Tips and Tricks

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.

Good Tips, Good Catch. Easy does it

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.

I can almost hear the cry “ek ka do, ek ka do” in their enthusiasm to provide foolproof tips.

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

Real Trends as on 17 Jan 2019.

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.

Different Drums

 

Dr M Scott Peck has many bestsellers beginning with “The Road Less Traveled” and two others with similar titles. “Beyond Road Less Traveled’ and ‘Further Along Road Less Traveled’. For a full list of his books see here.

an earlier post on a book by Dr Peck . here

His books traverses though fields far beyond psychiatry and goes deep into mysticism and philosophy. He has also done some pioneering work in Community Building. His ideas and experiences in this field are covered in his “Different Drums”.

Dr Peck says, It is community building that would save the world. The world today is getting more and more pluralistic and differences are getting sharper by day, there is an effort to make people think and behave in a uniform manner. This is not going to work. The idea is to accept the differences and may be even celebrate them. This is not something new in India, but where we go wrong is in being very selective about accepting the differences or weird behaviour. A naga sadhu is considered too weird, which he is, while whole communities taking over a public road to pray, which is as weird , is not considered so. Probably, the only criteria to accept weirdness should be “does this behaviour threaten or inconvenience other citizens ?” If so , it cannot be accepted .

The approach to community building is designed to work for the smallest community, ie a nuclear family and also the largest community that we know today, the global community.

As long as one doesn’t threaten or inconvenience others, all ideas, clothing ,or lack of it, behaviour and life style should be perfectly okay.

The book is organized into seventeen chapters in three parts. The first part talks of characteristics of a community and problems in community building. The second part is aptly The ‘bridge’. It dwells on the human nature on dealing with situations. and Part III suggests solutions. In a book of this nature, it is better to go directly into the source before trying to explain.

Here are some excerpts from the book. These excerpts are from my highlights while reading the book. These are given as block quotes , while my own annotations are in red italics.

……..Secure though it was, my home was not a place where it was safe for me to be anxious, afraid, depressed, or dependent— to be myself……

At some place the author claims , the entire aim of evolution of an individual is to be himself or herself.

 

As it happens a child is exactly that. That is one reason Indian Philosophers have suggested “be child like”

Chapter III: The True Meaning of Community > Page 61

Community is and must be inclusive. The great enemy of community is exclusivity. Groups that exclude others because they are poor or doubters or divorced or sinners or of some different race or nationality are not communities; they are cliques— actually defensive bastions against community.

Chapter III: The True Meaning of Community > Page 61 There was no pressure to conform.

Chapter III: The True Meaning of Community > Page 62 Our individualism must be counterbalanced by commitment.

Chapter III: The True Meaning of Community > Page 65 Begin to appreciate each others’ gifts, and you begin to appreciate your own limitations.

Chapter III: The True Meaning of Community > Page 65 : a group of people do these things— as they become a community— they become more and more humble, not only as individuals but also as a group— and hence more realistic. From which kind of group would you expect a wise, realistic decision: an arrogant one, or a humble one?

 Chapter III: The True Meaning of Community > Page 67 : Once a group has achieved community, the single most common thing members express is: “I feel safe here.”

 Chapter III: The True Meaning of Community > Page 67 : everyone enters a new group situation with his or her guard up.

Chapter III gives the characteristics of a community; inclusive, non-judgmental and non threatening. The corollary is that once you feel you ‘belong’, the guard is down.

Chapter III: The True Meaning of Community > Page 68
health and wholeness and holiness. (All three words are derived from the same root.)
 Chapter III: The True Meaning of Community > Page 68
When we are safe, there is a natural tendency for us to heal and convert ourselves.
Chapter III: The True Meaning of Community > Page 68
So they focus not so much on healing as on making their relationship a safe place where the patient is likely to heal himself.
 Chapter III: The True Meaning of Community > Page 68
are free to discard defenses, masks, disguises; free to seek your own psychological and spiritual health; free to become your whole and holy self. A LABORATORY FOR PERSONAL DISARMAMENT

In a community as visualized in this book, there is absolutely no effort to heal or convert. Normally when we are tolerant and sympathetic to someone having different views, there is an underlying assumption that the other person is sick and needs to be healed.

Dr Peck lays great importance to vulnerability. A child does not hide its vulnerability to her mother, though among playmates there may be an air of arrogance or bravado. Dr Peck goes to the extent of suggesting that for two nations to reconcile their differences they need to expose their weakness rather than arm themselves literally and figuratively. I am sure when people or close enough to one another they are not really looking to project their best appearance or behaviour. That is when one really feels at home, irrespective of the place be it an office, restaurant or a Temple. Today, one may include a social media group also. Are you part of the group to sermonize or seek information or just to be yourself and enjoy the warmth of the real community on a virtual platform.

Chapter III: The True Meaning of Community > Page 74
even the agnostic and atheist members will generally report a community- building workshop as a spiritual experience.

One area where there are profound differences is Religious beliefs. Replacing religious ‘isms’ spiritualism helps. Though many people don’t believe in spirit either , most people have experienced ‘out of the world’ feelings for which they are at loss to give a label.

Chapter IV: The Genesis of Community > Page 79
But I am reminded of the Chinese word for crisis, which consists of two characters: one represents “danger” and the other “hidden opportunity.

Interesting take on the word “crisis’

The author warns of pseudo community where everyone is polite to each other but the warmth would be missing. In a true community , there would be differences, there would be conflicts, every member may be becoming more and more of himself or herself, yet there would be not tolerance but acceptance of the individuality of others. There would be no conformity to generally accepted ideas , yet the conflicts would cease to be.

It is tempting to go into the complete book, which besides being a boring sermon may impinge on the Intellectual Property rights. I have uploaded my notes on the book in pdf form on my website , more for my reference than to be part of this post. I wind up with one final excerpt from Chapter IX. Dr Peck has categorized the evolution of individuals into four stages, based on his own experience.

Chapter IX: Patterns of Transformation > Page 188
Again it didn’t compute— until I realized that we are not all in the same place spiritually. With that realization came another: there is a pattern of progression through identifiable stages in human spiritual life. I myself have passed through them in my own spiritual journey. But here I will talk about those stages only in general, for individuals are unique and do not always fit neatly into any psychological or spiritual pigeonhole. With that caveat, let me list my own understanding of these stages and the names I have chosen to give them: STAGE I: Chaotic, antisocial STAGE II: Formal, institutional STAGE III: Skeptic, individual STAGE IV: Mystic, communal

 

Stage I is “who says”. There is disorder. One questions everything, every rule, every tradition or convention.

 

Stage II One is reconciled to following some rules imposed by an institution; may be a family, religious order, army . There is a need here for rigid beliefs to sustain the accepted behaviour.

 

Stage III One becomes skeptical about religion, and rules imposed by institutions, but acceptable behaviour holds.

 

Stage IV It is all mysticism and communal .Incidentally, ‘communal’ is not at all a bad word in this book. One is comfortable with God, religion, yours and others. One willingly works for the community without any induced incentives or threats.

Just as with any views, one may or may not agree with Dr Peck. But reaching the Stage IV for individuals as defined by the author appears to be a desirable goal. If nations follow this approach to community buiding, there would be no Wars of yesteryears or conflicts as they call it today.

Thathastu.

Trading times : Motive for Trading

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 !  

Trading Time

courtesy cartoonaday.com

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 smalllet 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 lossI am a long term trader and I’ll not sell at a loss

When booking a higher loss on the same stockyou 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..