From time to time you see some or large profit in certain scrips you are holding. Your start wondering whether to book profit or hold on to the scrip. If you book profit, the scrip may run up, if you hold, the scrip may erode gains till date. What to do ?
There are two schools of thought - one which says you should take profits quickly and the other one which says that only the big profits in certain investments would really make you rich. We all get confused. Which one should be our philosophy.
I have realised that one line quotes and phrases from successful personalities are misleading many a times insofar as their application to our life is concerned. I have also realised that two different answers to the same question can be right and work for us at different points of time so long as the same are coherent with the our overall philosophy and based on circumstantial factors affecting the question.
So what is the overall philosophy in financial markets ? Simple ... Making money for yourself. Does it really matter you should sell early or hold on for a long time ? No, it should not.
Now, how do you decide whether you should book profits or hold on to your scrip. The answer is pretty simple. But for that you have to know basic technical analysis. Is the scrip trending up or is it in trading zone or it is trending down ?
A scrip which is trending up should generally be held till the trend breaks. But this should apply generally if you have entered when the scrip was consolidating or when the upward trend had just started. How would you know that ? I will deal with that separately in my later blogs.
In case you have entered a scrip when the same had risen significantly, then you are better off taking profit when the scrip has completed its next upmove or has shown significant gains in short time. Holding for further gains (a sign of greed) can be lead to financial loss, many a times.
Sunday, August 23, 2009
Know your style of trading
Investment and trading in financial markets is ultimately a zero sum game. Some one gains and some one loses. Some people will buy and sell in impulse. Some people will trade short term sometimes, they will trade long term sometimes. Some times, their expected short term trades would become long term investments, due to adverse market movements. If you are one of the person who has not yet identified a style, you are the person who is always wondering whether you will earn in stock markets or not and be sufferring from many such thoughts related anxieties.
You need to know whether you want to buy and sell securities daily or over short term or over long term. This would decide your trading strategy and methods for identification of entry and exit points.
Please do not trade, just because you get a kick out of this activity. Investment and trading is your business (even if you working for someone else in daytime) and your means to become rich. So take it seriously. It is serious business. If you become happy because markets have risen few percentages and feel sad because markets have fallen few percentages, you are probably not fit enough yet to invest and trade to be rich. If you can be emotionless and still be able to invest and trade, then you have much better chance to take better decisions to your benefit.
You need to know whether you want to buy and sell securities daily or over short term or over long term. This would decide your trading strategy and methods for identification of entry and exit points.
Please do not trade, just because you get a kick out of this activity. Investment and trading is your business (even if you working for someone else in daytime) and your means to become rich. So take it seriously. It is serious business. If you become happy because markets have risen few percentages and feel sad because markets have fallen few percentages, you are probably not fit enough yet to invest and trade to be rich. If you can be emotionless and still be able to invest and trade, then you have much better chance to take better decisions to your benefit.
Winners win consistently and losers ... ?
Of course, they are consistent in losing.
Have you found yourself at the top of the world from time to time in life. Everything works the way you want it. You seem to be in total control. Whatever problems come, you brush them aside and go on doing what you want to do and many a times achieve it. Have you found opposite happening in your life too ? Do not tell me, you have not. I would not believe you.
The same thing happens with scrip prices and investment which are a reflection of mass mood and psychology. When a scrip shows a new high (say new 200 day high), it may get some selling pressure, but it would again go on to make newer highs and when a scrip shows a new low (say new 200 day low), it may get some support temporarily, but it would again go on to make newer lows.
Lesson : Stay with a winner and at least, do not short it. And get out of your loser portfolio and at least don't buy it in a hurry.
Caveat : If the new high has happened out of a very extended broad base, the scrip has strong potential to go far and vice versa. If the scrip has run up a long way to just touch a new high which it had touched 2oo days ago, then it is not very easy to guess its further potential for further tops. This applies in opposite manner for new lows.
Learn Financial Pain Management
Have you ever felt disgusted seeing your portfolio ? Have you again felt totally depressed while seeing it and have you wondered how come you landed yourself into such a pathetic portfolio where all scrips or most of them are showing negative returns ? Have you ignored markets for a few weeks / months on the pretext of (a) not being well, (b) lot of office work, (c) family pressures, etc. when your portfolio has started showing negative returns ? You are not alone.
Firstly, just think about it. You would have entered the scrip at a high point, when the scrip would have become a momentum play based on tips, advise or your own study or intution. A scrip which is a momentum play can simply give away agains before even you can decide whether it is a pullback from recent high or correction. Again it deceives and goes up again and you think it is back on track. Before you realise, it is down again and you simply get frustrated with the moment in that scrip. You want to look at that scrip after some time when the picture is clear and when it is clear, you realise even booking the loss may not make sense and a short term investment becomes a long term investment and hope.
Solution ? Face the truth. Don't look away from your portfolio. See what is the potential of those scrips now and whether you need to switch to more promising scrips and sectors which are market favourites when you are examining your portfolio. (Remember the rule : Winners win consistently ...).
You took a bet which you may have thought was a calculated one and in which you would earn some money. You may or may not have had a target for the scrip and obviously you did not decide before hand as to what is the maximum portfolio loss you are willing to take on the scrip. And ... you see a loss in market as a loss of judgement on your part (howsoever inept or irrational it may have been) and your ego refuses to believe you could have gone wrong in this one. You had to win this. Now how to save face for yourself in your own eyes. Hold till the price comes back ... 1 year, 2 year ... whatever and then you would be able to justify to yourself that you recovered the principle fully plus something (if any). But at what cost. You have stopped taking care of your portfolio because the pain of seeing it is too much. You have lost good opportunities just because you did not call it a day and squared off your position when you should have.
Please note. Everything fresh is good. Old is good only if it is performing. So your portfolio should always have something which is either fresh (and with a promise to perform based on rational expectations or study) or it is performing.
Firstly, just think about it. You would have entered the scrip at a high point, when the scrip would have become a momentum play based on tips, advise or your own study or intution. A scrip which is a momentum play can simply give away agains before even you can decide whether it is a pullback from recent high or correction. Again it deceives and goes up again and you think it is back on track. Before you realise, it is down again and you simply get frustrated with the moment in that scrip. You want to look at that scrip after some time when the picture is clear and when it is clear, you realise even booking the loss may not make sense and a short term investment becomes a long term investment and hope.
Solution ? Face the truth. Don't look away from your portfolio. See what is the potential of those scrips now and whether you need to switch to more promising scrips and sectors which are market favourites when you are examining your portfolio. (Remember the rule : Winners win consistently ...).
You took a bet which you may have thought was a calculated one and in which you would earn some money. You may or may not have had a target for the scrip and obviously you did not decide before hand as to what is the maximum portfolio loss you are willing to take on the scrip. And ... you see a loss in market as a loss of judgement on your part (howsoever inept or irrational it may have been) and your ego refuses to believe you could have gone wrong in this one. You had to win this. Now how to save face for yourself in your own eyes. Hold till the price comes back ... 1 year, 2 year ... whatever and then you would be able to justify to yourself that you recovered the principle fully plus something (if any). But at what cost. You have stopped taking care of your portfolio because the pain of seeing it is too much. You have lost good opportunities just because you did not call it a day and squared off your position when you should have.
Please note. Everything fresh is good. Old is good only if it is performing. So your portfolio should always have something which is either fresh (and with a promise to perform based on rational expectations or study) or it is performing.
Howsoever right you think you are, you can still be wrong !!!
What does the title mean ? It means that you take so many decisions from time to time on daily basis with respect to investments and so many other things. Many times you form judgements and opinions about persons and things on the some basis. Most of the time when you take a decision, form judgement or internal opinion, you think you have got sufficient information or as much information as much is required to take the decision and again most of the times, you are convinced that the decision taken by you would lead to the desired results.
What happens then ? The decision you made or the judgement or opinion formed, proves you wrong. It is in front of you. You can't refute. You start thinking that your decision, judgement or opinion was based on objective and rational thinking. You can go into a denial mode and continue to insist to yourself and others that what is happening is just an aberration and is actually not happening. OR. You may start thinking how could you have gone wrong ? This happens with all of us all the time. This is because all our thoughts, views, judgements and opinions are filtered in our mind through preset ones or preset rules based on our understanding and learnings from past experiences.
So what should you do, especially in financial markets ? Keep an open mind. AND. If you think you are thinking markets are acting crazy, watch the market behaviour but minimize your transactions and stick to what you understand. Market symbolizes mass psychology. If your thinking is against the mass thinking especially with respect to any financial position taken by you, your financial health can get seriously affected, unless you are always open to the possibility and awareness and alternative gameplan (which I call Plan B) in case you are proved wrong though you know how right you are.
What happens then ? The decision you made or the judgement or opinion formed, proves you wrong. It is in front of you. You can't refute. You start thinking that your decision, judgement or opinion was based on objective and rational thinking. You can go into a denial mode and continue to insist to yourself and others that what is happening is just an aberration and is actually not happening. OR. You may start thinking how could you have gone wrong ? This happens with all of us all the time. This is because all our thoughts, views, judgements and opinions are filtered in our mind through preset ones or preset rules based on our understanding and learnings from past experiences.
So what should you do, especially in financial markets ? Keep an open mind. AND. If you think you are thinking markets are acting crazy, watch the market behaviour but minimize your transactions and stick to what you understand. Market symbolizes mass psychology. If your thinking is against the mass thinking especially with respect to any financial position taken by you, your financial health can get seriously affected, unless you are always open to the possibility and awareness and alternative gameplan (which I call Plan B) in case you are proved wrong though you know how right you are.
Have a financial target
Do you have a financial target ? Have you ever thought by when you would like to achieve it ? If you are like most of us, you have not. You actually may not have even thought about it.
So if you don't have a financial target and do not have timeplan to achieve it, would you accomplish it ? Of course, you would. However, you wouldn't know when you achieved it. You wouldn't even know whether you could have done it faster had you paid attention to your target.
Markets do not work for you nor for me. Then how come can you or I be sure that such targets can be achieved ? Let me answer that question a little differently. If you go back to your own past you would notice that you have achieved quite a few targets and goals though very few things were working or supposed to be working in your favour.
So ? Just figure out what you have which you can call as your financial worth now. It can be equity, bonds, fixed deposits, bank balance, etc. whatever is encashable easily. Increase the figure by say 10% - 20% depending on your risk profile. Figure out your normal savings per month over next 12 months. Add current financial worth, incremental 10%-20% and normal savings over next 12 months. The amount so determined can be your financial target to achieve after 1 year from now. One more thing ... keep a daily written log of your expenses.
Believe me, this should help you in one way or the other.
So if you don't have a financial target and do not have timeplan to achieve it, would you accomplish it ? Of course, you would. However, you wouldn't know when you achieved it. You wouldn't even know whether you could have done it faster had you paid attention to your target.
Markets do not work for you nor for me. Then how come can you or I be sure that such targets can be achieved ? Let me answer that question a little differently. If you go back to your own past you would notice that you have achieved quite a few targets and goals though very few things were working or supposed to be working in your favour.
So ? Just figure out what you have which you can call as your financial worth now. It can be equity, bonds, fixed deposits, bank balance, etc. whatever is encashable easily. Increase the figure by say 10% - 20% depending on your risk profile. Figure out your normal savings per month over next 12 months. Add current financial worth, incremental 10%-20% and normal savings over next 12 months. The amount so determined can be your financial target to achieve after 1 year from now. One more thing ... keep a daily written log of your expenses.
Believe me, this should help you in one way or the other.
Play for meaningful stakes
Most of the investors I have met have very fragmented portfolio. They have too many scrips and most of the scrips as a percentage of their equity portfolio would be less than 2% of their portfolio value. If you have this type of portfolio - (a) you would be holding too many scrips to monitor their contribution to growth of your portfolio, (b) big movement in even a few scrips would not alter your portfolio value in a major way, (c) even if all the scrips move with market, you would not be able to monetize the gains in time, and (d) finally, you would dread to see your own portfolio.
You would be in a better position to monitor and work on your portfolio if your restrict its size to a maximum 15-20 scrips. Having a lesser number of scrips also ensure faster and efficient entry and exist from your positions.
You would be in a better position to monitor and work on your portfolio if your restrict its size to a maximum 15-20 scrips. Having a lesser number of scrips also ensure faster and efficient entry and exist from your positions.
Subscribe to:
Posts (Atom)