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Trading | Portfolio Yoga

Tag: Trading

Everyone Gets What they Want

Google’s top Search Prediction for “Stock Brokers are” is Scum. That is not too surprising either given how many have been ruined by brokers eager to make their dough. While things have improved a lot, even today one keeps hearing about scams run by brokers either with the knowledge and tactical approval (as long as it seems working) of the client or skim them off without their knowing. Anugrah Stock and Broking & Karvy come to mind as big ones in recent times. 

Sales is the cornerstone that defines success or failure for any product and company. If you buy a bad product in the normal world other than finance, the damage is limited to the amount you have spent. Buying a wrong financial product has implications beyond just your investment for they also create a narrative which is tough to counteract with.

Trading for example has been repeatedly shown as something that won’t make you rich or wealthy and yet the income for most brokers is driven by investors who are these days fighting the machines and if Kasparov could not beat Deep Blue way back in 1997, I wonder how much of a chance most traders have these days.

As a broker I was able to get a ringside view of the world of traders and I doubt I have come across a single successful trader who won regularly and consistently. Of course, on Twitter I now come to know that trading is as easy as ABC. While brokers I assume even today entice clients with the riches they could bekon my trading, trainers and advisors I assume are the real guys making the moolah.

Trading for a Living (which is what most want to do in life) is what most people dream about while having a capital that is fit for trading at best on the monopoly game board. I am pretty sure there are wonderful successful traders who make a good living by trading, but it has the same odds as the guy who won 1 Crore on Kaun Banega Crorepati.

Trading is addictive in nature regardless of whether you made a profit or not. I remember reading somewhere that the average time frame a trader survives in the market is 6 months.I guess the data is wrong for I know of unsuccessful traders who have survived the markets showing its displeasure for years.

Like a drunkard who cannot but stop by the bar every day after work, so are some of these traders who are successful elsewhere but decide that it’s in their destiny to win the battle of the wits. 

Before the arrival of Futures & Options on our exchanges, fortunes were made and lost by traders but the number of traders were fairly limited given the limitations exchanges of those days had. Technology and Futures and optiosn today on the other hand provide an easy way to take exposure greater than one’s net worth on nothing more than just a whim.

The odds of success being so low, it has always fallen upon the brokers and advisors to take up cudgels on behalf of the successful trader who is mostly seen missing in the woods so as to speak. How dare you point out the low odds of success here, don’t you know that 9 out of 10 businesses fail in the long run and yet there is no end to a new set of entrepreneurs who wish to do something different. On twitter, such a riposte would be seen as “whataboutery”.

Jack D. Schwager has in time written a few books in the Market Wizards (his latest book is out by the way – Unknown Market Wizards ). His previous books are worth reading and hence reading these should be fun. There are a few evergreens featured in his earlier books Bruce Kovner, Paul Tudor Jones, Ed Seykota, Michael Steinhardt, William O’Neill, and Richard Dennis who continue to command attention even today. What about the rest of the guys though – googling a lot of them ain’t easy but some of them did make news (not of the good variety though). 

Nothing can be tarred and so is the world of trading. Even if we have just 5% of traders who are the real outliers, we are looking at a few thousands if not lakhs of them. Who doesn’t want to be that 5% and yet the 95% who fall by the wayside have a different story to tell altogether.

Investing is tough too. Just look at the number of fund managers with degrees more than you can count and deep research scholars secured at a pretty expense trying and failing miserably to beat a simple system that is the Index. 

But on the other hand, if you remove the unfairness of that comparison which to me kind of reminds me of this cartoon

what is actually true is that in the long term most funds actually end up making money (even if lesser than the Index). Of course, many funds don’t survive so long because investors always want the next best thing, not something that seems to have tripped on its own shoelaces.

One of our family’s earliest mutual fund investments was made around 25 years ago. This fund was not the best for a long time (it was under par if my memory serves me right for the first few years since its NFO) and yet over time it has delivered around 14% CAGR. Over time the fund has changed its name and even the nomenclature but in the long term, its returns that count and its delivered. 

I like to make fun of Venture Capitalists as Philanthropists but the true Philanthropists are the traders many of whom are willing to burn their own home for the ability to light the home of the broker. 

As my good friend Sriram likes to say, there are old traders and there are bold traders but there are no old and bold traders.  

The Title of this post comes from an Ed Seykota saying – 

“Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.

Investing, Path Dependency and Mental Barriers

I spent the last few days at my Sister’s place and returned home today. On the way, I picked up a packet of milk. Between where I picked up my milk and my home, I seem to have inadvertently dropped my purse containing a couple of thousand bucks in addition to other Cards and miscellaneous items that keep my purse fatter.

Today is also the day when a stock I hold dropped 10% (Selling Circuit). The loss in that stock alone is greater than what I lost in money terms today but I basically forgot that I had a loss today in the markets while the loss of my purse still boggles my mind. Did I drop it or did it fall off – what if I had left later in which case I may not have had to stop for milk or better still taken my father’s advice and taken another route which would have meant I would have missed the milk booth altogether and maybe would still have my purse in hand or what if.. You know the drill.

In Investing and Trading, we look at the past and wonder, what if I had done this and not that. The difference in outcomes is so enormous that we keep wondering what if everytime we hit a speed bump.

Active fund investors are ridiculed for buying closet index funds that at max provide the same returns as Index before cost. Post cost, most of them under-perform to the extent of the cost (Fee). But given the fact that selling Mutual Funds is a push business vs say Fixed Deposit at Banks which is pull, one wonders whether one should even compare the investor with a Index fund or should one consider the alternative he would have invested into – Fixed Deposit at a Bank.

One of the biggest risks in back-testing is that you end up building a trading system that worked great in the past but the future has no bearing with the past other than the fact that sometimes it rhymes. Having done thousands of tests on data, I found this tweet to be on the dot

Buying Quantitatively Cheap stocks worked for a while and then it stopped working. Fund managers though keep hoping that the trend is about to reverse. Apna time Ayega is basically what fund managers seem to be writing to their clients as the fund keeps disappointing compared to other strategies the money could have been invested into. Very few seem to question why it worked historically versus trying to prove why it shall work in future (which basically is claiming mean reversion)

One reason for Do it yourself investors to start favoring Index funds is because they are unable to reason out which of the 400+ funds will take the route that provides them with returns greater than what they could achieve by investing in the Index. There are funds that will definitely beat the Index, but finding them before has become tougher given the odds of failure which keeps raising.

Sometime back, there was a running joke that if Anil Ambani had invested into Nifty 50 instead of investing into all those companies, he would have been far more richer today than facing the law of the land with regard to bankruptcy procedures. The same joke is not said with regard to Mukesh Ambani for he has been much more successful. In 2005, when the family decided to split, I doubt anyone could have seen this forthcoming, but thanks to how we think, today it seems natural that Anil – the once flamboyant superstar would fail. As Annie Duke – You can’t use outcome quality as a perfect signal of decision quality, not with a small sample size anyway. 

When it comes to biases, it’s amazing how many of them hold us back from achieving our true potential. Every decision we make in life can be reduced to a binary – Yes and No. Each decision in itself is like a split from the main stem and can take a life of its own. Some decisions go right, some go wrong and while in truth we always have a 50-50 chance, it’s amazing how much time is spent on trying to understand the wrongs than the rights. 

A right decision in my case was pursuing a job in 2017 vs launching my own business. This turned out to be right. But in 2005, I decided the other way – pursuing a career in my own business vs taking up a Job I was offered. That in hindsight I tend to feel turned out to be a wrong decision  – not because of anything else but because my business failed. Knowledge of biases and fallacies alone is not enough.

Should I pursue a Business or take up a Job, should I invest directly in stocks or buy a Mutual Fund, should I buy an Index Fund or an Active fund. Should I hold a concentrated position of stocks or a diversified portfolio, should I pursue a strategy of Value or one of Momentum. The questions that investors face is mind boggling in nature and its no surprise many are concerned about whether they are doing the right things.

Each of the decisions we make is based on both our own biases which can get exaggerated by the company we keep and our own beliefs formed by actions of the past. The biggest regret of many investors is not having been invested in the right stock when they first started investing. 

A good friend passed me this tweet for instance

I have had a similar thought before. Wouldn’t it be amazing to have the incredible foresight that one has achieved today years back when one was just starting. It’s a question that has bothered me too but I came to the conclusion that even if I were able to go back in time and tell my younger self the greatness of Momentum Investing, I may have still failed. Not because the strategy is faulty but because my beliefs in the style of investing I focus today has been borne through the combined experience of years. 

In Investing, we can read through hundreds of books / blogs. But ultimately the path you take is your own and one that will not be smooth either. The only way to stay sane and continue despite the hurdles is to get a better understanding of both our losses and our winners while understanding the limitations.


There’s a difference between knowing the path and walking the path..

Writing this post has been one way to overcome the disappointment of losing my purse. I do hope that it provided some food for thought. If it did not, hopefully I can do a better job next time around 🙂

Inactive Intraday Trading

In the book, Trading in the Footsteps of Sherlock Holmes: Balancing Probabilities for Successful Investing, Dr. Anthony Trongone defines Inactive Intraday Trading as some one who is not actively following the market but trades when it works best according to the system or fits within one’s specified trading schedule.

When I tell people that I am a full time trader, most of them assume that I am a guy who is stuck to the monitor for the duration of the market as I try to decipher the dark secrets of the market and pull wool over my competitors (other traders who take the position opposite to mine). Of course, that is far from the truth as I spend more time away from the monitor than in front of it.

Even though I do trade on the Intra-day time frame, my average holding period for a trade is around 5 days and that means that more often that not, I have not much to do other than twiddling my thumbs so as to speak. And then again, since at the current juncture I do not trade shorts (most trend following systems haven’t rewarded shorts for a long time now), the holding becomes even longer.

For instance, I got out of my long on Monday & have not placed a trade till date. The thought that immediately pops up will be, WTF! aren’t there a lot of other opportunities present in the market and would not it make sense to try and maximize the capital that is otherwise being left underutilized?

In most business, more the time you spend, greater the possibility of a higher income. If a Taxi driver decides to drive for 12 hours instead of 8, he has a very high probability that his Income will be higher (even after accounting for the Expenses). The same applies to a whole lot of other business / professions as well.

But when it comes to trading, more time or more trades does not have to mean a better result. Trading is asymmetric by nature which means that some one who places just a single trade may actually be able to beat you even though you are trading ten trades every hour.

Markets provide opportunities for a trader every day, every hour, every second. But be as it may, the fact remains that we can identify, execute and capture only a very small number of such opportunities. Only in hindsight do we realize whether we were truly successful or not.

But there is also the bigger issue of position sizing. If you put in a large number of trades, the risk per trade needs to be pretty low. But if you were to risk a small amount of capital, the rewards too will be small when measured against the total capital available.

On the other hand, if you were to start risking bigger chunks of capital, you could either start blowing up through you account way faster than what is sustainable or end up moving the markets every time you take a trade since the quantity you trade is higher than the liquidity that is present in the market. Either of them is dangerous to the health of your capital and since the impact of losses are much higher than the happiness of wins, the damage to the traders health can be pretty dastardly.

Since 1st January 1996 till date, CNX Nifty has moved up by 7211 points over a period of 4929 days giving us a average gain of 1.46 points per day. But if you were to have a crystal ball which could predict before close of today the closing price of tomorrow, you could have gained those 7211 points by being in the market for just 32 days (0.65%). Yes, just 32 days of rise accounts for the total gains made by Nifty over the last 19 years.

My point in providing the above static is not to say that one needs to search for a Crystal Ball (Holy Grail) that can identify such days. Rather, my thought out here is that the above numbers showcases the fact that with the right tools and strategies, no investor / trader needs to be distraught at missing small opportunities. On the other hand, its important that not only we have a system that can be rightly positioned when the big moves happen (here is a clue: most big moves have happened in line with the trend that was in effect) and more importantly we have the know how and ability to bet big.

Trading can be a enjoyable and profitable venture. Do not make it into something that eats into your life day in and day out. No amount of money / profits that you earn by taking that kind of stress can ever repair long term damage to the health and psychology that occurs due to such continuous strain.

Long Term Investing and Trading

Today morning, good friend and guide, Sunil Arora tweeted the following

On the face of it, that statement makes complete sense in every regard. There is tremendous evidence that traders end up losing their capital within a short span of time. In fact, evidence from brokerage points out that 95 to 99 percent of all traders end up either having wiped out their capital or at best generated returns that aren’t commensurate to the amount of time and energy spent on achieving the same. While there is no such static with regard to investors, I wonder how many really thrive – in sense, how many actually are able to generate healthy returns for the efforts put in as compared to what could have been achieved by just buying a Index ETF and sitting on the same. Its tough to measure success / failure for investors due to various reasons including but not limited to fact that there is a lot of Survivor bias and Sunk cost fallacy at work. Investor buys stocks like Koutons (which today we know is bad, but as I pointed out in one of my earlier blog posts was recommended as a fine stock by major brokerage houses) and if he had just sat on it, it would still be on his demat account even though trading has long stopped. If one has caught onto the right stock and sat on it, the returns would be fabulous indeed. But once again,as I wrote in my previous blog post, its the Quantum of profit that becomes important than just percentage since unless the bet was fairly large, even a 100x return can be meaningless in today’s money. The biggest difference between a trader and a investor is the time required to get a feed back. A investor generally has a large amount of time before the feed back is received as to whether his logic was proved right or wrong. A trader on the other hand has a much faster feedback loop with he knowing within a very short span of time how good or bad his decision was. A secondary difference between a trader and a investor is the use of leverage. While a trader loves to leverage his capital in the hope of capitalizing more gains, a long term investor can rarely leverage and hence can invest only as much as his capital would allow him to. The biggest advantage of not using leverage for a investor is that he knows that the only way his capital can go to zero is if all his picks go to zero. A trader on the other hand can get chopped out even though the markets may have moved nowhere. For example, just today, ReformedBroker posted this tweet  

If some one had traded every signal with a fixed position size, he would have run out of capital long before we hit this 27 mark. Of course, even a guy who uses position sizing would get killed (not to mention lose his hair trying to stick to his system) if he followed the same blindly.

Then again, if trading was not a feasible way to generate profits, could we see the kind of returns that Dunn Capital Management has generated using purely trend following systems?

dunn

 

 

While the fund goes through gut wrenching draw-downs that have in some cases gone on for years together, the end result has been one where the program has strongly beaten the markets (as measured by S&P 500). In fact, if you were to search the CTA world, you would find many such examples, though Dunn as far as I can see is the one with the longest track record.

Long term investing does not mean easy money as Sunil tweeted in his tweetstorm

Earning a profit higher than what the markets provide (again, as measured by the benchmark) is neither easy nor possible for a large number of investors.

In fact, I strongly believe that majority of the investing population out there neither has the capability nor the band-width required to be a investor / trader and are better off achieving their goals by prudent investing in Mutual Funds / ETF’s.

For every one stock that has given abnormal returns in the long term, I am sure one can easily find 5, if not 10 stocks that seemed to make even more sense at that point as a great investment just to be wiped out in time.

Every market peak has seen hundreds of stocks making the news and every bust has seen most of them wiped out. The few survivors that are left are those that could pass through some of the booms and busts and yet survive. In the 2000 IT boom, at Bangalore Stock Exchange, we had around 50 stocks that got traded. Of them, I wonder if even a dozen survived (forget about thriving since many of them are yet to see their highs of 2000, 15 years later).

I am all for the long term if you are willing to work hard at identifying opportunities that get presented by the markets and are willing to wait for long time frame to pounce only when a opportunity presents itself. Else, your long term is better off as a investor in Mutual Funds / ETF’s which enable you to more or less achieve what the markets provide without you having to sacrifice personal and family time in an attempt to beat the market and grow your capital.

List of Companies that have got delisted over time is available here (Link). The list of companies that have got delisted either due to Compulsory Action (many a time for not adhering to listing requirements) and due to winding up of the company is fairly large.

Walking the talk

One of the toughest things to do in life is disagree with something and then walk the extra mile to showcase that you really mean what you say.

For example, today Mr. Motilal Oswal who owns and runs Motial Oswal Financial Services posted the following tweet

Trading is a tough business, no doubt about it. Depending on what evidence you go by, as many as 95 – 99% of traders end up on the losing side. But the question is, what is the success ratio of those Investing (especially direct investing).

Unlike traders, measuring investor success / failure is tough for one, there is no constant. For example, if a person invests X sum of money and after say 10 years, his investment remains at X, is he a successful or a unsuccessful investor?

But does his own company walk the talk  in terms of offering products that he truly believes in. Yes, making such choices can be expensive for the firm in the short term, but if he really strongly believes that his clients health is affected by the choices offered by his company, should he persist in providing those choices?

If one were to visit the website, the page has this advertisement running

MO

Its interesting that not only is the seminar FREE, but you end up getting a FREE gift as well. How enticing 🙂

If trading is really injurious to one’s health, how does attending a free seminar change that. After all, its not saying that it will help you become a better investor but proclaims you can become a Professional Trader (whatever that means)

Taking the high moral road on Twitter is easy, the test comes as to one really goes the extra mile to ensure that the road one takes has that high standards as well. After all, that’s what separates the Men from the Boys.

 

Of Helmets & Stop Losses

Bangalore (like many other cities) has had a rule for compulsory wearing of helmets by those riding a two wheeler. But what I observe is that many a helmet are worn to protect not the head but the risk of getting caught by the police constable. At the first instance of a risk to the head, the helmet would be sure to bail itself out leaving the head to take care of the mess by itself. And since the wearer of the helmet in a way thinks that his head is protected, he may actually take more risks than what he would have when he was not wearing one (before it was made compulsory).

So, what is the relationship between the helmet and the stop loss you may ask. Well, there is one. A wrong stop loss like a wrong helmet may cause more grief to the user than to a trader who trades without one.

A stop loss is said to protect one from the loss while allowing the winners to remain in the system. But the thing about stops is that if not placed right, it has a ability to cause more damage than one where it was not used in the first instance.

So, what is the ideal stop you may wonder. Is placing a stop above a resistance / below a support a good idea? Or should one just stick to one’s risk profile and say that if a stock loses more than X% of my capital, I am out?

With the increase in algorithmic trading, stops below support / resistance are the easiest to take out since everyone sees more or less the same chart and comes more or less to the the same conclusions.

As to those using X% of risk per trade, the problem comes by the way of the fact that the stock may not necessarily fit that profile. Some stocks have very high volatility while some remain bland for most of the time but then spurt up in one swing what would be a multi X deviation from the mean.

So, when is that one should sell or buy (based on one’s existing long or short position). To me, the best way is the way described by Jesse Livermore (which I shall paraphrase) where he says that if a stock is good enough to sell, it should be good enough to short as well. So, if you are placing a stop at level X, not only should you be happy to sell your longs there, but also be willing to go short.

That does not mean that one has to go short every time one wants to exit a long, but its the conviction that matters.

On the other hand, if you are using a portfolio / ranking based model, the above assumption may not be required since you will be exiting one stock in favor of other which your model is showcasing as one with a better opportunity.

Stick to what we know best

Many a time, On my way to Office and on my way to Home, I come across daredevils who ride their vehicles as if they are in a Moto-GP race. While most onlookers either shake their heads or just ignore them, there are a few young guns who get influenced and attempt to compete with them, either straightaway or when riding with their friends.

More often than not, most speeding drivers finally end up in a hospital or get fined by the police and in worse case end up in Mortuary. Even the rider knows the risks he is getting into, but as they say, Speed Trills (as long as it does not Kill).

So, what is the relationship with markets you may ask. Sitting in a Air Conditioned cabin, one feels that there is a very low risk of getting physically hurt let alone die because of acts of omission and commission. But financial destruction is also a form of death, a slow death by a thousand cuts perhaps, but death for sure if one continues to tread on the wrong line regardless of the hundreds of pointers showing one is on the wrong side of the road.

Yesterday I was talking with a friend of mine about the legendary trader, Jesse Livermore. No matter what his greatness lie, the true fact is that he died a broken man. Broken both in terms of his mind and financially. While its nice to see the positives on one’s life, I wonder how many have given a thought that even the best trader (perhaps) finally ended up broke. He blew his capital not once or twice but four times (and officially declared Bankruptcy twice).

A wonderful quote from Jesse goes as thus

The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.

While we do not floor the accelerator just because we see some one race past us, why is that we do not think before acting on some one else’s thought. Yesterday I read a article which claimed that Anonymous Analysts were wreaking havoc in a few stocks by giving Sell calls without there being much of data to back them up.

When some one cries Fire in a crowded theater, the instant reaction is to rush to the exits without bothering to check whether the fire is real or not. The reason for the rush is that one is ill prepared to know whether there is a fire or not and would rather be found foolish to rush with the crowd than face the ignominy of being unable to escape just because of not acting fast (if there was really a fire).

In markets though, its a fact that Herds are both right and wrong. Right most of the time but wrong at the extremes. But if you are part of the herd, the end result will be one of failure since you cannot judge when they are right and when they are wrong.

Most Analysts (and you can include me as well 🙂 ) do not have a clue. While many of us work on probability, some just throw spaghetti on the wall and hope that some thing sticks. And then there are those who cry wolf every time the market dips a bit – the perma bears whose only hope is to claim that they in fact managed to catch the top.

Markets are a great vehicle for building long term wealth. If you were to Analyze the 140+ years of data (200+ from some sources) that is available for the US markets, you shall see that even those who were unfortunate to enter at the height of the market were able to generate more returns over time than what investing into safer assets (such as Bonds) at the same time would have returned.

But the key to building long term wealth is having a plan and having the balls to stick with it through thick and thin. If you are riding a Hero Splendor, do you worry about trying to compete with the Honda Hayabusa? If no, why worry about the noise generated by others who at best can misguide you on your journey and at worst derail your long term growth.

If you were patient enough to read through my long rant, I am sure that you can stick to your plan.

au revoir