Similarities between Historian, Market Analyst and Small Investors

Monday, June 19, 17

Similarities between Historian, Market Analyst and Small Investors

Greetings from Hitesh! Most people liked our post on HOW TO HIT THE JACKPOT? Most guys ask me - 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.

There is section of people – who tries to answer all of the above questions – we call them Market Analysts. They always try to answer the market movements with one or the other reasons. The same statements recorded become the history over a period of time. So, we have to understand the people behind HISTORY – when we read them.

History & Historian:-

History is a summary of events 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.

E.g. after 1000 years – people may or may not remember us. But they will surely remember GANDHIJI. Now, by reading the history of GANDHIJI – a person in FUTURE will assume that before 1000 years people were so simple, they were wearing SELF MADE KHADI and wearing minimum clothes on the body.

We are just 60 years away from GANDHIJI – we know that what did Gandhi ji do was not followed by majority of Indians. Am I right? 

Same goes for the DATA given in HISTORY about any company or any personalities. You need to use this data with 100% open mind and not with FANATICISM.

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 ambiguous answers.

What could be - A truthful answer – If I were to answer?

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 were also present on that day.

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 stop losses. Our way of STOP LOSS is not your TECHNICAL stop loss – which analysts or normal market guys follow. We have a commonsense stop loss – what we can afford to lose is our stop loss.

Because – the guy with Rs.50000 Cr and a guy with Rs.50000 both know the CHARTS, but the guy with BIG AMOUNT can take the small guy for a RIDE with TECHNICAL LEVELS. Many times I heard – my stop-got triggered and the stock went up. This happens because the big guys not only knows the levels better than you but has the capital to manipulate the same.

2.      You Don’t Need To Know The Future To Make Money:- When you focus on the levels ( depending on your loss taking capacity) 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. Many guys when come to me – talks about their failure with the past consultant and they want my assurance that this will not happen with me.  Honestly, they have a record of some transactions (like historians) and they are concluding about the market or the person. Moreover, they are changing the consultant but they are not ready to change themselves.

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

Mr.Nassim Taleb in his book – “Fooled By Randomness” has explained the idea of RANDOMNESS beautifully.

He said – that modern humans are often unaware of the existence of RANDOMNESS. They tend to explain random outcomes as NON-RANDOM.

Human beings…..

1.  Overestimate causality, e.g., they see elephants in the clouds instead of understanding that they are in fact randomly shaped clouds that appear to our eyes as elephants (or something else);

(It’s like seeing MIRAGE and assuming WATER. Normal guy gets a TIP and starts adding profit into his mind).

2.  Tend to view the world as more explainable than it really is. So they look for explanations even when there are none.

(They always spend time in asking why market went up today or why it went down today. They assume that the reasons they are arriving are 100% correct and there can’t be any more reasons then assumed by them).

3.  Survivorship Bias. We see the winners and try to “learn” from them, while forgetting the huge number of losers.

(Every time they TRADE – they think about their positive trade and assume how much they can earn, rather then thinking about losses they have suffered in the past).

4.  Skewed distributions. Many real life phenomena are not 50:50 bets like tossing a coin, but have various unusual and Counter - Intuitive Distribution. An example of this is a 99:1 bet in which you almost always win, but when you lose, you lose all your savings.

(They go for SURE SHOT calls as it there is no tomorrow and then they go for a TOSS).

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 want to make tons of money, do approach us.

Have a HAPPY WEEK AHEAD.

Follow me on Twitter @hiteshmparikh or on Whatsapp - +91-9869425399.

Live With Passion…Invest With Passion.

Hitesh Parikh.