Perform or Perish

Interview with T3B Founder Mr Keane Lee – Part 3.

Moolah.asia link

Interview with T3B Founder Mr Keane Lee – Part 1.

Moolah.asia link

I believe the biggest problem encountered by the masses, the ones who follow herd mentality in the financial markets is the challenge of predicting the movement of the markets and its components. It is one’s ability to correctly foretell market movement that is considered to be the sole ingredient to attain any discernible advantage over the market. Of all the myths and misconceptions that inhabit the minds of average traders, I believe this one has to be the most paradoxical.

It is this innate human nature that afflicts so many people with prediction syndrome. The large populace of people want their futures predicted, they want future events to be predicted and anything that is remotely unpredictable or uncertain leaves them unsettled and nervous. People flock those who presumably have a gift of clairvoyance to know if they can really peep into the future and actually predict it.

This is more true in the stock market than anywhere else where all and sundry waste most of their time trying to predict market movements. These people not only do not understand that it is impossible to predict market movements but even attempting to predict can be extremely dangerous for their investments. I fail to understand why is it so difficult to just follow the market? It is the failure on peoples’ part to take market at face value and on the contrary have contradictory opinions that often leads them to despair. If the market declares that it is going up, then why do you want it to go down and vice versa? It is not important to know where the markets are headed; rather it is important to know what you are supposed to do when it gets there.

But, believe it or not, the ability to predict or envisage correctly the next move of the market more often than not is more dangerous than not being able to.

 Let me explain why:

If one is able to predict the next market move correctly 90% of the times, then it is exceedingly probable that the said person will stake much more of his capital than a person who is unsure of where the markets are headed. Let’s say you are on a road trip and you encounter a zigzag winding road. A person who is unfamiliar with the road will obviously slow down and be much more circumspect with his driving. Whereas, the one who has driven the same road a number of times will have a feeling of exaggerated confidence in his ability to traverse the road with a considerable amount of ease. So, the problem is that this person drives faster than he should and secondly he thinks that he knows where exactly the road will turn next. Both these actions of his will leave him in serious danger of harm because if he encounters one wrong turn, then he may not be able to negotiate it due to the speed and over confidence with which he is driving.

These people who can nearly accurately predict market movements are in significant danger because they feel they have a sense of control and are not adequately prepared if the market presents them with the wrong turn and gets even with them. They are caught off guard and stand to lose much more than they would ideally be prepared to lose.

So, my question to you is, why do you want to predict? Why do wish to have an opinion over which you have negligible or no control? If the market does not care for your opinion, why do you care to have an opinion on the market?

And for all you know, the essence is, you are supposed to follow the markets and not lead. So, learn to follow and not try and lead. You will hold yourself in good stead, for the markets love those who follow them and despise those who try to outsmart them.

 What you need to do is, turn ‘Addiction of Prediction’ into ‘Dereliction of Prediction’.

All those following and/or trading the Indian Stock Market for the last 1 year would agree that the market is just not what they expected it to be and is trying the patience and endurance of all involved. It is a time when traders are developing withdrawal symptoms and more people are throwing in the towel with each passing day.

Just what is it with the market that it fails to give direction and behave so unusually? The question is whether the market is really abnormal or is this ‘New Normal’ for the market. For, if this ‘Irrationality’ is the ‘New Normal’ for the market then it can continue to behave like this for as long as one can imagine and suck the blood out of traders/investors and leave them bleeding. With technical analysts and softwares becoming more and more common; it is perhaps the market’s way of getting even with them and showing them the door before it decides to take flight.  When a trading technique becomes popular, widely accepted and employed by traders, the smart money always finds a way to make the techniques obsolete and redundant. Perhaps the market is doing to technical analysts what it once did to fundamental analysts; that is throw all their theories out of the window.

The macro economic situation is not helping the cause either, with countries on the brink of sovereign defaults. The US is reeling under a pile of debt which at one point of time will become unassailable and the once economic engine of the world is reduced to a nation looking for options, when none exist. What we are essentially witnessing is a shift of power from the developed to now developing countries and these shifts are neither easy nor smooth. It takes time for the world community to realize and further accept that a ‘New World Order’ is emerging and that change is now only a matter of time. What we shall witness in the times to come is the sort of event that a generation witnesses in centuries, in that sense we will be the fortunate ones to be a part of history.

India, on the other hand is having problems aplenty with the civil society agitation threatening to snowball into a fully fledged civil war against corruption and black money and the government displaying an absolute state of anarchy where the General is no longer in a position to control his own soldiers.

How big an impact this will have on the markets and for how long is a matter of speculation. The so called experts can continue with their aggrandized confabulations and eat into prime television time and newspaper space, but the fact remains that no one, yes no one has the slightest clue on the next move of the stock markets. Many live under the delusion that the markets should remain rational and they, as traders can behave as irrationally as they would wish, whereas the pragmatic thing to do is behave rationally themselves and let the markets behave as irrationally as the markets wish.

The rise of the Commodities & Forex markets are providing fresh investment options to traders and it is only a matter of time before people switch loyalties. Commodities have offered phenomenal returns in the past 1 year when the Stock Markets have only managed to disappoint and disillusion the traders, in particular and the public at large. The essence of the Stock Market is public participation and with dwindling volumes, it is amply clear that traders are fleeing the markets like school children at the closing school bell. So, does that mean that the markets are ringing their own death knell by this kind of behaviour? Because what the markets need to survive is money. The masses bring in the money that smart money feeds on, and it seems that it won’t be long before markets elicit public participation. All we need to do till then is hold on to our horses as hope floats on thin air.

In these trying times, for one to think that this could be the end of my trading career in the Stock Market, is a fool’s errand. What one could miss in the bargain is beyond imagination.

When investors buy shares, what they are essentially doing is that they are becoming shareholders of the company. The idea is to buy a very small percentage of the company’s stake with the objective of becoming a part of the growth story. So, when investors invest in companies with the overall view on the future growth projections of the company, they become a part of the company. In a way, they become stake holders. For this, they need to thoroughly investigate the company’s profile, its business, the management, future prospects, assets and liabilities and so on and so forth. This type of investment is best suited to the institutions as they have the resources and the manpower to do it for them. But it is not remotely possible for individuals like you and me. As a result, many so called long term investors try and emulate the institutions by trying to behave like them. What they don’t understand is that the institutions are sitting on cash; hordes of cash which is not the case with individuals. Institutions can afford to lose their entire capital in a particular company because of their highly diversified nature, which again can spell doom for retail investors.

Investment also offers retail investors the comfort of holding on to the losses without booking the notional losses thereby giving a feel good factor that they have not actually lost because they have not yet booked losses.

In that case the best thing for individuals to do is to trade. But what do stock traders trade? They neither trade a commodity nor a service. Stock Traders actually trade risk. When traders buy a stock, they are buying certain amount of risk. The idea of trading smartly and thereby profitably is to keep the risk to a level which is both acceptable and sustainable in the long run. But the problem is not so much of identifying the level of risk; the problem is to stick to the risk which you had anticipated at the time of making the trade. Because if you do not sell at the time your capital has reached the threshold level, then you are subjecting your capital to more risk than anticipated. The reason most traders are not able to sell at cut loss is because of what Psychologists call the ‘Risk Aversion’ which is the tendency to avoid a loss when you see it coming. People try and avoid losses and to do that they come up with all possible excuses not to sell. They either move their stops or plainly ignore the signal when it comes, thinking that it is a temporary dip in the market, the market will bounce back, the stock jumps back up after I sell and God only knows how many more reasons one would think of for not selling. This ‘Loss Aversion’ is the No. 1 reason why traders are not able to cut their losses and exit and instead they hold on to their positions hoping for the best but never ever expecting the worst.

One important factor that desists people from taking a loss is the fear of losing their entire capital to a string of losses. This phenomenon of losing the entire capital is called ‘Risk of Ruin’. There are a number of traders, many seasoned, who believe that if they are caught in a web of a series of losses then they might end up losing their entire capital and consequently face the Risk of Ruin. But what most people don’t know is nobody has ever gone bankrupt cutting losses. Cut loss is in fact the only way for a trader to ensure that he never goes out of the business of stock trading and you can invite the ‘Risk of Ruin’ if you don’t cut loss and a single trade can draw the curtains on your trading career.

So, if you are not cutting losses, you are breeding an opponent which has the potential to kill you. As we at T3B always say “Kill your losses before your losses kill you.”