positions they have on different stocks.

Except in a secular bull market, many of us are in the Red. There are people switching from quick losses to slow motion losses  (read short term term investing to long term investing ) and vice versa. Whatever be , hardly anyone calls himself an ‘universal donor’ kind of trader , though that could  be exactly what he achieves. It is  a kind of public service to provide liquidity to the market, unfortunately it is all done inadvertently and they get absolutely no credit for this Yeoman service. There are people who continue to keep trading in this mode. So, what is the motive ? Is ‘money making’ the only motive to be in the market ?

As I see there could be many other motives to deal in stocks quite unrelated to making money. Some that I can think of:-

Peer pressure . It is so cool to talk about stock market , particularly among men. Ladies are catching up fast in everything from cuss words and  drinking to gambling ! 

Intellectual Stimulus. Trading is very challenging. There is so much to understand , so much to conquer. Fundamental Analysis is full of ratios  to study and  numbers to digest and Technical analysis is a world of charts hiding in a few lines on the charts, the entire gamut of human emotions Fear and Greed. It is a fascinating world telling a different story every day, every hour. Some people just try to predict the markets ,just for the thrill of “I told you so” feeling. Just as hill folks love to predict weather , analysts love to predict the market moves.

Snob value . Surprisingly , the ability to lose big money has as much snob value as the ability to spend money. I lost a lakh today has more snob value than to say I made 500 bucks today.

Gambler’s thrill . When you risk something big and you are waiting for the outcome , there is that adrenaline rush which is so addictive. Stock market is some place where you can get the thrill by putting away just that amount you need to get that kick; too less makes it all too pedestrian and too much can destroy your Capital. 

One can think of many other motives. Once I heard a fellow officer saying with a rather dreamy look, “can’t wait to quit ….. post retirement, this is all I am going to do…” When asked , if it would be online, he was shocked.

“Why would I do that ? Look, a man can’t sit at home all day, running errands for the lady. The idea is to go to a brokerage , a trading place, join a gang of punters , talk crap, eat and drink junk food and just enjoy the bonding and go back home in the evening fully  refreshed.”

Those days, the trading stations were mostly ‘men only’ place .

As for me, I am more fascinated by the tools of the trade rather than the trade itself. The kind of software and database you have today is absolutely phenomenal. When you sit at a terminal, you have minute to minute data on your screen, even while you are listening to some great songs on you-tube and chatting with friends on social media. Once in a while I have a game of chess going on in one tab. At the end of the day , it is +1000 or -500, who cares ? It all evens out and the day is well spent and mostly pays for itself.  Mutual Funds and a few steady stocks along with some debt instruments beat the inflation comfortably.

Next is … Tips and Tricks !  

Time is a commodity available in plenty, post retirement. So, one looks for time-consuming activities rather than time saving gadgets or tricks.

Trading in stock , is indeed a time consuming activity. Starting from the time spent on learning about fundamental analysis and technical analysis , one needs to be always aware of the ever-changing macro and micro issues . Ashwini Gujral , a market guru calls trading a dance on moving dance floor. May be a guru can just let the floor do the dance for him, but others have to be constantly moving to keep from falling on their faces.

Trading in stock , is indeed a time consuming activity.

If that be so, how is it that you find so many people with busy schedules professing to be traders and that too successful ones? (Yours truly included in this group till a couple of years back; only now I realize what I had been doing)

I have always been calling myself a long term investor particularly after reading some great investor/authors like Warren Buffet,  Peter Lynch etc; it does not matter that this long term investor is yet to see a multi-bagger. In bullish times, when you are sitting on a profit of 50-60 % it is simply too tempting to book profits and thump your chest. The lurking fear is also present that a sudden crash could come anytime and wash away all profits in jiffy. Of course when you are sitting on loss , however small, for years together , it helps to remember the wisdom of Warren Buffet & Co and counsel yourself that long term investors are not easily deterred by short term losses on the book; it doesn’t matter that the short term may extend beyond five years.

All stock market ‘investors’ , including Warren Buffet  claim that they  were not speculators but investors in a business. Nothing can be far from truth. They are really not investors at all. Everyone in the stock market is a sheer speculator.  When TCS came out with a public offer to sell a share of face value Rs 1/- at a premium of Rs 899/- , we  investors bought it at such a huge premium hoping that the premium would rise much further in future. Noone bought it for the dividend of Rs 5 /- and Rs 10/- that the company gave every year.  So it is all about speculation on capital appreciation rather than for returns through dividends, which alone an investor should be looking for. It is a different matter that the capital appreciation could be dependent on the quality of business; wealth creation is through speculation as to how the market appreciates or discounts a business. very good businesses have given luke warm returns while ordinary companies have given great returns. 

Everyone in the stock market is a sheer speculator.  When TCS came out with a public offer to sell a share of face value Rs 1/- at a premium of Rs 899/- , we  investors bought it at such a huge premium hoping that the premium would rise much further in future. No one bought it for the dividend of Rs 5 /- and Rs 10/- that the company gave every year. 

The only time I was an investor was when I put some money in a cousin’s start up. Rs 5000/ in the eighties was large sum. For three years the company gave 20% dividend ie Rs 1000/ per year. The company was not listed in any exchange , so you could sell it to or buy it from only the company . For next 2-3 years there was reduced dividend pay out and one fine day the company folded up.

Fortunately, this long term investor had a short term requirement  for money and could sell the share back to the company without any buy back offer. No one who ever held the share saw any capital appreciation or depreciation till the day it just became zero.

Coming back to the world of traders /investors, in my opinion there is only one category Speculators. They may be divided into long term speculators or short term speculators. So wherever I use the word trader it could be read as a speculator.

An average trader buys a stock based on ‘tips’ from colleagues, friends, TV Channels and well just about any source. Many a time it is just a group of letters like ONGC rather than a company with real people and real operations. The normal question is “will it move up, when , how much “etc .Once the stock is bought then you watch the tickers everywhere; on TV and  mobile phone. The day you see green , the chest fills out and any red streak on the ticker prompts one to seek assurance from experts, in order to continue being long term investors. Who wants to book losses ? Losses are left unrealized and they keep growing . How else would you hear such queries on business channels, “bought xyz stock at 1020 three years back; should I continue holding it; I am a long term investor”. The stock would be trading around 250/-.

It is always the intellectual honesty that becomes the first casualty . It doesn’t matter what you tell others, but it certainly matters what you tell yourself.

It goes like this .

When booking profits, however small “let me book the profits now; At least I am getting something ;have been holding on for over a month; after all you can’t keep holding on to it for ever ;It might take a nose-dive again to below my purchase price. I am a position trader“

When holding on to a stock at a huge loss “I am a long term trader and I’ll not sell at a loss“

When booking a higher loss on the same stock “you know I need money to buy ABC stock which is sure to go up”

Then you can call yourself, day trader, swing trader, position trader and what have you , to justify the fear , greed, insecurity, need to brag,need to cry and loss aversion.

Fortunately or unfortunately, the very process of trading becomes so random that it becomes difficult to keep track of the profit and loss. Human mind is so smart, the profits remain on the surface while the losses are buried deep into sub-conscious mind ,as Freud calls it. 

Today, you have all kinds of reports generated by the web interface of your brokerage company . It is not just the overall profit and loss for the year, but the exact XIRR for each trade done. 

So, as I see it, the first requirement of successful trading is , absolute intellectual honesty to understand where you stand.

——will continue..