Of Godmen, Miracle Cures and Trading Coaches

India has no shortage of miracle men or also known as godmen and as the recent episode in Harayana showcased, they seem to have the ability to mesmerize folks to the extent of committing violence and taking the risk of getting killed for defending someone they don’t even really know that well.

Of course, India isn’t unique – we have seen similar folks elsewhere too – Religiously motivated Suicides are huge (Wiki Link)

Baba’s are famous for offering cures for every type of ailment known to man – from Cancer, the dreaded disease that has no cure to common cold. What is interesting is the profile of people who believe and follow such characters – they aren’t just the illiterate folks who can be conned. Many are well educated and can make out a difference between what is true and what is not and yet, like a herd they would rather be part of it than take a objective view.

Stock trading is a tough business and is unlike any other business. While other businesses prosper by providing a product or service, the only way you can earn money by much of trading (Futures / Options / Intra-day) is if there is a sucker on the other end of the trade.

Depend on who you ask, trading has a win loss ratio anywhere from 50:50 (it can never be where more people win versus the losers) to 95 : 5 (Loss:Win). Then again, it will also come down to the question of who is really a trader.

Would you consider a guy with a capital of 1 Lakh and exposure of 5 Lakhs (over leveraged) a trader. What about a guy who trades on a capital of 1 Lakh though his own Liquid Net-worth is 1 Crore a Trader? Is a guy who buys today to sell tomorrow (on margin) a trader? What about some one who holds for a bit longer – week / month / quarter but with intention to sell a trader?

In a way, everyone can be considered a trader regardless of whether you are buying with a extreme short term view or buying with a extreme long term view. The only reason you are buying is because you believe that you can sell it at a higher price than for what you have bought.

Trading / Investing / Speculating is tough. After all, in which other business can you just buy a product / service and just wait it out to sell at a price which would generate returns way better than any other form of investment.

The reason to invest in Equity is simple – it has over time proven to generate better returns than other asset classes such as Bonds. But the path isn’t straight forward.

Like the Godmen who promise miracle cures, so do coaches who claim that just taking their class will help you change from a trader who is consistently or inconsistently losing to one who is winning most of the time.

In the field of medicine there is something known as Psychosomatic Disorder. These are disorders that are caused more by mental factors than by physical. Treatment for these therefore lies less in Drugs and more in counselling.

In the world of trading, counselling can be helpful if one is able to analyze his trades and the reasoning for why he isn’t ending where he intended to be.

If you are over-trading – higher leverage than what you should ideally be trading with. If you are not diversified enough – too much of risk in a single trade. If you are expectations are far off from reality for the capital you have deployed. If you lack a strategy and this is one of the single biggest reason for failure of many.

Every issue about has a solution, something we know in our own hearts. Yet, there is always a reason we don’t want to take the medicine prescribed.

The rise of the Machines

The biggest attraction towards short term (Intra-day) trading lies in the knowledge that one can take a exposure multiple times one’s own capital. Many a broker for example is happy to allow you to trade Nifty futures while collecting only Exposure margin at the time of Initiation of the trade. This means that you get to take up a exposure of 7.5 Lakhs for a upfront margin payment of just 22K or 3% of the total value.

If you can then capture just 0.50% of a move during the day, this translates into a return of 17% on the trading capital. And all this without having to move one’s butt from one’s chair.

Since 2000 when Nifty futures were first introduced for trading, the median difference between the high and low of the day is 1.40%.

Introduction of computerized trading has also meant that a skilled trader could try to program strategies that can trade more efficiently than a human ever can and over time this has started a Industry we now know as High Frequency Trading.

High Frequency Trading is a term used to denote trading at extreme short term time frame and can be based upon a plethora of trading strategies – from plain villa trend following on micro second scale to market making to arbitrage between Cash / Futures or one exchange versus other.

These days machines can pick off the slightest of market inefficiencies even before they can be spotted by a human eye. The biggest advantage of the arrival of such strategies has been the reduction in terms of spread between the bid and the ask.

While human ingenuity can still beat the machines, the opponent is growing stronger by the day and can be expected to skim off any easy profits that may have worked for years.

One such strategy which to me has been impacted would be “Trend Following” strategies on the short to medium term scale. While these still can work to generate decent returns over the long term, the pain point one needs to endure is becoming larger over time.

Take a look at the Barclay CTA Index returns

While one could see barely any negative years in the years leading to 2008, post 2008 this has become way too common. Unlike small individual traders, these results represent the combined efforts of some of the greatest funds managing Billions of Dollars.

Every one loves to quote “When the facts change, I change my mind. What do you do, sir?“, yet how many approach our Trading Equity Curve as a fact and if facts are indeed changing compared to the past change our strategy. Most of the times, we are happy to cling on to vestiges of the past hoping that some day,the facts themselves could change to our favor.

Coaches are key people in a sportsmen’s life for they can make or break them depending on how lucky they have been in selecting the right person with the right attitude. In Trading / Investing, a Coach / Mentor can help you understand your weakness and point out to areas of your strength.

But Coaching / Mentoring is and cannot be one off event. To me, its a continuous process with the aim to understand one’s own behavior better. The longer you strive, better becomes the probabilities of success.

Knowing why we fail isn’t enough for most of us know the reasons regardless of whether we want to accept it or not. To achieve better results requires more than just a one off class / session for we are stubborn and would rather defend our views than try to seek out contrarian thought. But the first step is to accept –  There are no miracle pills.