In life we experience the existence of ‘pairs’. Everything (or almost) comes to us in the form of a pair of opposites. If there is good then there is bad too. If something brings happiness there are other things that make us sad. If certain events give us success then there are others that lead to failure. In life we are constantly confronted by pairs of opposites. We have to come learn then and accept them as being real. While everyone hopes and expects the positive, they also know that the negative exists and has to be faced, experienced and endured. When we come to the markets what could be the pair of opposites? An easy answer to that question could be profits and losses. Or, right and wrong (about price moves or expectations). Can there be others that need to be looked at and become aware of? When we are aware of something, then there is a chance to deal with them when they do occur.
Lets look at behavioral patterns of traders and investors. The first question that one faces in the market is about whether one should invest in it or not! While the merits of being in equities are extolled by those who invest, the prospects of losses thru price decline are held out by those who don’t. This produces the first pair of opposites. If you don’t have your money in equities, you are going to miss out on the one single asset class that can make the difference to your overall returns. However, if you do invest, then you will be exposed to losses during phases of market declines, as they are unavoidable.
Most people just take the Ostrich route- they duck their head into the sand when it comes to stock markets. They will then give their money to sweet talking salesmen of Mutual fund schemes who will sell them the dream of high returns. Some minimal work on this asset class would tell the investor that long term returns in this space cannot beat and has never beaten inflation. But very few would do the work and instead believe the pamphlets given by the salesman and wait for returns to accrue. They never do. Small to medium investors, in my view, would find it extremely difficult to create wealth out of investing in mutual fund schemes and fixed income assets. It is the endless capacity of self delusion that enables the MF companies to take money away from such investors. So the only way out would be education, effort and skill upgradation.
Thru education, one can slowly progress towards making greater number of distinctions about what the market is doing. This increases one’s insight and progressively, that transforms into a skill. There is tremendous money to be made in the market. But why should it ever accrue to those who make no effort to become more skillful, more insightful? Laws of the universe do not permit this. Victory is always to the more skilled and more powerful. Even David won against Goliath by skill. The spoils of the market are only available to those who collect, hone and practice the skills. And it is disproportionately large too! There is no point in being attracted by the outsized returns (for eg size of Rakesh J’s portfolio) and your ability to make at least a percentage of it. Unless there is skill upgradation.
What does this have to do with the pair of opposites, that we started out with? Well, my belief is that most people who refuse to come to the market are unwilling to even look at the “real” opposites that they should look at (i.e. investing vs not investing in the market) and instead shy away with an image of another opposite (profits vs losses). We are in a new bull market since mid 2013. The market is giving us another chance to reenter now with the ongoing reaction. The process of rate cuts are continuing and perhaps gathering pace as well. It is time for all those who are outside the equity system to begin looking at this area with changed eyes. There are many other pairs of opposites and I expect to write about them in future. Stay tuned!