The Game of Con

“One thing I’ve learned in the last seven years: in every game and con there’s always an opponent, and there’s always a victim. The trick is to know when you’re the latter, so you can become the former”, so says Jake Green played by Jason Statham in the film Revolver.

When we hear the game of con, the image we reflect is of casino’s, lottery tickets among others where the odds of winning are theoretically zero in the long run. Its only in the short run that some do get lucky and win small (compared to the overall pot). Theoretically they are not games of con, just that they are games where the odds are always in favour of the house. But people still play with the hope that they aren’t the sucker and lady luck shall reward them for the risk they assume.

Just in the last couple of days, someone in the United States won a $400 million Powerball jackpot and the risk he took – a measly 20 dollars. This one story in itself will push millions more to participate in the hope that they could be the lucky winner without giving a moment’s thought to the odds of such a win. 

The question that I want to ask is – Are the stock markets nothing more than a big con run to enrich the strong while small wins ensure that people never stop believing that somewhere at the end of the road, there is a pot of gold awaiting them.

Going back to the film Revolver, there is another dialogue that can be quoted in this context, “In every game of Con, there is always an opponent and there is always a victim. More control the victim thinks he has, less control he actually has”

Compare this to the markets. The victim, the small trader / investor is always under the assumption that he is in control – the reason maybe as diverse as knowledge of Fundamentals / Technicals / Astrology / Macro analysis or to the ability of his intuition to guide him correctly. Small wins here and there cement that view while the losses always occur due to bad luck or mistakes that could not have been seen or avoided.

Recently there was this article about a two month challenge run by Zerodha. Being in this industry for more than 15 years, I had a inclination that the number of winners in percentage terms would be on the lower side, but nowhere I expected it to come as low as 5% which the challenge showed.

I recently tweeted a study which said that the just 1%, let me put that in words One out of hundred are consistently profitable. That gives us that odds that I am the One a miserly 0.01% chance which is less than even the brokerage I pay to my broker.

The key attraction to the stock markets has been in generating returns higher than what other asset classes (save for Real Estate in the Indian Context where as @lordludus says It can never come down J ) can provide. But is that really so attractive?

If one were invested from 1979 onwards (never mind the fact that Sensex was not even born at that time), you could have gained an approximate 17% returns per annum – not bad at all. But the very fact that Index ETF’s came into the picture just before the 2003 – 2008 rally took off. A investment at the start would have yielded one a CAGR return of 14% and all of which came in due to the 2003 – 2008 rally. In fact a investor who bought at the peak in 2008 would not yet be in profit despite the profit despite being invested for nearly 6 years now.

Deepak Shenoy has just written a article on how indexed for inflation, Nifty returned a miserly 4% (approx) above inflation. While this seems good (considering that investing in FD may not have even beaten inflation), this number has to be adjusted for the risk taken. After all, there is no draw-down aka negative volatility in FD vs. the kind of draw-down we saw when markets tanked in 2008. Adjusted for risk, markets perform very poorly to other alternatives.

People get attracted to the markets due to the winnings of someone else without applying whether the win was due to skill or pure lady luck. Personally even I got attracted by the riches of a neighbour who made it big in the 1992 Harshad Mehta led bull run. It’s another matter that this ignores survivorship bias and even when the person who was the key motivator himself fell from grace losing all in the markets, I did not exit the market (Endowment effect).

In his book, “Thinking, Fast and Slow”, Daniel Kahneman writes and I quote “The successful funds (referring to mutual funds) in any given year are mostly due to luck; they have a good roll of dice”. My family has been an investor in Mutual funds since 1994 and in the long term, we have bought both good and bad funds with the overall average performance not being as spectacular as our best investments tend to show.

Everyone knows that investing in the markets are risky, it’s just that we hugely underestimate the risk factor and believe that over the long run, we shall make it past the chequered flag, but how many really make it is a question that has no answers.

If one were to look at the Forbes list of billionaire’s, every one of them including Warren Buffet have made it because of the businesses they own. If Warren Buffet was just another shareholder and not the majority owner of his biggest businesses, I doubt that he would have even got featured in that list let alone be the fourth richest guy on planet earth.

Markets are currently in one of the longest bull rallies ever. One key reason for this has been the ever expanding money supply which has ensured that like sheep, investors have no choice but bet money on the horses in the exchanges in the hope that they can beat the returns offered by bonds (which are next to nothing if inflation is accounted for – and in many a country even negative). But if history is any Guide, this free run cannot continue till eternity and the higher we go, harder shall we fall.   

And it is into this market we are investing our money (direct / indirect) with the hope that they shall pay off big in the future to enable us to achieve our goals and live a happy retired life. The question though is – what is the probability of finding the pot of gold at the end of the rainbow. 

I believe that this market is not one suitable for investment (and have written a blog post a few months ago on it as well detailing my reasons) – not for now, not for in the next couple of years at least (when one can re-analyze the situation with fresh data on hand). But if you do think that you are one of those guys who are above average (in terms of being able to milk the bull), do note that almost everyone thinks they are above average in which case, one needs to question who is actually below average J

To me, the markets are a way of transfer of wealth – just that the odds of you being the recipient is so small that you may actually be lucky to be there in the first place.