Lure of the Trading Ring

(This appears in Deccan Chronicle. Today. Maybe now the number of stocks to read up and track will increase as the exit door gets crowded. Another lesson. Forget. Next time will be different. Like this time is different)

Bull markets are a great thing. Apart from happiness to those who trade in the market, it also makes us feel very intelligent and confident. Without being an analyst or a professional investor, we start to build portfolios. There are so many recommendations and tips that come, we tend to buy as many different shares as possible. Every share comes with ‘hot’ news and they all tend to move rapidly when we hear about them the first time.


In the initial phase, we want to be sure. We take the recommendation. Then we check out the highs and lows and the recent moves. We see that the sharpest moves have happened just before the recommendations came to us. So we say, let me wait till it goes down a bit. It has gone up too fast. This way, we see that in a week or so, some shares do not come down. At the same time, we have received a few more ‘sure’ winners’ tips.


Now, we decide to buy small quantities (instead of twenty-five thousand rupees per share, we will limit our first buy to fifteen thousand rupees) and then add up. So as soon as we get the tip, we buy first. Afterwards we find out the spelling of the name, the business and maybe some headline numbers. Our comfort is the fact that the ‘source’ of recommendation is good and probably he makes so much money and is intelligent that we cannot question or doubt. If we ask questions, we think that we will sound silly.


Thus begins our journey of growing up.  Soon we have more number of shares than we can remember. And we follow a simple rule of selling off those that make us some money. We may all have some rules or we may just get negligent and keep watching them every hour without doing anything except searching for our next hot number. Slowly we see some stocks slipping in to the red. But then we rationalize. At some stage we use our second instalment to buy more. On those that rise, we are hesitant to spend our second instalment. We think that once it ‘corrects’ to our original buying price, we will buy the lot.


In all our decisions, we have let our common sense go to sleep. We had a fear of ‘being left out’ in conversations and WhatsApp groups. What we have done is to bet on price behavior of unknown bunch of stocks. We look at the insides of the buys we did and decide not to discuss it at any forum. We never had a strategy in mind about how much gains or when to get out. We remain in this suspended confusion for a long time. We now start tracking buys by big names of the market and try to tailgate them. The problem here is that by the time we get the news the price runs up and we will never know when they get out. Many ‘big’ names use this crowd following to make quick bucks. Large lots are bought. News is made public AFTER their buying is over and prices already show some jumps. Now the fans get in. No one asks the ‘big’ name about why he bought it or when will he sell it or how long he will hold it. Some of the ‘big’ names even mislead with public talks or selective leaks. Then the ‘big’ names will sell in small quantities at higher prices and totally exit their positions. They make their quick money. And now we see the prices slowly crashing. We do not have the heart to cut our losses and become wiser till the next tip comes round.


Some of the trades will NEVER make money. Some will make money in a bull market. The important thing to see is that the overall returns are not going to be something that you will boast about. The average returns will be just around the index. The more likely possibility is that after some time, we will realise that we cannot make money continuously, even if we spend more and more time.

Sometimes, it is good to have a break from routine. Keep your regular investments as they are. Do not listen. Do not track things that will never qualify for long term investments. Remember that only success stories get told. Even a Warren Buffett admits that some calls go wrong. We are not him. And the other thing is that the ‘big’ names probably devote a small part of their portfolio to this kind of aggressive or momentum trades.


Always have a plan for exit before you buy enter. And lay down rules and follow them. That way, your trading experience may not become sour and drive you out of investing. Fundamentals and prices can be at disconnect for a long time. Like there is no reason for a rise in the market, when it falls, you will still keep searching for reasons.



R Balakrishnan