One can fool others but not oneself. It’s an old adage with deep meaning, especially if you’re in the world of stocks. You can call yourself an investor all life long and still never make it big. Why? For you were a trader in mind and punter at heart.
It’s essential to know who you are and what you are trying to accomplish in the market. It’s okay to know that you are trying to make a quick buck to fund your new iPhone or simply acting on a tip your colleagues passed along with a coffee in office as long as you don’t begin to intellectualise your gambling as Investing. The word investing has only one meaning- buying a growing asset which generates cash flow over time, at a price you find reasonable. Whenever you look at a stock, what you’re buying is future value of all cash generated by the underlying company which will lead to price appreciation and dividends.
Where people confuse this is when they look at price and say oh Reliance is very expensive at 2000, let me buy Adani green as it wil go up to 1300. Chemical stocks are doing well so let me buy whatever amine and make 15% in ten days. Whenever you’re chasing price as the soul indicator of risking money, you’re not investing. It’s termed as trading, if not plain punting and is a perfectly legal and legitimate way to earn money. However, most people will never like to be called as traders. Investing sounds classy, trading sounds cheap. Hence, they themselves falsely fall pray to this trap and confuse what exactly they have set out to do.
When you begin to lie to yourself, you’re sure to be screwed. You don’t know if you’re buying Tata Steel at 800 because you are sure that the steel industry is on a genuine upswing or just because the momentum indicator green flags the stock. This works well as long as the market is rising and most punters come on Twitter to rain applause on how fundamentally sound Jain irrigation was or how DHFL is the new HDFC as both went up close to 10x in a good market. You don’t want to be associated with someone buying HUL or SBI when the junk is shining more than gold. As long as the markets are rising, and the occasional dips are bought with vengeance, the system is sound. Everyone buying Vakrangee and PC jewelers and MS Shoes is in the same league of investors buying stable well bred horses.
One fine day some NBFC defaults or some promoter is sacked or something else goes wrong somewhere in the world and the music stops. You are so high on junk that you’re sure it’s just like the most recent dip which was followed by a rally that you don’t care. You have long sold Reliance and TCS for Adani green and some fancy chemical company and are now a true believer in their potential to make the world a better place. You are absolutely certain because your broker has confirmed that it will keep going up and you don’t have to worry a bit. CNBC analyst confirms that there is some massive breakout waiting to happen and this is a technically strong stock. Until it isn’t!
The market cracks 20% in two weeks and your portfolio is down double that. Since you’ve long forgotten that all you were trying to do was to ride the upswing in a bull market trying to make 30% and have falsely believed yourself to be a long term investor, you are now in a fix. You don’t want to sell in a hurry. You are sure that this is just a shakeout from weak hands to strong hands and you have diamond hands! Dewan housing is bound to be the next HDFC. You just can’t be wrong on this one. To this day, you have never held a stock for more than two months but now you suddenly dig up ten year charts, confirming your belief that it has always bounced back from 200DMA. It is a blue chip after all. Half your office owns this stock. It can’t go wrong.
However, it’s different this time. The market falls further and your favorite stock quickly goes down in lower circuits. After its down 80% from its peak, you and others finally realise what it was- horseshit. And since you didn’t sell it at 100, you sure won’t sell it at 40,30 or 20. The stock then languishes in your demat account forever. You finally accomplish your true calling- becoming a long term investor.
In this age of technology, you can learn from best of the minds, both in trading and in Investing almost free of cost. The key is to choose your God’s wisely and be honest with yourself. If you’re honestly gambling with ten thousand rupees, you’ll quietly book a loss and get out at -20%. Don’t make a trade or a label a matter of prestige. As long as you are sure and certain of your limitations, you’ll not go broke. As Mark Twain has said- it’s not what you don’t know gets you into trouble, it’s what you know for certain and isn’t!
Life is all about Compounding! 