Similarities between Historian, Market Analyst and Small Investors

Tuesday, June 18, 2013

Similarities between Historian, Market Analyst and Small Investors

Great Morning Guys. Many of you might be habituated to ask what will happen to the market? Where it will go? What will be the top? How low it can go? Many such questions are routine. The most funny aspect of these questions….there are people who answers them also….we call them Market Analysts!! Can we see them as historians? To understand that, let us see What is history & How it is recorded?

History & Historian:-

History is a summary of what historians consider relevant. Selectivity of a limited number of events is required. Behind these events are millions of other events and processes that must be ignored. Many of these are causal elements and not even known to the historian. What is reported is the outcome(s) of these complex interactions. Historians then focus on a few causes that rationalize the outcome(s). Often these are correlative; never do they fully explain the outcome they purport to. That is the nature of all history.

How Market Analysts Discuss the performance of the stock market?

It is subject to similar simplification. At the end of each market day, analysts “explain” why the stock market went up or down. These explanations are more rationalizations than explanations. Stock market outcomes can never be explained in terms of one or two variables, regardless of how relevant they might appear to be or how enlightened the analyst sounds.  To retain the aura of “expert,” these self-professed gurus must provide short, pithy and incorrect answers.

A truthful answer would go something like the following:

I have no idea why stocks went up or down today, nor does anyone else. There are literally thousands (millions?) of variable affecting peoples’ decisions to buy or sell stocks. No one knows them all and no one knows how to measure or weight them on a particular day. The market went up (down) because more buyers (sellers) participated today.

On some days, one or two major news items may ostensibly move markets, but that doesn’t change the fact that numerous other variables also had impact.

Small Investors:-

These guys are interested in knowing the unknowable. Their desire to be certain (in 100% uncertain market) is so over powering that any answer is better than no answer. The guy who can give them the answer is the Expert!! No doubt, I have always liked the business model of business channels!

What is our strategy?

Rather than wasting time on knowing the unknowable….We follow 5 basic principles while trading….

1.   Anything Can Happen:- Just because we are buying or selling a particular stock….market may or may not support our view….so we play with pure technical levels…and follow the stop losses.

2.   You Don’t Need To Know The Future To Make Money:- When you focus on the levels….it itself leads to making money or stop losses…we do not waste time in predicting the price levels or market levels.

3.   Play with Probability:- Once the levels are decided…we look into the probabilities of that levels going up or going down…and we buy if there is more probability of levels going up and vice versa.

4.   Every Moment in the market is Unique:- So, your past trade has nothing to do with your present or future trades.

5.   There Will Be Random Distribution of Return:- A random trade can generate unexpected returns.

For Investment, we follow only one rule……Market is a slave of business performance. If business is doing great, if business is growing at higher rates than its peers, if business has a unique moat…..market will have to take a note of it. So, we just buy when others are selling and we sell when market analyst starts recommending them!!

While we follow the above, we also know that “Market can remain irrational longer than one can remain solvent.” So, here also we follow our stops.

My Personal Call:-

You can apply above rules not only in the Market….but also in your life….you will have the best of the both worlds….happiness in life and success in market. Enjoy.

What Next?

If you need help in finding out the investment opportunities, do approach us.

You can follow me @hiteshmparikh on twitter.

Live With Passion, Invest with Passion.

Hitesh Parikh.