Please read the first part before you go ahead.
Q: Can you be both – a trader and an investor?
A: Yes. I also had these doubts till I met some successful people, where I found that they were able to keep a very different mindset as a trader, as a investor. I really think that’s a really fairly advanced stage in the whole mental makeup, maturity, intellectual and psychological. For example, as a trader you may be short but as an investor you would be having some long-term bets. So the conflicts that are there within you, would really come up. So you have really been a very good evolved person psychologically to be able to have this conflict. It’s possible but definitely very challenging.
Q: How important is it to just concede that the market is always supreme? Do you have to start by saying whatever I am seeing on the screen is a right price and I am often wrong?
A: I am a great believer in that. This is very much a technical analyst’s or a trader’s mindset. But yes, there are lot of fundamental analysts who search for value. Let’s say, they look for a stock, say Reliance. They assume that the value of that stock is Rs 1,000. Today it’s below Rs 1,000, so they think that the stock is undervalued, sooner or later the value would take it to the price and what would happen is, they would make money.
Similarly, if the stock price is above the value, lets say if they find that the value of Reliance is Rs 400. Today it is above that, so they feel that sooner or later it will come down. So as a value investor, as a fundamental investor if you have that kind of time horizon or that kind of mindset, then they would approach it in that manner. But if you are a trader, where you are looking to make short and quick gains, then there is no need to struggle about values because discovering value can be a very long-term procedure and it’ll also require deep pockets.
So from this point of view, it is best to accept that the market is right. The market is factoring in the fundamentals; it is factoring in the greed, the expectations. Now days, you know what liquidity can do? It factors in liquidity, it factors in inside/outside information. There are so many variables to the market. You cannot put them on a spreadsheet. So for a trader, it’s best to accept that ‘price is God, I am going to trade on the price, make money on the price, lose on the price, being right and wrong is not important, making money and losing money is important’. So that really would be a great premise for a trader.
Q: So one should have that ability then – to say that ‘I am wrong, I accept it and I’ll have to cut my losses’ and move on?
A: Yes. But then the ego comes in. The ego is a very big thing. We all say that we come in this market to make money but at a basic level, if you look within, there is a lot of ego that goes in. It is terrible; you know there is something wrong when your stomach churns. So that is the problem about taking a loss and accepting that you are wrong. The fact is your ego will get hurt.
We must remember that this is a game of probability and you cannot be right all the time. Stop losses are a must and they are a reality, but the big problem is ego. Accepting that you are wrong hurts you emotionally. So it’s a real big challenge. People think trading is easy but it’s really not easy and you require great emotional maturity to be able to trade successfully.
Q: Is averaging a dangerous concept? Have you seen that go wrong with a lot of people?
A: I personally do not believe in averaging. If I buy something and the stock goes down, I am wrong at that point in time. So I really wouldn’t go on an average. I like to average upwards, what I term as pyramiding, which is if take a trade, the stock is right, the call is right, it’s making money. I may take more of that and in this way I try to build a pyramid in a particular stock that is a case of rewarding your winners.