The frenzied rally on Dalal Street since early April seems to be evoking, among many investors , memories of the 2007 bull run and the subsequent crash of 2008. But their anxiety is much lower today compared to the last bull run. This is because today most traders and investors, including retail, have played it safe by reducing their exposure to futures and hedging their positions by betting on options trading.
In the case of futures, investors can take leveraged bets as they only have to pay prescribed margins. For instance, if you buy a contract worth Rs 2 lakh by paying a margin of say Rs 50,000 or 25% of the contract value, apart from the daily mark-to-market margin. If the futures contract rate rises by 25%, you can make a gain of 100% on your margin payment. However, if the bets go wrong, the loss would also be equally large. This is what happened when the market crashed in January 2008.
On the other hand, options are like insurance policies. In the case of options (call and put), there are different payoffs for the buyer and seller which are relatively less risky. Depending upon his risk appetite, a trader can take bets based on his view on the markets. It can be a combination of strategies and may also be taken along with positions in the futures.
In the past three months, options have contributed 40% of the total turnover in the equity derivatives segment on NSE, against 10% in the three months preceding January 2008. According to analysts, the increased activity in options limits the possibility of a sharp downside.
Experts say traders are cautious about taking naked bets through futures this time. “The contribution of options in the market is higher than the last time, when the market peaked. This suggests that the market is cautious. Due to this, it is unlikely that the market would see the kind of crash it had witnessed last year,” said Gurudatta Dhanokar, technical analyst and derivative strategist at Almondz Global Securities. “Further, the last time around, the market was swayed by euphoria, driven by liquidity and leverage. This is not the case right now,” he said.
Investor wealth shrank by nearly Rs 80,000 crore during the week ended on Friday, with the Indian market closing in the negative terrain after rallying for 13 straight weeks.
The total investor wealth, measured in terms of combined market capitalisation of all the listed companies, has decreased by Rs 79,922.59 crore to Rs 50,09,492.65 crore at the end of trade on Friday.
The total market cap of about 4,500 listed companies stood at Rs 50,89,415.24 crore at the end of trade on Friday last.
Investor wealth had increased by a whopping Rs 23,74,946 crore in the 13 weeks since March 6, when the Bombay Stock Exchange benchmark Sensex had set its upward journey.
The market valuation of all the listed companies stood at Rs 27,14,468.85 crore at the end of trade on March 6 and the benchmark index was hovering around 8,324 points.
Investor wealth had crossed the Rs five lakh crore-mark last week with the Sensex breaking the 15,000-level for the first time in nine months.
Further, the 30 Sensex companies, which account for over 47 per cent of the total market capitalisation of all the companies, saw their combined market valuation dropping by over Rs 6,862.47 crore in the week.
The 30-share Bombay Stock Exchange Sensex declined 134 points during the week and settled at 15,237.94 points today. The loss in today's trade was mainly because of a skid in the shares of Ranbaxy Laboratories, DLF and Reliance Communications, which all fell in the range of 4-6 per cent.
At the end of trade today, the valuation of Reliance Industries stood at Rs 3,70,913.18. RIL was followed by ONGC, whose valuation stood at Rs 2,41,007.87 crore, NTPC at Rs 1,82,265.89 crore and NMDC at Rs 1,69,699.25 crore.
At a time when companies are finding it hard to raise capital to fund their projects due to the global slowdown, thugs in India have successfully steered clear of the recessionary spiral. Beating global meltdown fears, they have cashed in on the ignorance of gullible investors , duping them of crores of rupees.
And with two such cases coming to light recently, an alarmed Delhi Police is planning to launch an advertising campaign urging people to be cautious against alleged fraudsters like Subhash Aggarwal and Ashok Jadeja. The latest case involves owners of BK Jewellers — Rajesh and Chetan Mallik — who are being alleged to have duped more than 300 investors by assuring them handsome returns.
Similarly, Aggarwal, who has been arrested, allegedly lured people into investing Rs 10,000, promising them Rs 1,000 interest every month. In the same manner, self-claimed godman Ashok Jadeja in Gujarat also won the trust of a denotified tribe over a period of time and assured its members of tripling their investment. In all the cases, the alleged fraudsters won the confidence of the people they targeted through word-of-mouth publicity and by initially living up to their promise. While Jadeja allegedly duped people of Rs 1700 crore across 11 states, Subhash, who started three years ago, allegedly made away with several crores, operating from his Aman Vihar residence. Both of them targeted people from the low-income group.
Joint commissioner of police (crime and rlys) Amulya Patnaik said: ‘‘ If any advertisement , e-mails , any person is offering returns which look very attractive, we appeal to investors to consider such offers with caution. We will issue a list of dos and don’ts through a series of advertisements.’’
Explaining Jadeja’s modus operandi, a senior officer of the Economic Offences Wing (EOW) said: ‘‘ Jadeja targeted his own tribe. He invoked religious sentiments to milk his tribesmen who have traditionally been into the liquor trade. The tribe is very secretive and Jadeja knew that no one from outside the community will come to know of his designs.’’
He was also aware that his tribesmen were financially illiterate and would never invest in mutual funds or any other financial instrument. ‘‘He had a free run for almost six months since January. His publicity was done through word of mouth and his tribesmen approached him from all corners of the country. His aunt, Manbai, advised Jadeja to inject a religious aspect into the scheme. She spread the word that Sikotar Mata had blessed Jadeja,’’ said the officer.
Aggarwal, on the other hand, used the old trick of quick and fat returns. To win the trust of investors, he initially did keep his word. ‘‘Later he collected money from investors and gave them cheques. But these cheques bounced and Aggarwal after two to three assurances disappeared.’’
Investigators say that such complaints are very common. These people will always target a community or a region and would set up their base secretly. ‘‘Any person, coming out with unrealistically attractive schemes, knows his exit time and what it takes to create a base. In Jadeja’s case, Ahmedabad Police has found that he started the schemes in January. His scheme was more like multi-level marketing in which investors also become agents and spread the word,’’ said another police officer.
Such scams are not new. ‘‘ Delhi Police recently registered cases against Kanakdhara MLM Company for allegedly defrauding investors by drawing them into multilevel marketing. They promised a return of Rs 26 lakh on an investment of Rs 13,000,’’ said an officer.
An elite group of great professional investors (world’s greatest investors) have shown time and again that it is certainly possible to beat the market continuously and consistently over long periods of time. These people act as an inspiration and as an example to less experienced investors. The methods they followed have become legendary and these can act as a starting point for beginners looking to familiarise themselves with the basics of investing and trading in the financial markets (stock markets, forex markets and so on)
Becoming a successful investor needs patience, learning and sometimes even a bit of luck. But investing other people’s money is entirely a different ball game. Fund managers rely on hard work, intelligence and financial discipline to find opportunities that other professionals might have missed.
Given below is a list of 7 people who excelled in this and managed to beat the markets continuously over long periods of time.
Warren Buffett Peter Lynch John Bogle George Soros John Templeton Julian Robertson Michael Steinhardt
Warren Buffett Born: Omaha, Nebraska in 1930 Employer: Berkshire Hathaway Chairman Most Known For: A $10,000 investment into Berkshire Hathaway when Buffett took control in 1965 would be worth over $50 million today. By comparison, $10,000 in the S&P 500 would have grown to only $500,000. Less Known For: Buffett is considered by many to be a real Scrooge (in fact his personalized license plate reads, “Thrifty”). Reportedly he is only going to bequeath around $3 to $4 million to each of his children, despite his $40+ billion net worth. However, he does so with good intentions and plans on leaving the vast majority of his fortune to charitable causes. Quotes: “If past history was all there was to the game, the richest people would be librarians.” “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” “Someone’s sitting in the shade today because someone planted a tree a long time ago.” “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.” “Risk comes from not knowing what you’re doing.”
Peter Lynch Born: United States in 1944 Employer: Former Fidelity fund manager, today he is the vice-chairman of Fidelity Most Famous For: When he started managing the Fidelity Magellan Fund in 1978, it had assets of $20 million. When he retired in 1990, it had assets of $14 billion. Less Celebrated For: Some people were not too pleased when Lynch, one of the greatest, retired at the tender age of 46. Quote: “Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it.”
John (Jack) Bogle: Born: Montclair, New Jersey in 1929 Employer: Founder and Chairman of The Vanguard Group Most Famous For: Often referred to as the father of index fund investing, he’s the creator of the first S&P 500 index fund. Less Celebrated For: Admits that mutual funds “haven’t been up front with investors - top fund performance has always been followed by mediocre returns”. Quote: “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”
George Soros Born: Budapest in 1930 Employer: Founder of Soros Fund Management Most Famous For: A highly respected currency speculator, he once shorted the British Pound for a one day gain in excess of $1 billion. Less Celebrated For: Although not entirely responsible, Soros’ comments on the Russian economy contributed to its stocks plunging 12% in the first hour of trading. Five days later, the currency had devalued 25%. Quote: “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
John Templeton Born: Winchester, Tennessee in 1912 Employer: Founder of the Templeton Group Most Famous For: Created some of the world’s largest and most successful global investment funds using his independent investment strategy. Less Celebrated For: More recently, his funds have failed to provide the astounding gains his followers were used to, partly due to the recent Asian recession. Quote: “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.”
Julian Robertson Born: Salisbury, NC in 1933 Employer: Founder/Chairman, Tiger Management Corp. Most Famous For: A titan of hedge fund investing, his funds today require a minimum investment of $5 million per person. He turned $8 million in 1980 into over $8 billion in the late 1990s. Less Celebrated For: Remembered for losing $200 million in 1996 when a “bet” on U.S. Treasuries went wrong. Quote: “[O]ur mandate is to find the 200 best companies in the world and invest in them, and find the 200 worst companies in the world and go short on them. If the 200 best don’t do better than the 200 worst, you probably should get in another business.”
Michael Steinhardt Born: 1941 Employer: Founder, Steinhardt Partners Most Famous For: $1 invested with Steinhardt when he founded his firm in 1967 would be worth $462 today. Less Celebrated For: Steinhardt didn’t exactly go out with a bang. He ended his illustrious hedge fund career in 1995, a year after suffering big losses. Quote: “In the 1950s and 1960s, the heroes were the long-term investors; today the heroes are the wise guys.”
Do feel free to add other great investors whom I might have missed out.
EquityPandit.com brought few data for you regarding some of the biggest Indian real estate companies. Let’s go through these data and analyze the future of these companies.
COMPANY
DEBT
(Rs Mn)
Networth
(Rs Mn)
Gross Debt/ Equity
Cash
(Rs Mn)
Net Debt
(Rs Mn)
Net Debt/ Equity
DLF
1,46,731
2,41,130
0.6
13,326
1,33,405
0.6
Puravankara
8,050
13,251
0.6
374
7,676
0.6
HDIL
39,478
42,209
0.9
3,494
35,984
0.9
Parsvnath
21,344
19,856
1.1
3,887
17,457
0.9
Omaxe
20,500
14,140
1.4
3,266
17,234
1.2
Sobha
19,000
9,882
1.9
1,456
17,544
1.8
Unitech
1,00000
43,827
2.3
10,000
90,000
2.1
Now what do you analyzed?
By these data we can easily analyze that:
-DLF has enough net worth and cash against debts it has.
-Puravankara again have enough net worth and cash against its debts.
-HDIL and Parsvanath net worth and cash are minutely more than the debts it has.
-Omaxe and Sobha developers net worth and cash are very less than debts it has.
-Unitech, second biggest real estate company in India, has very little worth and cash against its debts.
Outcome of analysis:
-DLF: You can undoubtedly invest for long term in DLF as company has enough cash and worth to sustain.
-Puravankara: You can invest for long term.
-HDIL and Parsvnath: Don’t invest at this time, wait, wait and wait.
-Omaxe and Sobha developers : Not very good companies to invest in for long term.
-Unitech: It may be good for day trading, but not for long term investments.
Brokers celebrate outside the Mumbai stock exchange on Monday(18th May,2009).
Investors have become richer by a whopping Rs 6.5 lakh crore in just a minute as the Bombay Stock Exchange Sensex saw a historic 2,111 point rise to the 14,000 level as the markets cheered the decisive win of the ruling UPA government in the Lok Sabha elections.
Investor wealth, measured in terms of the combined market capitalisation of all the listed companies, increased by over Rs 6,56,477 crore in a minute -- in the first 30 seconds and then after the resumption of trading at 1155 hours -- to Rs 44,63,420.97 crore.
The 30-share Bombay Stock Exchange Sensex zoomed 1,305.97 points at 13,479.39, hitting the upper circuit within seconds of opening of trade, following which trading was halted for two hours. After trading resumed the Sensex soared 806 points at 14,284.21, following which trading was halted for the day.
Further, the 30 Sensex companies, which account for over 47 per cent of the total market capitalisation of all the firms, saw their combined market valuation rise by over Rs 3.16 lakh crore today.
The combined market capitalisation of the 30 blue-chip stocks rose to Rs 21,53,590.09 crore on Monday, from Rs 18,36,841.33 crore at the end of trade on Friday.
Reliance Industries was the major contributor to Monday's increase in market capitalisation for regaining the 14,000 level along with other heavy-weight stocks like BHEL and Bharti Airtel.
Onlookers watch share prices on a digital stock ticker outside the Bombay Stock Exchange (BSE) building in Mumbai on Monday.
Main stock market is booming after the people gave a thumping mandate in favour of the Congress-led United Progressive Alliance (UPA) in the Lok Sabha polls, dispelling fears of a fractured mandate.
The main stock market leapt by nearly 15 percent on Monday, triggering a temporary trading halt, after the ruling coalition sealed a decisive election victory that calmed fears of political uncertainty.
The Indian rupee gained by moving more than two percent to four-month highs against the dollar while the benchmark bond yields fell as the win boosted hopes a strong coalition would be able to push through economic reforms that would boost the much needed foreign investment in the country.
The investors and market analysts are upbeat and believe that the Congress-led UPA government will push the reforms needed to boost the economy in times of recession and will provide a stable government.
“I am overjoyed for the simple reason that we have been facing a lot of problems for the last two years when the market was down. The government has come with a thumping majority and the government will come up with further reforms. They will come up with banking reforms, they will come up with infrastructure benefits, and they will come up with public sector divestment. So the overall trends for the long term market are bullish, because the government will rule for five years,” observed Manish Debrawal, a Market Expert.
The investors are hopeful that the Congress led UPA will now fast track the process of economic reforms without any pressure, which in turn will boost the economy.
“When in 2004 the UPA government was formed with the Left Front support, then because of the Leftists, the markets had fallen by over 800 points. The picture is completely different in today's scenario. The new government will be without the Lefts' support. So the reform bills in the insurance, foreign direct investment and banking sector which had been blocked by the Left will now be tabled and passed in the parliament, which is very good for the overall economy and from the market point of view,” opined Siddharth Kuwala, an investor.
Brokers celebrate outside the Mumbai stock exchange in Mumbai on Monday.
Mumbai Dalal Street witnessed its best-ever post-election rally in history with the benchmark index jumping over 2,110 points or 17 per cent on the first trading day after the announcement of the Lok Sabha election results.
In the general elections in May 2004, the market did not expect the defeat of the BJP-led National Democratic Alliance and the Congress-led coalition had to take the support of the Left parties to form the government.
The election results were announced during the trading hours on May 13 and the Sensex had ended up 0.8 per cent after highly volatile trade, but lost 6.1 per cent the next day.
In the following trading session on May 17, the index plunged as much as 11.1 per cent, its biggest drop in 12 years, on fears of a Left-backed government.
The domestic stock markets, in line with the global markets, are in the midst of a strong rally. The strength of the rally can be seen from the fact that the markets rallied 17.5 percent in the month of April, a surge not seen in last 12 years.
Making this more significant is the fact that the stock indices bounced back from all sharp declines very quickly, ignoring all bad news.
There were buyers for stocks at every decline. The rally was more pronounced in emerging markets with India being the top Asian performer for the month.
Bullish overseas investors: Analysts, especially from foreign institutional investors (FIIs) and mutual funds with a global presence, are very optimistic about this rally.
They are of the opinion that even after the current gains, the valuations for emerging markets remain attractive, and the rally is expected to continue as the economies in developing nations are proving to be more resilient than what was expected earlier. China's GDP expansion is about seven percent for this year and India is growing at five percent.
Hence, analysts from these institutions feel it is an interesting entry point for long-term investors, and the levels seen over the past six months will be remembered as very attractive in the next few years.
Strong rupee : Confirming this optimism from global investors, the rupee advanced after the latest data showed that FII stock purchases were the highest since August last year.
The currency strengthened as the signs of a global economic recovery promised to increase demand for emerging-market assets, thereby for the rupee.
The SEBI data showed the net investment by FIIs in equity for April was Rs 6,508.20 crores.
Cautious domestic investors :
Other experts, especially from domestic institutions, are cautious in their optimism about the markets.
They say that what started out as just a slowdown snowballed into recession due to failures of large financial firms. Now that failures and bankruptcies have declined considerably, the markets have stopped going down. But key indicators like industry demand, employment, capital spending and profitability are still declining A recovery in the global economy, which is currently standing at a 'low point', will depend on a rebound in the US economy.
The gross domestic product in the world's largest economy fell 6.1 percent in the first quarter reconfirming that recovery of global markets was still sometime away. In India too the news flow was far from rosy. India's inflation held near a 27-year low. Inflation went up by 0.57 percent year-on-year in the week ended April 18 after gaining 0.26 percent in the previous week.
There are fears that inflation is likely to turn negative from early May. India's diamond sector shed two lakh jobs. The IT industry too announced layoffs. But the biggest fear that India Inc has is that of a hung parliament, which could end the rally in the stock markets.
Hence, domestic institutions actually sold some of their investments in this rally.
Investment strategy :
With experts so divided in their opinions of the markets, the quandary in the minds of individual investors is understandable. A perspective that can help them decide whether to hold on to their investments is portfolio returns.
Rather than worry about whether the market is poised for a decline or not, investors can focus on whether their portfolios have generated the required returns or not. In this rally, some stocks have gained more than 50 percent with some of them rallying up to 80 percent.
If the investors have such stocks in their portfolios they can sell them as their returns targets will be achieved. This rally can be used to rebalance portfolios by weeding out weak stocks.
A good strategy for longterm investors who have already invested in the markets would be to hold on to their investments. They can wait for the outcome of the elections before committing further funds into the markets. Short-term investors, however, can book profits in this rally and wait for an opportune moment to reenter the markets.
Before diving into Day Trading, please ask yourself if you have the following personality traits!
Confidence This is perhaps the most important personality trait of good day traders. You won't succeed at day trading unless you have a high measure of confidence in yourself. Lack of self-confidence will result in doubt, indecision and second-guessing which, in turn, will lead to missed trading opportunities and frequent losses. You must believe in yourself when day trading. If not, you will be better off pursuing some other endeavour.
Discipline In order to day trade successfully, you must develop a trading plan and consistently stick to it. You must avoid a "shooting from the hip" or a "seat of the pants approach" to day trading.
Get out of the market when you have reached your objective and do not let emotions like fear and greed influence your trading decisions.
Decisiveness Good day traders do not hesitate to "pull the trigger" when entering and exiting trades. Traders who are in the habit of being tentative or indecisive will never become successful.
Passion Most successful day traders have a true love or passion about their trading activities. If you do not enjoy reading charts, dealing with numbers, reading market news, interpreting quote screens, learning new trading strategies and working independently in a fast-paced environment, then day trading is probably not your cup of tea.
Ability to Accept Failure (and blame yourself for all failures) Good day traders know that many of their trades will fail to meet the original objective. They do not, however seek to blame someone else for their loss, and they don't dwell on it. They attempt to learn from their mistakes and move on to the next trade.
Ability to Accept Risk (lose money) Another personality trait of good traders is that they are comfortable with risk and are prepared to lose money from time to time. If you are afraid that you will, on occasion, lose money, then day trading is not for you.
Patience Good traders do not rush into trades. They take the time to select good trading opportunities and do not place orders simply for the sake of holding a position in the markets at all times. On some market days, where few good trading opportunities exist, they are content to simply stand aside and wait.
Concentration In day trading, a great deal of real-time information has to be absorbed, analyzed and acted upon in intense bursts throughout the trading day. This requires a great deal of concentration and stamina on the part of the trader, and the ability to avoid distractions. Day trading can be very hard work and a lack of concentration can doom a trader to failure.
These are the key personality traits that successful day traders tend to have in common! Do you??
Retail investors are most vilified set of investors. The general assumption is that they are the ‘greater fools’ as in the theory by that same name. Very unfortunately, to an extent the sobriquet is deserved.
In Indian mythology it is said that Gods get their power from the devotion of multitude. Similarly, retail investors, call them by whatever name, are the power bearers for the power-brokers. They are the ones holding the visionary torch when power brokers have safely made their way home.
Retail investors are usually the loosing side of the trade. There are some very common errors that they end up doing. I just tried to list out some common errors or bad habits that we retail investors tend to repeat.
Buy knowledge: Home-works are for kids
Most of the retail investors do not do homework on which their trades and investments are based. They expect brokers to do the work for them; after all the investors/traders are paying the broker for the research in form of commission/retainers. Unfortunately, broker has conflict of interest and to put it bluntly but truthfully, does not care about retail investors. For the broker, the investor is nothing but a trading account, no matter what the advertisement said. The Broker very well knows that before the investor blows up his account, Broker have to make maximum use of the account to earn his money. Use a part of that money for advertisements & marketing campaign and voila, Broker will have a new replacement account.
Broker does not care about retail investor. They don’t matter in Brokers’ scheme of things. Many brokers misuse the trust reposed by these investors, some are neutral and only a few are real partners in trade. In the dog bite dog world, investor can trust only his own work
Do not pass the buck. It is your trade, your profit, your loss. Stay clear of actions that are meant to blame others/brokers, every action should be independent of external variables and be based on what is important to the investor. And the end of the day you should not and you do not have any body to blame except yourself.
Easy money business: Trades first and then learn
The realization that trading/investing has to be learnt first before putting into actual practice is common. This in itself does not in any way differentiate the caliber of traders. What matters is the realization and subsequent action. For example, most of the traders after initial few losses realize it is better to learn and know a bit more about fundamental analysis and technical analysis, but it is very few who actually strive to gain knowledge or expertise in that.
As wise men in the market have told us, it is must to study how the market functions before we start our operations. As somebody said, in every business/profession, a person spends years studying that art before he reaches a stage of perfection. But in the business of trading/investing the common perception is that we can make money from the Day 1. This is not true. Like any other profession/business, stock markets need constant dedication in learning and working towards the goal.
He(a)rd on street: Get swayed by friends' or analysts' remarks
One of the common 'retail investor error' that results mainly from lack of research/homework is the trader/investor getting influenced by the suggestions of fellow traders/analysts. Since, there is no background analysis done by the investor himself, the fundamental basis of the suggestion is lost and what remains is a skeleton of a reason. Investor becomes the part of the herd, not knowing what and why it is happening, where or why it is moving. When the environment changes the investor/trader does not have a clue that fundamental basis on which the scenario/trade was suggested have changed. Ultimately, after a loss making trade, we end up blaming others when in fact the blame should be squarely be placed on ourselves.
Open-minded: Open conviction
Most of the problems arise due to lack of proper study/homework. When an investor/trader makes a trade but happens to read/hear an adverse comment relating to the trade, the investor starts to get jittery and looses composure. More often than not, psyche helps him out by giving some good reasons to exit from the trade. If such exits are beneficial to him initially, this breaking of trades when somebody casts aspersions on the trade/investment reasoning becomes a very bad habit. The trader is conditioned into a bad habit.
Psychologically, this means trader himself believes that he is not capable of coming up with good arguments for trade. Hence, he short sells his opinions repeatedly. It is must to have an open minded attitude to all trades, but the fundamental belief, the conviction for the trade must be clearly established before the trade is put through. Lacking which the trade/investment will crumble under the pressure of doubt/aspersions.
Let the breeze of thoughts blow from all direction but I refuse to be blown off my feet. – Mahatma Gandhi
Smart news: Trade news
Retail investor is always late for the trade. We can confidently say 'always' because I doubt we have a single instance where the retail investors were the "smart money" It is this characteristic of being so gullible that makes us retail investors the laughing stock.
Smart money anticipates the "news" and probably even knows it before ink meets the paper. Retail investors majorly react to these revelations and enter the trades. There are many scenarios, where trading on news-based events are possible and successfully made. For example, in foreign exchange and commodity markets the news events are very important trading points/opportunities but in equities the "news" is usually compromised facts.
Blinkers on: Watch news channels
Retail investor is a news watcher. Sad but true, retail investors’ biggest weakness is perhaps his/her total surrender of thought faculties to the talking heads on the television or experts in newspapers, a media which has been and is still being used for propaganda and subtle persuasion.
Nothing makes an investor more gullible, blinkered and fixated on an idea/theme than the constant sensationalism of the news media. The following of such media themes, of course are propaganda by the so-called smart money. Under the constant bombardment of compromised ideas, the resistance of the retail investor is finally broken, and investor/trader (usually) ends up making a bad trade.
Tips: Got a tip?
Perhaps, the most obvious sign of the retail investors is "tips". Talk to an investor and after few minutes of conversation; if the conversation veers towards tips, you are talking to a confirmed retail.
Please do not mistake me, lot of "smart money" also ask for tips or rather to put it more appropriately watch the "tips market" to get a sense of what tips are being passed along. You can be sure 'smart money' does trade on the "retail tips" as otherwise they wouldn’t be smart in the first place. Smart guys are interested in the psychological information involving tips than in the tips itself.
The simple logic that if anybody knew a confirmed move would have a large vested interest does not seem to strike many.
Immersed in market
You cannot talk to a person for a long time without conversation veering towards market. I wouldn’t classify them readily as retail investor, but certainly not as matured investors. There is a class of investors/traders for whom the market has taken over their soul. Nothing exists behind the walls of the market. Unfortunately, this only makes them less productive and closed to many trends developing, subtly. There is a class of investors who do not talk about markets in routine conversation even though they are equally involved in the market. For these classes of investors it is usually a concerted effort to avoid the talk. There are many things more important than the wall.
Stocks on fire: Head for exit
One of the main weaknesses of retail investors, in most scenarios, is that they do not sell. Wise men have said you cannot make money unless you sell. But most hold onto their favorite stock, for just one more ride. It is unfortunate the greed takes over the psychology just at the time all the profit objectives are fulfilled. No trend is perpetual and when the market turns back, the opportunity of booking the profits would have been lost.
Retail investors also do not exit at the stop losses. It is not necessary to have stop losses, but if the original plan of trade included stop losses then the discipline of trade must be followed.
And also contrary to expectations, it is not necessary to have stop loss figured out for the trade. But very essentially, the acceptable risk must be clearly defined.
House money: no problem
Another one of the bad habits of retail investors that they do not feel the pain of loosing the money. Either it is part of the "house money" or the capital. As Warren Buffet said the first rule of the game is not to loose money and the second rule is not to forget the first rule. You can make money only if you have capital, without capital or worse lost capital nothing can be achieved.
Volatile plans
A bad trading/investing habit is to exit at the first signs of profit and waiting endlessly drowned in losses.
The biggest pitfall in the market is simply, we do not know the future. No one does. Hence all approximation is nothing but an optimistic estimation of probabilities. We do not know when the trend breaks down but we can only guess; some times a very sophisticated presumption. The uncertainties of the future are part and parcel of markets. But in the case of the retail investor, the fear of this uncertainty amplifies anxiety. This
Jesse Livermore said the biggest money was not made in trading but in waiting. Probably because when the trend is established it runs for a longer time. An early exit in such rallies is usually ‘very’ early and creates a left-behind feeling which in turn leads to some bad decision making just to ‘catch up’. Retail investors are usually the worst offenders of this.
Thrill seeking: Expensive tickets
There is probably no ‘power experience’ in the world than ‘bark’ orders into the phone.
Market is certainly not a place to look for some fun. It is very expensive fun. Not a place to look for thrills. This doesn’t come cheap.
I guess it was Lord Dryden who said most of our problems are due to the fact we can’t spend some time quietly in a room. We crave for action. Markets are a very expensive place to find that.
But trading, just as any other businesses works best when it is boring. So boring, so on auto-pilot that we would rather have our nails plucked out for fun. Making money is perhaps easiest thing to do if only we could sit quiet and wait.
Holy Grail: Double circle
Every retail trader is like Indiana Jones looking for Holy Grail. The Holy Grail, the silver bullet to stardom, the key to his dreams beyond the forbidden borders entice him as powerfully as it did knights templars.
You can see him unraveling the circles of life, like leaves of onion, trying to reach the inner-most circle. Trying to reach the pool that will give him the most reliable tips lots of money, time and hopes are wasted.
Like the Grail, there is an ‘inner-circle’. Just that there is always a circle inside your circle. It should be chased, perhaps, more in the fashion of philosophy of alchemy, refining ourselves to be better traders/investors. But for all the practical reasons the chase should not take precedence over the current realities. When you grow you could find yourself in the center of the circle.
Conclusion
If you look at these reasons, just a sample of large number of bad habits, solving these habits is very easy. But it takes some effort on part of investor to solve them. First and the foremost are to learn about the working of markets, do the homework and plan out the trade, no Plan-Bs if they were not part of trade-plans. Have a bigger picture view of the market; you do not have to be 100% involved to get the most, in other words, have a plan to enjoy the benefits of trading/investing.
Rely on self; you do not have a stronger ally in these markets than yourself.
