Sudeep Sahi is a good friend. Yesterday over a chat at a party he asked me what was happening in the stock markets. I said, “Nothing. Just the usual, the markets are fluctuating.” I had actually borrowed the reply of John Pierpoint Morgan, the famous banker. Whenever he was asked the question, “Where will the stock market go?” His standard reply was, “It will fluctuate.” How true !
Sahi is basically a real estate guy. He invests largely in real estate and turns over his investments in six months to a few years, presumably in profit. But he said something which made the rest of the conversation interesting. He said, “What’s the point in putting money in stocks if one does not get a high and a daily kick? I think one should keep some portion of his money for daily trading and making gains in the market.”
I was non-plussed. But he being a friend, I could be candid with him. I told him, “Stop trading in stocks. The ‘high’ you want shows you are getting addicted to the dopamine. Slowly, pleasure which you receive from small gains will become boring and you would take bigger risks, ultimately losing big sums of money. The variables in stock markets are many, one can never control them. What one can control is one’s own emotions. At the end of the day, the odds in favour of an amateur gambler are always minimal, and you are turning to be a gambler. If you need a high of gambling go to Las Vegas. Don’t squander your hard earned money.”
I don’t think he was convinced much. But it made me think about this “need for a high”. I have also indulged in day trading during my learning curve. I was one of those who by chance, made some money. I would always buy some shares and then be constantly stressed out to sell them at a higher price by the end of day or by next day. If all else failed, i.e the price went down, I would take delivery of those shares and keep “over priced” shares in my portfolio in the hope of selling them at my purchase price, at least. In 2005, I calculated my gains and losses in the past one year. I realised that I had made about Rs 45000 in the full year and my broker made Rs 55,000 due to brokerage and transaction costs. Someone would say, what’s the harm if your broker earns, till the time you are making money. Damn it, there is a harm! The risk is mine and not the broker’s. I am stressed out, not the broker. Post tax my returns further reduced. And that is when I decided, I would never do trading.
But I was still not Graham’s “Intelligent Investor”. Then I got introduced to derivatives: Futures & Options (F&O). I read books on it, thought I understood it and jumped into it. Made some money, then my younger brother who is a Chartered Accountant also got into it. We were getting our highs. Small sums, giving you great returns by leveraging. Till one fine day, on 18 May 2006, the sensex dived by 816 points (6.76%) which in today’s terms would mean a fall of 1350 points in a day. My brother had over leveraged. All our positions were cut by the broker. Saddled with huge losses. I had to sell all my blue chips in order to honour our commitments. So much for getting highs. I learnt my lessons, the hard way. Very costly ones. I made big mistakes. Costly mistakes. Financially unnerving mistakes. I also learnt that “You don’t have to pee on an electric fence to know what it feels like.” I didn’t say it. Charlie Munger did.
In life we learn only 10% through direct experiences, 90% of our learning is by vicarious or indirect experiences. By reading, observing, listening and learning. If we remember the mistakes of others and learn from it, we are called wise. I have learnt my lessons the hard way and it is only in the last three years that I have transformed into a “value investor”. And now through my blogs and columns I am trying to share the vicarious experience, hoping that the wise would learn from it. The entire transformation in me has happened by vicarious experience. By reading and listening to the “gurus” like Benjamin Graham, Warren Buffet, Charlie Munger, Philip Fisher, Nassim Taleb, Charles Mackay, John Galbriath, Richard Thaler, Stanley Millgram etc. In the past two years I have read books which I should have actually read twenty years earlier, before putting my first hard earned rupee in the stock markets. But better late than never.
And what did I learn? Whenever we make small gains or get a small reward, the brain releases a neuro chemical called dopamine. It controls the risk taking side of our nature and controls the reward centre of the nervous system, it leads to craving for rewards -– whether these be in the form of monetary profits or a nicotine fix or a heroin fix or something stronger. Scientists have also proved that dopamine is released by the brain when we take a drug. It results in temporary euphoria. After a while the body becomes used to it and craves for it in larger quantities. The result is the addict takes larger doses of his ‘fix’ and the stock market trader takes bigger risks by borrowing funds. The results in both cases are similar. A precipitous fall from a cliff without the safety of a parachute.
For all those day traders in the stock markets, a sincere advice. Please stop trading. You are gambling by proxy. The stock markets and TV channels encourage trading by talking about gains, stop losses, targets etc. Because, as in my example earlier, they gain more by your trading than you do. Never ask a barber whether you need a haircut. Similarly, never ask an insurance agent for advice on a policy. They will always indulge in “Whose Bread I Eat —His Song I Must Sing”.
Now you decide, whether my friend needs a kick from the markets or needs a kick to tread the right path of investing for the long term. Amen !