Is there money to be made in the markets?
June 12, 2015.
In the constant enquiry of the question posed above, one has gone thru many aspects and come to many conclusions. Success in any arena really depends on the behavior of the participants of that arena. So lets look at the participants of the market and see whether the answer is available in there. Markets consist of two types of players- those who invest (cash players) and those who trade (margin players). Of course, there can also be a mix and possibly a good chunk of the people are indeed a mixed breed (“InvesTraders”). Margin account owners tend to be trend followers; in the aggregate, they increase buying as the market rises and increase selling as it falls. Cash account owners tend to do the opposite; they increase selling as the market rises and increase buying as it falls — except at the turns.
In the current rise, brokers report that all thru the advance from Aug 2013 low, investors have generally tended to exit their holdings as prices rose. This continued well into 2014. Post the Modi election, when it became obvious that the trend is up (what is called the ‘Modi trade’) the selling actually increased as there was a fear that prices will be missed. When the rise in the small and mid cap group persisted and indeed strengthened, the selling petered off and when the sharp declines of Dec and Jan 2015 occurred, we actually saw an increase in the buying by retail segment. This was very close to the turning point of the market in March and April! The retail segment has not really turned sellers in the market as the market has peeled off about 12% from the highs in March and therefore is probably engaged in buying during the current decline of the market. Some averaging, some value seeking, some bargain hunting. So they are going against the current trend and will probably stop and switch directions only when it would appear that the uptrend is no longer going to continue- that is, the next price extreme. It is only by chance (mostly) that they are able to get some substantial gains on their holdings. Else most of them make small gains as the trend runs and serve as holders of stocks during the non-trended phases.
Traders on the other hand (margin players) are more prone to follow the current trend and remain sensitive to the news flows as they are keen to zig zag with every turn of the market. This makes them a very volatile lot in terms of their holdings and this lack of conviction on their position makes them very vulnerable to market swings. Because they are always into a reactive mode, it becomes difficult for them to make money unless some trend does emerge after the turns. So margin players lose tremendous amount of money when the market is volatile and make a tidy packet when the market trends. However, when trends do occur, many of them (particularly those that are not truly professional about trading) cut their profits early. As a result most of them don’t make sufficient money from trended phases to over compensate for the occasions when they lose money during volatile times.
So what we have here is the classic market player end result. Investors (i.e cash players) make small profits and hold investments for long periods of non-performance. They exit soon as the trend is back in action and then get into that trend too late (i.e. at inflexion points) and repeat that cycle of holding and exiting all over again. On the other extreme, Traders (i.e. margin players) limit their gains by taking early profits and lose much by remaining too sensitive to the market fluctuations and in the net, don’t end up with much profit.
Is there a way out? Obviously there is, because, the market is finally a zero sum game (minus the costs). The money is going somewhere. Granted that it keeps moving from one hand to another thru time but it does get localized to some hands over time. These are the people we know as operators or bulge bracket market players. Names like Jhunjhunwala, Enam, Damani etc., have all become known in recent times because the money seems to have pooled around them much more than it did around others. What made that happen?
Whether it is RJ or Ketan Parekh or Harshad Mehta or any such names who are all famous for having cornered large chunks of money, the common thread that runs thru them all is the fact these people “ changed” themselves over time. What did they change? Their way of thinking! They changed from being like the usual margin players to professional margin players. Thus they were able to retain their positions thru the trending times thereby creating the larger inflows that then take care of the volatile times rather easily. Their approach enabled them not to be active during such volatile times too, thereby reducing their outflows at such times. They changed from being the usual cash players, buying stocks when trends and underlying fundamentals change and then holding that thru all the way until the conditions change again for the worse.
What does the above example of these market icons really show us? That we need to reinvent ourselves in an entirely different way- almost completely OPPOSITE to the way we currently are! Is that easy? Not by a long shot! But is that really required? You bet. Without that you are forever doomed to be an inconsistent performer on the markets, remaining frustrated at the potential that is visible but that which remains so elusive!
It is in our hands to bring about this change. No one else is going to do it for you. Training, applications, experience, mentoring, all help. But ultimately, the desire to change has to come from within. Until then it can never manifest. Growth Avenues assists traders and investors in their pathway towards creating such changes with services in trading, training and mentoring. The “last mile”, as it is called in the Telecom industry, has however to be walked by the individual himself. When that last mile walk happens, the money will start pooling around our feet as well rather than just flow away, as it used to do in the past.