There must be some kinda way outta here.. There’s too much confusion.. Yes there’s reason to get excited (sic).. Actin’ Funny, I don’t know why?
Thanks to Jimi Hendrix for providing the perfect context to sum up the essence of speculating or investing in the Financial Markets. How Do The Pros Make Money? Can you become a pro? Can you emulate the pros? What on earth is a pro anyway?How do you do it? Buy ULIPS? Or TULIPS? SIPs? Mutual Funds? Or Stocks? If stocks, which cap would you like to wear? Small? Mid? Large? Heck, there’s even Micro? Or some hybrid of them?
Do you want to make enough money to retire in your mid 30s without worrying about your next three generations having to work? (I hear some people scream ‘YESSS’ and some screaming ‘SCAM SCAM SCAM’). The answer isn’t a resounding no. Nor is it a resounding yes.
Arrgggh… This is getting too complicated. Fear not, brethren (and sisteren), if you’re confused already, I’ve partially succeeded. Because that’s what this world is like.
Warren Edward Buffett agrees with me on this when he says, “There seems to be some perverse human characteristic that likes to make easy things difficult.”
To start with let’s have a look at the colourful lives of some of these Investors, Traders and Speculators.
Jim Rogers formed one-half (George Soros was the other half) of the phenomenally successful Soros Fund. During his tenure, 1969-1980, the fund was up 3365% vs. the S&P composite’s gain of 47%.
John Templeton is the dean of global investing. His investing record shows that for thirty-one years his performance has averaged an annual increases of 15%, versus 7% for the Standard & Poor’s Index. He managed $6 billion for the Templeton Funds before “retiring”.
Warren Buffett started Buffett partnership at the age of 25 with $100,000. In 1969 when he liquidated the partnership at the speculative market peak, it had grown to $100,000,000. Buffett’s take – $25,000,000. His investors earned 30 times their original investment. Today he runs Berkshire Hathaway and his investors continue to benefit from his stellar performance.
Paul Tudor Jones earned over a million dollars in commissions in his second year in the business as a commodity broker. In 1980 he switched to the floor of the New York Cotton Exchange and made millions during the next few years. As Chairman of Tudor Investments, each $1,000 invested with him in 1984 had grown to more than $17,000 by 1988. Michael Steinhardt has one of the best 20 year track records in investment history. $10,000 put in his hedge fund at its 1967 inception grew to over $1,000,000 20 years later, achieving a compounded annual growth rate of 30%. Over the same period, $10,000 invested in the Standard & Poor’s 500 Index grew to only $64,000.
A few other illustrious personalities in this list include Marty Schwartz, Peter Lynch, Roy Neuberger, the Chairman of Neuberger-Berman & Company, Bernard Baruch and W. D. Williams, who have been successful in their Trading & Investing endevaours.
We now proceed to compounding the confusion that pervades this complex maze (Don’t worry, Part 2 will be DA climax).
Broadly, there are two approaches taken to evaluate a financial security. Fundamental and Technical. Let us say you want to buy oranges for end consumption. You care about the nutrition it provides and how it tastes. That is fundamental analysis. When you buy a stock of a company, you look at it as if you owned and ran it; The profits it produced, the quality of its product, and such. However, if you’re an orange trader, your chief concern is what price you buy and sell at. Your aim is to buy at the lowest possible price and sell it at the highest possible price (and pocket the spread). This is the sort of analysis that technical traders do. Again, standing on the shoulders of a giant, Warren Edward Buffett, “Price is what you pay. Value is what you get.” In the financial markets, very often price and value diverge, because market participants have both the incentives – capital gains as well as dividend or interest, depending on whether the security is a stock or a bond, respectively. Imagine a 100 rupee note being sold for 50 rupees. As counterintuitive as this idea sounds, the financial markets are crazy places and crazy things happen. Looking for explanations might result in schizophrenia.
Study the best investors and traders from Wall Street and La Salle Street: Peter Lynch, Bernard Baruch, Jim Rogers, Paul Tudor Jones, Richard Dennis and many more. After all, when you’re sick you want to consult the best doctors, and when you’re in trouble you want the advice of the best lawyers. So, we consult what the successful pros have to say about making money in the markets. If we could figure out how they did it, we could get rich. Below is some of the advice the pros offered for making money. I hope you’re familiar with these names and their stature from Part 1.
Advice and Dissent
“I haven’t met a rich technician. ” - Jim Rogers
“I always laugh at people who say, ‘I’ve never met a rich technician.’ I love that! It is such an arrogant, nonsensical response. I used fundamentals for nine years and then got rich as a technician. ” - Marty Schwartz
Not very encouraging! Okay, so maybe the key to success wasn’t whether you were a fundamentalist or a technician. Maybe another topic would begin to reveal the pros’ secret.
“Diversify your investments.”- John Templeton
All right! Now we are getting somewhere (or are we?). This strikes a familiar chord. Or it looks that way until we read the following:
“Concentrate your investments. If you have a harem of 40 women you never get to know any of them very well. “
Buffett has made billions in the market. Who are we to disagree with him? But Templeton is also one of the greatest investors alive and he said something totally opposite of Buffett. Okay, so maybe diversification wasn’t the answer either. Maybe you could put all of your eggs in one basket and still get rich by watching the basket very closely. Perhaps the topics we have selected so far were too broad in their implications. Certainly the pros would agree on the more specific and practical applications of investment and trading mechanics.
Top and Bottom Picking
“Don’t bottom fish. “
- Peter Lynch
“I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle. Well, for twelve years I have often been missing the meat in the middle, but I have caught a lot of bottoms and tops.”
-Paul Tudor Jones
“Whether I am bullish or bearish, I always try to have both long and short positions- just in case I’m wrong. “
- Jim Rogers
“Many traders have the idea that when they are in a commodity (or stock), and it starts to decline, they can hedge and protect themselves, that is, short some other commodity (or stock) and make up the loss. There is no greater mistake than this. “
We expect that there might be some subtle differences among the pros. After all, some were stock market moguls, while others traded options or futures contracts. But didn’t these guys agree on anything? Based on the examples above, they sounded more like members of a debate team trying to score points against each other. We have to find out how the pros made money in the markets. We have to learn the secret that all of them must know. But if the pros couldn’t agree on how to make money, how are we going to learn their secret?
And then it began to occur to me: there was no secret. They didn’t all do the same thing to make money. What one guy said not to do, another guy said you should do. Why didn’t they agree? I mean, here was a group of individuals who had collectively taken billions of dollars out of the markets and kept it. Weren’t they all doing at least a few things the same when they made their money? Think about it this way; if one guy did what another said not to do, how come the first guy didn’t lose his money? And if the first guy hadn’t lost, why didn’t the second guy? If imitating the pros was supposed to make you rich and not imitating them was supposed to make you poor, then each one of these guys should have lost all his money because none of them imitated each other. They all should be flat broke because they very often did things opposite of each other.
It finally occurred to me that maybe studying losses was more important than searching for some Holy Grail to making money. So let us read through all the material on the pros again and noted what they had to say about losses.
”I’m always thinking about losing money as opposed to making money. Don’t focus on making money; focus on protecting what you have. “
- Paul Tudor Jones
“One investor’s two rules of investing:
1. Never lose money.
2. Never forget rule #1.”
- Warren Buffett
“The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.”
Now we are getting somewhere. Learn about how to not lose. The pros could all make money in contradictory ways because they all knew how to control their losses. While one person’s method was making money, another person with an opposite approach would be losing — if the second person was in the market. And that’s just it; the second person wouldn’t be in the market. He’d be on the sidelines with a nominal loss. The pros consider it their primary responsibility not to lose money.
The moral, of course, is that just as there is more than one way to deal blackjack, there is more than one way to make money in the markets. Obviously, there is no secret way to make money because the pros have done it using very different, and often contradictory, approaches. Learning how not to lose money is more important than learning how to make money. Unfortunately, the pros didn’t explain how to go about acquiring this skill.
That’s it for now. Apologies for the abrupt ending. I hope you have started seeing the proverbial light at the end of the tunnel. Now hold on to your horses for Part 2 titled ‘The adventures of a retail investor with the bikini clad supermodel at a beach’.