Money, Method, Madness AND Mountebank- New Age of Stock Market Investing

[JLivermore]

Past may be history but it gives a clue for future

31st December 2007- new year evening in Mumbai. Very few had an idea of a crash and its terrible consequences in the future financial leaders ringing the bell. We celebrated a decade of prosperity and unbound optimism, what we called ourselves, the party seems to last forever. Harshad Mehta scam was 15 plus years old, a slew of reforms unleashed were paying off. On top of its global liquidity, it was flown to India as the land of next financial dreams.

My mentors who are seasoned Dalal street traders and investors cautioned me. I said to myself and to them- this is a new era of unbounded opportunities. Credit card, consumer finance, ever changing electronic products, franchise food outlets…with a billion plus we embarked on a journey from socialism to capitalism. Capitalists like me no matter however small we are; smiled from roof top, from pubs and bars…we declared with a thundering voice; Dhotiwalas time for you to go Ganges and wash your sin—move over, new era begins of competency and meritocracy. Little did I know after a week the hope and optimism would converge with illusion which led to a terrible crash.

Come back to 2006 June, this is the first time every Indian thought they can have a share in the company; be it the barber, sabziwala, kudawala. Stocks themselves don’t have a fixed value. For almost 5 years the stock market has been rising. There seems to be no upper limit to the world of numbers and dreams. So many people made so much money it seemed you can’t go wrong buying stocks. And interestingly this was a new way of making a fortune. Unlike Ambanis and Tata’s or Birla’s or even Murthy’s who had dug oil wells, slog through Bajaj Scooter men like Rakesh J made their fortune buying pieces of paper. People were fascinated, Dalal street was dominated by a handful of capitalists and people were convinced buying and selling stocks as they thought if these guys can do; why can’t we?

One of the major changes for us during the early 2000’s was credit. EMI, buy now pay later, leverages just catapulted the consumption in this highly populous country like ours. My father and many others waited a whole lifetime to buy a house, now 25-year-old are buying with an equally 25-year-old EMI scheme. And there were guys who didn’t even study the company, for them the stock market was a game of numbers.

Dalal street became Bollywood…everyone was talking about stock. Times of India introduced 2-page financial news, dozens of books/best sellers advised how to become rich in 3 months! Even astrologer Bejan Daruwala who came on television everyday giving stocks. He was able to calculate so accurately that practically there was no difference between investment bankers and astrologers. There was a joke in our deal room, if you are not able to make money for clients then watch the Bejan Daruwala show. Stock market which was always considered risky by our forefathers suddenly became a place for amateurs like me. I was from the middle class like many, I was worried about future…I knew saving money from limited resources was not going to change my life. So, I plundered all my money from 1996 even when I was barely in college. Stock market is not a level playing field as many understand even today. It’s a game of flawed democracy, where every one can participate but few institutions manage market making and liquidity.

HDIL, Unitech etc were skyrocketing. After all, infrastructure is the backbone of any economy. Some know the game is rigged by big boys, but maybe THIS TIME WE CAN BEAT SYSTEM. There were some who cautioned in public places, people ran after them calling them anti national. Socialists and communists called the stock market as crooked. Finance minister then said business is the future of India, and the Government will not interfere.

[JLivermore]

Uneasy, calm, re-assurance and confusion

Politicians came and went in the 2000’s but businessmen were King. This was the era when serious wealth was created for the first time in India legally (at least by paying legitimate taxes!). By the end of October 2007 leverages were rising like crazy but no one came with a public statement even RBI. Starting from Oct 16, 2007 the market collapsed 15% in 5 days. There was a credit crunch suddenly, bulls were about to collapse. Suddenly people inside investment banks/deal desks were horrified. The whole fortune they built over the last decade was under severe challenge. 23 Oct 2007, investment banks released additional money as leverage which catapulted the market upwards by 20% in 5 days. It appeared the week of correction was temporary but rot was deeper inside the system. Everything was not fine with the economy; production declined so is consumer spending. So, it was expected the market would reflect economic slow down but instead it accelerated upwards thanks to additional liquidity by bankers.

Few received margin calls even, rather than getting worried they pumped more. Markets were going up and up. Finance minister said all is well. Astrologers said BUY. It was a record three months on NSE, some stocks doubled in 45 days.

The October 2007 rally was short-lived. Starting from November 2007 the market went up and down with huge volatility. Little did retail investors know what’s coming next. Finance minister re-assured again; economy is going to go up after temporary blip. Then came 7th, 8th, 9th Jan 2008 markets halted at peak. Finance ministry celebrated the success of reforms the same week. 10th Jan 2008, Nifty went down by 2% making retail investors nervous. After 2 days of lull starting from 15 Jan 2008 markets were in a free fall. There were no bids for many shares. Crowd gathered at Dalal Street to find out what’s happening. Maybe Rakesh J can bail out? Some investment bankers? All eyes on the BSE and NSE president. People were behaving like chickens with their necks cut out. There seems to be no answer. RBI was silent, so did investment bankers, and so was the Finance Ministry. 21 Jan 2008, index collapsed 12% before recovering mildly. HDIL, Unitech down in double digits, even they couldn’t find buyers. For most investors the game was over…. barber, bank clerks, university professors. Hope of easy retirement, a new home and everything was gone. Some even threw themselves to Ganges to avoid humiliation at the cost of their own lives.

Aftermath terrible questions were raised about bankers, brokers and all others. Some blamed-on Lehman collapse. Come back to 2018, everything was forgotten. People said rules have changed, this is the digital age. Game is different before the 2020 collapse happens again.

This tells us that the market is cyclical, no matter what stories we plant it will have its ebbs and flows. If credit couldn’t hold 2008 collapse, digital could neither in 2020 and neither technology in future. So how do we survive? Answer lies in the steps of investors and traders of different times.

Next time…lets talk about these footsteps or footprints. You will be surprised, there is no technology there. Technology is meant to achieve something not an achievement by itself.

[JLivermore]

Pattern of footprints of Successful Trading & Investing

We keep hearing always; want to do well in life? Follow like minded people in terms of process and philosophy. Also known as the circle of competence and circle of influence. If we want to look back at successful traders and investors in India very little is documented. Whatever ever documented falls short of giving deep insights into the process of the investor. This is one of the reasons every time we have to look upon American traders. Now there will be an argument that trading in the 20’s and 70’s can’t be the same as 21st century. Technology, liquidity and participants have changed.

Question for us now is how much is documented for the US market. We have to go back to the 1920’s to start with. Of course, many argue Newton was even trading but he hasn’t shared how he was doing? During 1920’s Richard Wyckoff took pains to write down the process he was following; even he wrote for legendary trader Jesse Livermore. At the same time one of greatest trading books was written by Edwin Lefevre based on the life of Livermore; arguably the best book ever written on markets. Also, Bernard Baruch wrote a chapter on his trading process. Name of books:

•      Baruch My own story by Bernard M Baruch
  

•      Reminiscences of a stock Operator by Edwin Lefvre
  

•      All books by Richard Wyckoff including Methods of Jesse Livermore
  

Post 1929 crash stock market and commodity markets have been ruled by many wizards of the previous century. John Train compiled two books as Money Masters of our time. But the man who did the most heavy work is Jack Schwager. He met most of the biggest traders of time and summarised them, not once but five times. The series is called Market Wizards, any one who wants to do well in markets must read the Market wizard series first. There are 5 books in Market Wizard Series:

First book was Market Wizards released during 1987- this includes some titans of market like Paul Tudor Jones, William J O Neil, Marty Schwartz, Jim Rogers, Richard Denis etc. The wizards covered in this book mostly started trading as early as early 1960’s

Second book was called The New Market Wizards who traded from 1970’s onwards. The book includes again best of breed like Bill Lipschutz, Randy Mckay, William Eckhardt, Turtles, Gil Blake, Victor Spernadeo and so on.

Third book was titled Stock Market Wizards. This covered traders mostly started during 1980’s. Once again the list is illustrious like Stuart Walton, John Bender, Steve Cohen, Mark Minervini, Mark D Cook.

Fourth book was called Hedge Fund Wizards. This book again included most big names from the 1990’s including Edward Thorp, Col O Shea, Ray Dalio, Joel Greenblatt etc.

Last and fifth book released known Unknown market wizards recently. These are new age traders; again, some exceptional performers.

With 75 plus legendary traders interviewed during 4 decades, the Market Wizard series offers a strong footprint of common characteristics of successful guys. Incidentally, the book outlines in the last chapter about common principles observed among all traders. Jack called them “Wizardom”. If BE/BTECH makes you engineer Wizardom is a basic certificate someone needs to have before starting trading.

In the next article I will present a table of common attributes of successful traders covered over multiple decades which includes the biggest names, tech savvy legends, and new age trading. You will realise trading has never changed, neither will it.

Jack Schwager invited traders from all over world via community, authenticated the returns and account value including sharpe ratio by a Big 4 accounting firm. Subsequently he interviewed them multiple times, that’s why these books are so powerful. None of our so called successful traders on Twitter or else where don’t even dare to apply for profiling in Wizard series. That tells you volume of falsehood is build by fly by night traders and trainers on social media.

Trivia- 1. None of these wizards have a social networking presence talking about stocks or commodities except few who are retired.
2. There is no training program from these wizards. They may be doing personal mentoring, money for them is a peripheral thing.

This is the reason I used a word Mountebank or Charlatanry. As a growing market we have most of them out on public space. Finest traders of India are inside home, silent like any seasoned professional enjoying their private life. Want to reach out to them? Possible, yes. It takes effort to do it; Twitter/Facebook won’t help you.

[JLivermore]

Common attributes of most successful traders of world

Market Wizards

A1. Burning desire to become successful trader

A2. A confidence to continue winning over a long period

A3. A methodology fit to person and remain true to discipline following the methodology.

A4. Invest substantial time to trading work.

A5. Rigorous risk control

A6. Patience to wait for right opportunity.

A7. Love what you do.

A8. Losing is part of game

A9. Acting independent among crowd

A10. Good and bad trades- asymmetrical risk reward relationship

A11. Implementation is as important as direction

A12. You don’t get paid for being right

A13. Sometimes it is what you don’t do what counts

A14. Trade size can be more important than entry point

A15. Don’t try to be 100% right

A16. Trading execution around position

A17. Flexibility is a critical trait

A18. The best remedy for a losing streak

A19. Differentiate between volatility and risk

A20. Intuition does matter

A21. When everything is going great watch out

A22. Don’t fight market

A23. The market doesn’t care when and where you entered

A24. Annual targets are counterproductive

New Market Wizards

B1. First thing first- do you really want to trade?

B2. Examine your motives

B3. Match trading method to your personality

B4. Its absolute necessary to have an edge

B5. Derive a method

B6. Developing a method is hard work

B7. Skill versus Hard Work

B8. Good trading should be effortless

B9. Money Management and Risk Control

B10. The trading plan

B11. Discipline

B12. Understand that you are responsible

B13. The need for independence

B14. Confidence

B15. Losing is part of game

B16. Lack of confidence and time outs

B17. The urge to seek advice

B18. The virtue of patience

B19. The importance of sitting

B20. Develop a low risk idea

B21. The importance of varying bet size

B22. Scaling in and out of trades

B23. Being right is more important than being a genius

B24. Don’t worry about looking stupid

B25. Sometimes action is more than prudence

B26. Catching part of move is fine

B27. Maximise gains not the numbers

B28. Learn to be disloyal

B29. Pull out partial profits

B30. Hope is a four letter word

B31. Don’t do the comfortable thing

B32. You can’t win if you have to win

B33. Think twice when the market lets you off the hook easily

B34. Mind is terrible thing to close

B35. The markets are expensive place to look for an excitement

B36. The calm state of a trader

B37. Identify and eliminate stress

B38. Pay attention to intuition

B39. Life is a mission and love the endeavour

B40. The elements of achievement

B41. Prices are non random, markets can be beaten’

B42. Keep trading in perspective

Stock Market Wizards and Hedge fund wizards combined

C1. There is no single true path

C2. The universal trait

C3. You have to trade your personality

C4. Failure and perseverance

C5. Great traders are marked by their flexibility

C6. It requires time to become a successful trader

C7. Keep a record of your market observations

C8. Develop a trading philosophy

C9. What is your edge

C10. The confidence chicken and egg question

C11. Hard work

C12. Obsessiveness

C13. Be innovators, not followers

C14. To be a winner you have to be willing to take a loss

C15. Risk Control

C16. You can’t be afraid of risk

C17. Limiting the downside by focusing on undervalued stocks

C18. Value along is not enough

C19. The importance of catalyst

C20. Most traders focus when to get in and forget when to get out

C21. If market behaviour doesn’t confirm to expectations get out

C22. The question of when to liquidate depends not only on the stock but also whether a better investment can be identified

C23. The virtue of patience

C24. The importance of setting goals

C25. This time is never different

C26. Fundamentals are never bearish or bullish in a vaccum. They are bullish or bearish only relative to price

C27. Successful investing and trading has nothing to do forecasting

C28. Never assume a market fact based on what you read or what others say; verify everything yourself

C29. Never ever listen to others opinions

C30. Be aware of ego

C31. The need of self awareness

C32. Don’t get emotionally involved

C33. View personal problems as a major cautionary flag to your trading

C34. Analyse your past trades for possible insights

C35. Don’t worry about looking stupid

C36. The danger of leverage

C37. The importance of position size

C38. Complexity is not a necessary ingredient for success

C39. View trading as a vocation, not hobby

C40. Trading like all business requires a sound plan

C41. Define high probability trades

C42. Find low risk opportunities

C43. Be sure you have a good reason for any trade you make

C44. Use common sense in investing

C45. Buy stocks that are difficult to buy

C46. Don’t anchor to low price

C47. Holding a losing stock can be fatal

C48. You don’t have to make all or nothing trading decisions

C49. Pay attention to how a stock responds to news

C50. Insider buying is an important confirming condition

C51. Hope is a four letter word

C52. The argument against diversification

C53. Caution against data mining

C54. Synergy and marginal indicators

C55. Past superior performance is relevant with same conditions expected to prevail

C56. Popularity can destroy a sound approach

C57. Like a coin market has two sides- but the coin is unfair

C58. The why of short selling

C59. The one indispensable rule for short selling

C60. Identify short selling candidates in advance

C61. Wall Street reports are biased

Unknown Market Wizards

D1. Trainer trains, trader trades

D2. There is no single true path

D3. Find a trading method is compatible to your personality

D4. You have to change your method before finding right one

D5. Keep a trading journal

D6. Categorise trades

D7. Know your edge

D8. Learn from your mistakes

D9. The power of asymmetric strategies

D10. Risk management is critical

D11. Choose meaningful stop points

D12. You don’t have to wait for a stop to be hit

D13. Don’t speculate with a loss

D14. Winning traders are dedicated to specific methodology life long

D15. Stick to trades as per your methodology

D16. Your methodology need to change

D17. If you are comfortable with an aspect of your methodology, then change it

D18. How a trade is implemented is critical

D19. Take high conviction trades matching size

D20. Don’t trade so large that fear becomes a dominant factor

D21. If you hope trade will work out, get out

D22. Don’t trade based on other’s recommendation

D23. Distinguish between trade outcomes and decisions

D24. The risk reward ratio of a trade is dynamic

D25. Human emotions are detrimental to trading

D26. Guard against impulsive trades

D27. Trades motivated by greed usually end badly

D28. Beware of a compulsion to make money in market

D29. The real damage is a bad trade

D30. Don’t exit entire position at the profit target

D31. If you are right side for too long be cautious

D32. Guard against complacency

D33. The flexibility to change opinion

D34. Missed trades can be more painful and expensive

D35. To do list when you are out of sync

D36. Tune out media

D37. Being profitable vs being right

D38. Aiming for consistent profitability can be counterproductive

D39. Be observant and highly attuned for behavioural trends

D40. Trading sometimes doesn’t work

D41. Trading for a living is hardest thing

D42. Extreme work commitment

D43. Take responsibility for your own results

D44. The two sides of patience

D45. Internal game of trading

D46. Love what you do

All these points can be mapped to each other …they are repetitive. Try doing that, I will post the table in a day or two.

Now note something what is missing here meaning what these traders DID NOT FIND USEFULL AT ALL even to discuss

1. Futures and options are instruments to trade; as standalone they are not a process at all. Matter of fact none of these legendary traders are not full time F&O traders. They used these instruments when wind was on their side.
2. Educational background- it doesn’t ask you should be an engineer or CA or MBA. Basically market education are live and philosophical instead of classroom based.
3. None of them again asked us to use 32GB High end lap top or outdated desk top. Infrastructure is not a show stopper.
4. Original capital size is not an obstacle to start trading. Same way like retirement doesn’t mean full time trading. Full time trading doesn’t mean 30 years of savings!

Next, I will share the mapping table. As you notice the principles can be bucketed into 3 broad categories:

1. A Method/process
2. Money Management (includes risk management)
3. Human philosophy (psychology and biases)

Mastering these areas is a lifetime pursuit. But catching the rope is first step to learn rope!

Best of luck

[Zakir]

I am new in stock market. Trying to understand market. Currently reading “How I Trade and Invest in Stocks and Bonds” by Richard Wyckoff. At the same time your article enlightens me.

You have mentioned about “Wizardom.” Is it written at the end of every book of the series or in last volume only?

Kindly reply.