Stock Market is a giant casino.
Surprised that this statement comes from an investment advisor who invests in stocks and equity funds and who also advises clients on the same. Let me explain.
More than 90% of the people in stock market treat it as a Casino and so it gives results accordingly to them. In a Casino, who earns? As you are aware, Casino is a zero sum game. The only guy who earns consistently in a Casino in none but the Casino Owner. Likewise since most of the people in stock market treat it a like a Casino, the only guy who consistently earn here is none other than your stock broker who keeps providing you almost daily trading tips.
If 90% of the people in market only continuously speculate and trade in market and end up loosing money in the long run, why are they doing it? This is similar to why someone is a smoker or alcoholic or drug user knowing fully well it is injurious to health. The answer is addiction! Like wise, for the speculators and traders in the market it is an addiction for continuous action. This continuous action only makes their adrenaline flow.
That is why the world’s greatest investor Warren Buffet says ” Never ask the barber if you need a haircut. There’s very little money to be made (by a broker) recommending our strategy of buy-and-hold.Your broker would starve to death. Recommending something to be held for 30 years is a level of self-sacrifice you’ll rarely see in a monastery, let alone a brokerage house.”
As Personal Finance legend John Bogle points out,the way to wealth for the stock brokers is to persuade their clients and say ” Don’t Just stand there. Do Something”. But the way to wealth for the clients is the opposite maxim ” Don’t do something. Just Stand there.” This is the only way to avoid playing a looser’s game.
Stock or an equity mutual fund is not a lottery ticket. It means that you are part owner of a corporation (as in the case of stock) or corporations (as in the case of equity mutual fund). Roughly only 10% of the people who are involved in the market think on those lines. They are not worried about every day stock price movements. All they care is whether they are invested in a company which is continuing to grow or invested in a diversified fund which is a consistent performer and is able to beat the Benchmark returns. Their typical investment horizon is 10 to 20 years or more and the barest minimum period they look for equity investment is 5 years. Only this 10% would have earned the annualised return of 18% provided by the Sensex in the past.
For a trader, few weeks to couple of months itself a long term and for an investor, as I mentioned above 10+ more years is only long term.
Please read the book ‘Fooled by Randomness’ by Nassim Nicholas Taleb. You would get more insight on the issues I’m speaking above. Less than 5% of the traders ever make big money in the long run and the remaining 95% are complete loosers. If you are a long term investor, in a growing economy like India, the chances are almost close to 100% that you would make good money in the long term.
Would you want to be an investor or trader? Would you want to be in the 90% loosers category or 10% successful category?
I want my clients to be in the 10% successful category who makes good money in the long term, who do not worry about short term volatility, do not track the stock prices and NAV on a daily basis and see where one stands. Once you a take a short term perspective greed or panic would set in and you would end up being like a casino player. Market rewards people with patience and extreme emotional discipline. But be sure that the reward is worth the wait.
But we should also be thankful to these speculators and traders. Because of their greed and panic they keep providing us periodic opportunities to keep rebalancing our asset allocation and build our wealth. To explain, you should always follow an asset allocation. How much of your financial assets you want in Equity (Shares, Equity Funds) and how much in Debt (FDs, Postal deposits, Debt Funds etc.). When due to their greed speculators keep raising the shares to the extraordinary levels, your equity as a percentage of financial assets would go up. Then book some profits and put more in debts. When due to their Panic when speculators sell heavily and stocks are available at dirt cheap prices like now, your equity as a percentage of financial assets would go down. Then move a portion of your debt into equity by investing in shares / Equity Mutual Funds. This has been put more succinctly by Dhirendra Kumar of Valueresearch in the following paragraph.
“One of the more interesting ideas in asset allocation is to change the balance according to market conditions. The concept is that over medium to long terms, equity markets inevitably move in cycles. There is a part of the cycles where equities are clearly underpriced and there are parts of the cycle when equities are clearly overpriced. In the former, one should give more weightage to equities and in the latter, less weightage. Then, as the markets go through their cycle, the investor will be best able to capture an optimum level of safety with that of returns.”
By the suggestion I’ve mentioned above, you may not get the maximum returns from the market, but would definitely get a very decent return with optimum level of safety.
I’m a champion of long term ( 10 to 20 years) investments in markets especially through SIP (Systematic Investment Plan). As your corpus in SIPs keep growing and once exceeds the asset allocation ratio, we can continue to rebalance your asset allocation by infusing the fresh money into debt funds. For people who do not have fresh money to infuse at that time, a part of the equity holdings can be sold / redeemed and moved into debt funds.
There is no point in reviewing asset allocation too frequently. Some people even look at it daily !!!. Once in a year is sufficient to review and rebalance the asset allocation, if required. Considering our tax laws, yearly rebalancing would be more tax efficient too.
So please be an investor and not a trader. Then you would never fail in stock market and would end up building a substantial wealth.
As I indicated above, it needs enormous emotional discipline to be an investor. I wish that all of us develop the same and reap excellent rewards which Indian stock market is waiting to offer.
Stock Market is a giant casino.