Success in using Trading Strategies

Success in using Trading Strategies

While going through what's probably an ancient book (by today's standard of viewing a week-old article as "old"), I came across a very interesting study - the Ralph Vince Experiment. For those who are interested in the name of the book, it is "The Complete Guide to Day Trading" by Markus Heitkoetter.

First, the details of the experiment:

The Ralph Vince Experiment Ralph Vince is a well-respected and well-known financial investor and educator. He's published a number of books on trading and the trading industry, and he also performed a very famous experiment known as the Ralph Vince Experiment. Mr. Vince took 40 Ph.D.s and set them up to trade with a computer game. Now, these 40 people all had doctorates, but Mr. Vince made sure that none of their doctorates involved any sort of background in statistics or trading. In the game, each of them were given $1,000 and 100 trades, with a 60% winning percentage. When they won, they won the amount of money they risked. When they lost, they lost the amount of money they risked. Simple. As you can see, ALL of them had a profitable trading strategy. So, after all 40 had completed their 100 trades, how many do you think made money? Only 2 - Just TWO Only 2 doctorates out of 40 were able to make money. The other 38 failed to succeed. Source: CSI News Journal, March 1992

I've been in the investment world for over a couple of decades now. With reasonable success. As an investor - not as a trader. Certainly not as a day-trader. I'm aware that a vast majority of investors end up losing money in the stock markets. I should admit that I've periodically wondered why?!?!??!

While it is true that I've always been surprised by this, I'd not bothered to think much about it till I started reading up and doing some research in the field of Behavioural Finance.

Here are a few reasons for such high overall failure rates:

• Traders hate - Hate - HATE to book losses - Intellectually they know that they should "cut their losses" and "let the profits run". Practically, they often fail to "cut their losses". Instead, they let the losses run due to:
  • Ego hassles - they don't like to admit even to themselves that they were wrong
  • Loss aversion - they don't like to actually incur the loss - as long as it is a paper loss, it is OK!
  • Hope - Surprisingly large number of traders almost have a belief that "Hope" can be a winning strategy!
• Greed - Traders love profits - Hence, traders commit one of two cardinal sins:
  • They often book profits very quickly - only to see the stock run on in an upward trajectory after they've sold out or ...
  • They want to catch the "Peak" - And wait till eternity, only to see all their paper profits evaporate
  • And they repeat the above two sins every day, week, month and year - without fail.
• Traders don't learn lessons from history.
  • Despite knowing that guys of the calibre of Warren Buffett, Rakesh Jhunjhunwala, etc. earn "ONLY" x% p.a., they seek to earn 3x, 5x, 10x% p.a.
  • Despite knowing that old story of the inventor of Chess (who asked for 1 grain on the first square, 2 on the second, 4 on the third, 8 on the fourth, 16 on the fifth square, etc. - only to make the king realise that his entire kingdom will never be able to meet the demand of the inventor of chess), traders still fall for every single Ponzi scheme that comes their way
  • They firmly believe in the "Greater Fool Theory" - Not once do they begin to wonder if they will end up being the "Greatest Fool"!!
• Traders seldom bother to invest time, money and energy to learn - In virtually every other field ranging from law to medicine to engineering to agriculture to fishing to cricket to singing, people put in enormous efforts to learn - BEFORE they start performing. Unfortunately, trading and investing in equity is one field which everyone tends to assume "is easy". They literally follow the NIKE slogan - Just do it!

And most importantly, a vast majority of traders KNOW all the above points and still continue to make virtually EACH of the above mistakes

Do we still wonder as to why many old-timers equate "Equity investments" with Gambling???

Regards,

N

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Rajiv Gandhi Equity Savings Scheme

Rajiv Gandhi Equity Savings Scheme

Came across in the website of Money Life an interesting article about:

• Rajiv Gandhi Equity Savings Scheme

The author has given a whole host of suggestions, most of which are valuable. One hopes that someone "up there" passes it on to Pranabda!

However, I disagree strongly with respect to a critical point mentioned in the article:

• The author says: "SEBI should ban loss-making companies from coming out with Initial Public Offers (IPOs)".

I wonder why??? There are many instances, especially in a capital-starved, infrastructure-deficit country like ours, when new companies seek to come up with greenfield projects which involve long gestation periods. These projects are often highly capital-intensive. In fact, even in industries which are highly profitable, the initial years of a company are not profitable as they need to establish themselves in an already competitive market.

It is but natural that such compies which are loss-making in the initial years would not find too many easy sources of funds. One of the best ways of raising funds for such companies is to come up with an IPO. Obviously, the IPO is likely to be priced at a far more "reasonable" level when the company is incurring losses than when it becomes a cash cow. If anything, the promoter should be worried about diluting his stake at such low levels.

Hence, to ban an IPO of loss-making entities is to miss the woods for the trees. Equity investments, by nature, are risky. You can perhaps ban such loss-making companies from raising public deposits (which are unsecured). Don't ban them from raising equity capital. Let the retail investors participate in the development of the nation and reap the rewards in due course - albeit with a bit of risk in the process.

Regards,

N

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The rise of Regulatory Raj

The rise of Regulatory Raj

One of the most disconcerting aspect of the 2012 budget is the scant respect shown to the law of the land. By the Finance Minister, representing the Government of India. Headed by a Prime Minister who was the architect of the famous reforms that started the initial downfall of the Licence-Permit Raj.

When we enter into a contract - oral or written, we agree on a basket of terms. When we violate those terms, the other party can (and often will) take us to court. Normally, the courts will hear both sides out and come to a conclusion and pass a judgement. And after all appeal options are duly exhausted, the matter rests. This is the single-most vital aspect of any functioning democracy. The sanctity of the rule of law. One of the most important tenets of any law is that any enactment comes into effect on a prospective basis. And NEVER on a retrospective basis.

It is like one team having finished batting its quota of 20 overs in a T20 cricket match, and when the other team comes in to bat, the team batting second announces that the game has been converted into a 50-overs match, and they will have 50 overs to achieve the target! To any normal cricket fan, this will sound so crazy that it will be considered beyond the realms of possibility.

When a thief or a rogue scamster or a criminal breaks the law, it is only to be expected. And he / she is perfectly aware that if and when the law catches up, he/she will pay the price for it! However, when the persons who are supposed to uphold the sanctity of the law in high esteem do precisely that, we're beginning to wonder what's happening to our democracy.

Unfortunately, our "otherwise extremely wise" Finance Minister has chosen to do precisely that in his 2012 budget.

Apparently, our FM has broken all previous records when it comes to the number of retrospective amendments. And many of them are in a manner increasing the "discretionary" powers of people like Income Tax authorities. Considering the prevailing moral standards, this obviously would lead us to believe that rent-seeking would increase (in a layman's language, bribe-seeking would increase).

Take a look at this nice article on the subject by Haseem Drabu, a well-known economist and an ex-banker:

• The rise of Regulatory Raj

For those of you who want a sample, don't just think of Vodafone, the most obvious one. An interesting sample of retrospective amendment is that in certain specific cases, the FM has authorised the Income Tax authorities to reopen the Income Tax returns of upto 16 years. Yes, you heard that right. Sixteen long years! Till the other day, the corresponding figure was less than half that duration.

I've got a hypothetical doubt (which may not be so hypothetical for many of you):

Suppose that a particular individual has chosen to destroy all his Income Tax-related records which are over 10 years. If this individual's case is taken up for the aforementioned scrutiny and if the IT authorities wish to go through the last 16 years records, what are the options before such an individual???

To my mind, it is obvious. Unfortunately, the obvious solution is not within the realms of what's considered legal or ethical. The legal or ethical option, of course, would be to go to the courts. And the individual may well die of old age before he comes out of the case!

Regards,

N

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Interesting thoughts on Post-Bubble performance of stocks

Interesting thoughts on Post-Bubble performance of stocks

The long-term price movement of hindsight-driven bluest-of-blue-chip stocks in a post-bubble scenario is most interesting.

Take a look at this one:

• Performance of Microsoft, Intel and CISCO after the dotcom boom and bust!!!

I'm sure that we ought to learn a very careful lesson from the above when it comes to booking profits (our cutting losses) at the end of any major bull run.

According to experts, we're just entering the next major bull run which is likely to last a few years, or till it reaches index PE Ratio of 25 and beyond. While we ought to enjoy the bull run by accumulating blue chip companies, we should constantly remind ourselves of the importance of what happens to stocks after the bubble eventually bursts!

Regards,

N

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Expectations from the Railway Budget

Expectations from the Railway Budget

(Realistic Expectations & Wishful Thinking)

After a long while, we're going to have the budget excercise in March. Tomorrow, we'll have yet another "Trinamool" Railway Budget.

In this post, I plan to have two simple sections - Realistic Expectations & Wishful Thinking. Here goes:

Realistic Expectations

• Announcement of new trains, especialy to / through West Bengal and election-bound states. Gujarat could be a googly.
• Meaningless tinkering of passenger fares
• Promises of extra allocation for Safety, only to be surely forgotten
• Announcement of a few tokenistic reform measures (to please the "reform-oriented" PM for what it is worth)
• Demand for an enormous amount of funds from the Finance Minister to actually execute the announcements made in the railway budget and to "make both ends meet"

Wishful Thinking

PASSENGER FARES

• Introducing a three-tier system of passenger fares for second class passengers:
• The least level of passenger fares (pegged at a level 10% - 20% below the current fares) - These fares will be applicable for all really poor "below poverty line" BPL card-holders (who will have to produce their BPL cards as proof of identity for travelling with these fares
• A "middle-level" but-still-subsidised set of passenger fares (pegged at a level 10% - 20% above the current fares) - These fares will be applicable for all "Ration-Card-Holders" who have actually bought any items from the ration shop within the last 3 months preceding the date of booking of tickets - After all, anybody who buys anything at the ration shop is at best belonging to the "lower-middle-class" or truly cost conscious. They ought to be provided with a reasonable subsidy - perhaps for a few more years
• A "cost-based" fare fixed on a "No-profit-no-loss" basis for all other passengers
• Announce Privatisation of ALL air-conditioned compartments in all trains. These air-conditioned compartments can be sold on 3-5 year leases to the private operators on the basis of public auctions - "Uneconomic routes" can be bundled together with "attractive routes" while auctioning, so that the private operators are encouraged to cover the entire existing railway network across the country. The successful bidders would be expected to recover their investment by pricing their tickets in any manner they deem fit. The government will be free to introduce a maximum of 50% additional air-conditioned compartments in any route "on grounds of public interest". Rules pertaining to the minimum number of passengers to be accomodated in each air-conditioned compartment can be laid down prior to auctioning these additional air-conditioned compartments that are introduced on account of "public interest".

PRIVATE INTER-CITY RAILWAY CORRIDORS

• On a pilot basis, a maximum of 10 "Bullet Trains" travelling at a speed of "Not less than 300 KM per hour" to be run by private operators can be started. The railway tracks for this purpose will be created by the private operators who will get a long term lease of, say, 25 years to operate these routes. Based on opinions obtained from an expert panel, these routes can run parallel to existing tracks or underground or on elevated tracks well above the existing trains - Let me not attempt to guess what's optional - let the experts decide.
• The passenger fares for these bullet trains will be completely market-determined with no intervention from the government. The private operators will be at liberty to create any innovative revenue streams. They will be free to determine the frequency of trains.

PRIVATISING STATIONS AT ALL STATE CAPITALS

• The Primary Railway Stations at all state capitals can be let out on long-term lease of not less than 25 years on the basis of a "Build, Operate, Transfer" model. The existing space that is presently being utilised for railway stations can be used by the private operator, with the right to create enormous high-rise buildings which may be used by the private operator for any legal commercial / residential purposes - with the clear understanding that it will be for a period of the long-term lease. Whether he'll have retail malls or offices or theatres or residences will be the choice of the operator.
• User Charges for the railway stations (like platform tickets, parking fees, etc.) will be fixed at pre-determined levels which will be part of the terms of the agreement between the private operator and the government.
• Each Railway Station operator will be identified through a two-step global tender - First step will be to identify competent players based on financial clout, commitment for user charges, technical knowhow on handling such large-scale projects, etc. The top 5-7 players thus identified for each station will be asked to participate in the second stage of the tender through a public auction.

CREATING 400 URBAN CENTRES

• 400 Railway stations will be identified across the entire country which will form 400 "CENTRAL STATIONS" of the future.
• A "Group of Statesmen" including the Railway Minister, Finance Minister, Urban Development Minister, Leader of the Opposition, a representative of each Chief Minister will be appointed to study the proposal and come up with a plan of action within 90 days.
• They will identify a suitable method by which the entire land area sorrounding each of these 400 stations (within a radius of x kms from the station) will be declared to be "Model Urban Centres". The existing land-owners will be allowed to either continue their present activities or will be encouraged to start any business activity of their choice. Meaningful tax incentives will be created for this purpose. Both at the individual level and for corporates.
• Business leaders will be encouraged to "Adopt" each of these "Model Urban Centres" through a similar basket of incentives
• Any new school, college, hospital, theatre, etc. that comes up in any of these 400 "Model Urban Centres" will be offered a similar basket of incentives
• All these incentives will be directly linked to fresh investments in these 400 "Model Urban Centres", and will be subject to independent audit
• The Railways already own vast tracts of land in different parts of the country, and probably in these 400 "Model Urban Centres" as well. The railways will identified actual gaps in investment in each of these "Model Urban Centres" and lease their land parcels to fill such gaps. For instance, if a particular "Model Urban Centre" does not receive a proposal to start a high quality primary healthcare centre, the Railways will create one using their "sphere of influence".

I'm intentionally not going into other "specifics" which are part of the usual suspects of any Railway Budget.

If, however, any Railway Minister who actually follows all the above suggestions, chances are bright that he and his party will reap extremely rich electoral harvests. And, if I may add, the Railway Minister will, in due course of time, go on to become our Prime Minister in the years ahead. Just like Manmohan Singh built on his successful stint as the Finance Minister who brought back India from the brink to go on and become the Prime Minister of India.

I've consciously titled this portion as "Wishful Thinking". If wishes were horses, this one ought to fly!

Regards,

N

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