Thursday, February 19, 2015

INTELLIGENCE AND TRADING

There is no correlation between intelligence and trading. 

Many people assume that those who regularly make money in stock markets must be very clever. Or that you must be blessed with some intelligence to "make it big" in the markets.

This is a very wrong assumption as there is no correlation between intelligence and trading.

If clever or intelligent traders were good traders, then all your classmates from school or college who were toppers or other clever people (like doctors, engineers etc) you meet in life would be excellent traders. That is certainly not the case.

On the other hand, a lot of ordinary people have earned excellent returns by simply buying a stock and not doing anything for years or decades (Warren Buffet). While people with far shorter timeframes and wanting to "do something everyday" have lost a lot several times over.

In both cases, the returns or losses have nothing to do with the intelligence or lack of it. It is more a case of "cut your losses fast and let profits runs". In case of long term investors, provided you have invested in a good stock (no intelligence required -common sense is enough) and have held on to something for years (not difficult), prices invariably catch up and you will be in profit. For traders, it becomes "follow the trend", respect stoplosses and hold winners. Again no intelligence required.

Another example is of star traders in brokerage houses or in hedge funds. They all go through their ups and downs. When they are at the peaks, they are the toast of the media and articles are written about how they succeeded. It is when they go through severe drawdowns you realize that their previous winning streaks were just random events and they were at the right place and the right time and they traded in the direction of the trend. We tend to call this intelligence but if they were really clever, they should not have been affected by trend reversals but they too lose fortunes or fail to capitalise on the reverse trend.

Let's put this the other way round. If I buy a stock and then the stock gives a 200% or 300% return in 6 months, does it mean that I am a genius? Obviously not. And if the stock loses 50% in 6 months, does it mean I am a fool? No again. These are random events!

I am fool IF I cannot exit a loss making position OR I cannot ride a profit making trade as long as possible. And yes, I have been foolish several times in my life though less often now than before. So sharing this experience becomes important so that others can benefit from this.

Now it has taken me years to understand this which now obviously looks very obvious. But for most people, it is not easy taking a loss and there is a strong tendency to "book profits" whenever this happens. This approach will never help you earn big money. Your broker will always earn.

Monday, February 16, 2015

A TRADER

A trader is usually an “opportunistic ” person who believes in inefficient market theories. He believes that markets are driven by human emotions like greed/fear and due to demand / Supply. No stock is fairly priced at any point of time. He tries to take advantage of these mispricing and profit's from the excessive “greed” and “fear”.


A trader always uses “probability”. He never uses words like “should” or “will”. He know's that no one can predict the markets and he never even tries. Like the markets “will” do this or the markets “should” do that. It is always, something “may” happen or “may not”. He is always optimistic that a trade might work out but turns into a “realist” when it doesn’t. He changes his opinion as many times as the market changes its direction. That’s how he always manages his risk and believes in cutting his losses. Traders take ‘directional” bets and also use some “leverage” to enhance their returns. Traders also use “market timing” techniques to get an edge in the market. A trader can choose to trade a “single market” or “multiple markets” like stocks, commodities, currencies, etc. Trading multiple markets helps him reduces his risk.


Usually when we hear the word “trader” we start thinking of “short term traders or intra day traders” who buy and sell 50 times in a day.Contrary, Swing trading last for 5-7 days, Position trading last for a month and long term trading often last for 3- 12 months. So difference between a “trader’ and an “investor” is not the time frame but rather the difference in their thinking, approach and attitudes.

Sunday, February 15, 2015

A BRILLIANT INTERVIEW


Don't miss last 2 Questions...
 
Some, rather most organizations reject his CV today because he has changed jobs frequently (10 in 14 years). My friend, the ˜job hopper™ (referred here as Mr. JH), does not mind it. well he does not need to mind it at all. Having worked full-time with 10 employer companies in just 14 years gives Mr. JH the relaxing edge that most of the ˜company loyal™ employees are struggling for today. Today, Mr. JH too is laid off like some other 14-15 year experienced guys “ the difference being the latter have just worked in 2-3 organizations in the same number of years. Here are the excerpts of an interview with Mr. JH:

 
Q: Why have you changed 10 jobs in 14 years? 

A: To get financially sound and stable before getting laid off the second time.

 
Q: So you knew you would be laid off in the year 2009? 

A: Well I was laid off first in the year 2002 due to the first global economic slowdown. I had not got a full-time job before January 2003 when the economy started looking up; so I had struggled for almost a year without job and with compromises.

 
Q: Which number of job was that? 

A: That was my third job.

 
Q: So from Jan 2003 to Jan 2009, in 6 years, you have changed 8 jobs to make the count as 10 jobs in 14 years? 

A: I had no other option. In my first 8 years of professional life, I had worked only for 2 organizations thinking that jobs are deserved after lot of hard work and one should stay with an employer company to justify the saying ˜employer loyalty™. But I was an idiot.

 
Q: Why do you say so? 

A: My salary in the first 8 years went up only marginally. I could not save enough and also, I had thought that I had a ˜permanent™ job, so I need not worry about ˜what will I do if I lose my job™. I could never imagine losing a job because of economic slowdown and not because of my performance. That was January 2002.

 
Q: Can you brief on what happened between January 2003 and 2009. 

A: Well, I had learnt my lessons of being ˜company loyal™ and not ˜money earning and saving loyal™. But then you can save enough only when you earn enough. So I shifted my loyalty towards money making and saving “ I changed 8 jobs in 6 years assuring all my interviewers about my stability.

 
Q: So you lied to your interviewers; you had already planned to change the job for which you were being interviewed on a particular day? 

A: Yes, you can change jobs only when the market is up and companies are hiring. You tell me “ can I get a job now because of the slowdown? No. So one should change jobs for higher salaries only when the market is up because that is the only time when companies hire and can afford the expected salaries.

 
Q: What have you gained by doing such things? 

A: That's the question I was waiting for. In Jan 2003, I had a fixed salary (without variables) of say Rs. X p.a. In January 2009, my salary was 8X. So assuming my salary was Rs.3 lakh p.a. in Jan 2003, my last drawn salary in Jan 2009 was Rs.24 lakh p.a. (without variable). I never bothered about variable as I had no intention to stay for 1 year and go through the appraisal process to wait for the company to give me a hike.

 
Q: So you decided on your own hike? 

A: Yes, in 2003, I could see the slowdown coming again in future like it had happened in 2001-02. Though I was not sure by when the next slowdown would come, I was pretty sure I wanted a ˜debt-free™ life before being laid off again. So I planned my hike targets on a yearly basis without waiting for the year to complete.

 
Q: So are you debt-free now? 

A: Yes, I earned so much by virtue of job changes for money and spent so little that today I have a loan free 2 BR flat (1200 sq.. feet) plus a loan free big car without bothering about any EMIs. I am laid off too but I do not complain at all. If I have laid off companies for money, it is OK if a company lays me off because of lack of money.

 
Q: Who is complaining? 

A: All those guys who are not getting a job to pay their EMIs off are complaining. They had made fun of me saying I am a job hopper and do not have any company loyalty. Now I ask them what they gained by their company loyalty; they too are laid off like me and pass comments to me “ why will you bother about us, you are already debt-free. They were still in the bracket of 12-14 lakh p.a. when they were laid off.

 
Q: What is your advice to professionals? 

A: Like Narayan Murthy had said “ love your job and not your company because you never know when your company will stop loving you. In the same lines, love yourself and your family needs more than the company's needs. Companies can keep coming and going; family will always remain the same. Make money for yourself first and simultaneously make money for the company, not the other way around.

 
Q: What is your biggest pain point with companies? 

A: When a company does well, its CEO will address the entire company saying, ˜well done guys, it is YOUR company, keep up the hard work, I am with you. But when the slowdown happens and the company does not do so well, the same CEO will say, œIt is MY company and to save the company, I have to take tough decisions including asking people to go. So think about your financial stability first; when you get laid off, your kids will complain to you and not your boss.

7 PSYCHOLOGICAL HABITS

1. Overconfidence and optimism

Most of us are way too confident about our ability to foresee the future, and overwhelmingly too optimistic in our forecasts.
This finding holds across all disciplines, for both professionals and non-professionals, with the exceptions of weather forecasters and horse handicappers.
Lesson: Learn not to trust your gut.

2. Hindsight

We consistently exaggerate our prior beliefs about events.
Market forecasters spend a lot of time telling us why the market behaved the way it did. They’re great at telling us we need an umbrella after it starts raining as well, but it doesn’t improve our returns. We’re all useless at remembering what we used to believe.
Lesson: Keep a diary, revisit your thinking constantly.

3. Loss aversion

We hurt more when we sell at a loss than we feel happy when we sell for the same profit. But stocks don’t have memories – decisions on whether to buy or sell should always be independent of your buying price.
Lesson: Ignore buying prices when deciding whether to sell.

4. Regret

Investment decisions should overwhelmingly be about risk, and risk implies a judgement, which may turn out to be wrong, often through bad luck rather than bad thinking.
Becoming overly focused on past decisions that have gone wrong without analysing whether the decision made was rational under the circumstances isn’t rational. Investing involves making mistakes and is often down to luck.
Lesson: Learn to live with mistakes.

5. Anchoring

Ten years or so of research have shown we have a nasty tendency to ‘anchor’ on specific numbers. Psychologists can change the results of simple estimation questions (for example, how old do you think Woody Allen is?) simply by posing an earlier unrelated question containing a number.
Lesson: Don’t get fixated on specific numbers, such as buy prices, stop loss prices or index values.

6. Recency Bias

We pay more attention to short-term events than the longer-term. So the effect of a short-term downturn in a company’s fortunes may be exaggerated, or we may simply assume that current market conditions will persist forever.
Lesson: Buy some history books, and look beyond the short term.

7. Confirmation Bias

We just love other people to confirm our decisions. And other people just love us confirming their opinions. In fact we could just get together and have a regular love-in but it doesn’t make for good investing. The only money you lose is your own.
Lesson: Make your own decisions; don’t worry about what others think


SOURCES : ASR