Trading Vs Investing
Monday morning, I woke up to passionate twitter discussion on Trading Vs Investing and should retail participate in derivatives. These 02 topics are as old as hills and in fact I covered it in my 2014 IIF presentation.
Due to commitment bias, one falls in love with their method and tools so much, that they start despising the others. Knowledge is not confined to a category and one should not put the blinkers on and close oneself.
There is more than one way to skim the cat, and idea is to find a way which is right for you, what works for you, what is in accordance with your temperament.
As far as success and failure is concerned, there is no survivor-ship free research available to adjudge the winner. All those “Value boys” who say that all the rich people are investors and there is no trader in forbes 500 list are suffering from Availability Bias.
First of all, coming on any list may not be their target, some people know how much is enough and they reach there rather fast with crazy CAGRs. William o neil, Ed Seykota, Dan Zanger, Jesse Stine, Mark minervi, ofcouse you have not heard of them because you were busy quoting Warren Buffet on your facebook status.
There are 02 ways to get rich. Slow compounding for a lot of years so that your kids can enjoy your wealth or fast CAGR for a decade and actually living on the money you have earned.
Seriously, think about it, all these SIP ads showing the table of what kind of money you would have 40 years from now. I mean who gives a F, if i get rich at 80. Considering the average life expectancy in India, you will either be in grave or 3 quarters there. And if you know anything about compounding, you would know that majority of that money would show up only in the last decade of your existence.
P.S. WB was financially independent at the age of 25. (he had $2 Mil worth inflation adjusted)
Now to the second point. Should Retail participate in Derivatives.
Let us start with a WB Quote.
If you are intelligent, you don’t need leverage to get rich. And if you are not intelligent, god forbid, leverage is the last thing you should have”.
Having said that, Warren has time and again used leverage. He sold 50k Naked Puts of K.O (coca cola) when he was interested in buying it, reducing his cost basis by a few million dollars.
He did the same again in Burlington Northern Santa Fe. All those Puts expired worthless and his cost of acquisition came down.
During the peak of 2008 financial crises, our own Warren the value Buffet, sold Puts (expiring in 20 years) of 04 major indices.
His Insurance business itself is nothing less than running an Option Writing business where he takes advantage of Volatility contraction.
But his Advise is still intact and spot on. He realizes that he is NOT AVERAGE. You see, Leverage does not do any EVIL in itself, it just accentuates and highlights and accelerates who you are. And since 99% of participants are village idiots, (including myself) leverage simply expedite their miseries.
So what is the bottom line.
Bottom line is that markets are designed in such a way that majority of people will lose money. Only people who make money are the ones with the EDGE. So the idea or the modus operandi is simple. Do nothing, if you don’t have an edge. Or invest in Index fund with low cost (quantum and ETF kinds) or find a fund with skin in the game (PPFAS kinds)
And if you stumble across an EDGE, a strategy with a favorable risk reward skew and expectancy, simply keep pounding away at that, day in and day out until you get rich, not to be on any stupid list but to attain financial independence.
Swami Vivekananda said it best
Take up one idea. Make that one idea your life – think of it, dream of it, live on that idea. Let the brain, muscles, nerves, every part of your body, be full of that idea, and just leave every other idea alone. This is the way to success.
Or as Charlie Said it
Find out what you’re best at – and keep pounding away at it” Just like Simon Marks, (Marks & Spencer); said “I’m smart in spots and I stay around those spots”.