Theory and Practise

In the movie, Inception, there is a interesting dialogue which I quote below;

“Mal: Pain is in the mind, and judging by the decor we’re in your mind, aren’t we, Arthur?”

When investors / traders enter the market, they know that they shall experience some amount of pain – pain of draw-down is guaranteed. But its one thing to experience pain in back-testing / historical insights and quite another when faced with the real thing.

As a well quoted quote by Mike Tyson goes

“Everyone has a plan ’till they get punched in the mouth”

Most trading systems – Trend following or Mean Reversion experience strong draw-downs. Streaks of losses are fairly common as well.

But when faced with the uncertainty of every trade going to dogs and the fear of further losses make most investors and traders first behave like a Deer caught in the Headlights Syndrome and then at some point beg for them to be removed themselves from the trade, even if its at a big loss since the pain (of losing money) is just too great to bear.

As markets decline without there seeming to be a iota of support, blame is distributed across the spectrum – from the crony bankers to Raghuram Rajan to the broker who wouldn’t allow them to hold on to a few days more. But none and am sure I could include myself here, would blame oneself for the mess one finds himself in.

Most investors and traders just don’t have a Plan B. A plan that is to be put to action if Plan A fails – most hope that Plan A is so good that there isn’t even a need to put a Plan B in place let alone come to a point where its activated.

Everything is a give and take. When markets were rolling just a few months ago (which now seems like eons earlier), the place to be was the small and mid cap. Large cap investing wasn’t even considered a option.

But when mid caps and small caps crumble, its the large caps that seem rock solid (even after accounting for their own falls). In 2000, when Infotech stocks were going through what seemed to a never ending rally, most old favorites were languishing at multi year lows. But once the rally ended, the divergence suddenly started to collapse till we reached a point where brick and mortar was again the fashion and eCom (nearly every one of them) was out of fashion.

Fast forward a few more years and the survivors who stuck out did better than what even the most optimistic report at that time would have predicted.

Recent fall in PSU Banks have come on back of the troublesome NPA’s again rearing its head. But is every back going to dogs? At what price do they start making sense again? Which banks shall survive and thrive and which won’t?

Dr Raghuram Rajan made a interesting point during this CD Deshmukh lecture and I quote the same

The Finance Minister has indicated he will support the public sector banks with capital infusions as needed. Our estimate is that the support that has been indicated will suffice, especially when coupled with other capital sources that are usually available to banks.

Banks are going down but at some point they shall make sense as a investment yet again. The question though is, Do you have a plan and more importantly Do you have a plan B if plan A fails.