On this very pleasant Sunday, I, my father, and his good friend sat down in front of glasses of ice tea and mocha to discuss the markets. My father and his friend have been managing their money in the stock market for a good while, with one account that my father personally manages himself and another that his friend manages on his behalf.
I can vouch for them being smarter and wiser about business and nation-wide macroeconomics far more than I, and yet, I have begun to sense that emotional factors can easily rule it out. You see, I had recently taken over my aunt's DEMAT account, and I found with a little dismay that a few stocks had been dumped into it from an year ago. This account had never been managed, and had been simply left be. Now, all those stocks had a total unrealized loss of Rs 53,000.
My first decision was to sell off these shares, and start building the portfolio back from scratch. In my mind, it seemed the only sensible thing to do. Atleast my aunt would get back some cash in her portfolio, those losses would be realized and cut off, and the portfolio can be now built over again with some rational perspective and with more regular management and efficiency.
I was opposed on this decision by both men. "Some of those were good stocks! How can you sell them off?" I explained that when my purpose was to start improving the portfolio, I can hardly start off by just trying to find rationalizations to hold on to the existing stock. The loss on those shares had already been made. My aunt's Rs 179,000 has had a loss of Rs 53,000 for over a year; a stunning 29.6% loss. To hold on to the hope that I will miraculously make a 42% gain on these existing shares so as to break even and then sell them off is like gambling on the unlikely. Further rationalizations were made by them, that I should have held on the Reliance Industries stock because it is an infrastructure company and will receive support from the government, that BHEL might receive disinvestment, and so on.
However, my father's friend to start this discussion on a fresh basis, and posed the question, "What are your goals with the money that you want to invest?" It was then that my father coolly said, "If I may speak on my son's behalf, I seek to have a 40% annual return on my investments." Turning to my father, I said, "40%? Would that be 40% by the end of this very year and then for each years after, or is that 40% annual average for the next few years?" He told me that he wished the former. Sitting back and curious to listen to how they felt they would achieve it, I asked them how they would intend to do this.
They told me that they wanted to ride market sentiment and get those shares at their peaking times, but they also wanted to start buying them at downtrends when their stocks were falling, so they can average down on the share price. Their hopes on seeing these downtrending stocks go up was based on their belief of how the public sentiment might change on those stocks later on; the said beliefs being based on how they'd predict the new government would make the new policies for different industries.
That's when I responded, "Gentlemen, you wish for entirely contradictory things. You hope to to follow the uptrend and make money by following where the market goes, and yet you also want to do so by betting against the market? So you'll be buying for stocks that would going up AND you'll be buying them because they are going down? It's one thing that the fundamentalist would go and buy cheap stocks when nobody else wants it, but solely on the basis that the basis that he understands the business better than most people, and that he sees something in the company that the others don't, so that sometime in the future, he'll reap the rewards for it. And it's another thing that the trend-trading technicalist would see which stocks are on the uptrend, buying them as they go up and then selling on the first sign of downtrend. He is not seeing the business here, he is seeing the numbers and doing the math, so that he'll get the rewards in the short run. Somehow, you think that you'll be able to do both; that you can you can shift your goals between wanting to buy a company for the business it is doing and yet also for the price trends on it." It made no sense to me; that you are to be turning a trade into an investment, and then an investment into a trade; that you want to make money by having a weak stock for the good business behind it, but then changing your plans to trading it on its swings so that you can quickly make a 40% return every year. If it were possible to be that sort of genius techno-fundamentalist who can successfully keep betting against two standing odds to always make big money, then you'd be rather working as the world's best hedge fund manager than an ordinary individual investor, who has no control over market fluctuations.
Of course, more rationalizations were made; rationalizations based not on actual situation, but on HOPE, on the idea that the market will do what they want to do based on how they pin their hopes; hopes such as hopes on the government's new unannounced policies and whatnot. It is in these situations that I start realizing that old men can not accept failure; that they have had so many failures in life, that their hearts try to block it out. And they must achieve nothing short of absolute miracles to get what they want. Quite recently, my father was insistent that we must hold on to the Tata Teleservices stock, a company doing terrible business, and also bad in stock performance, and yet my father wanted it, because he thought that his knowledge of telecom made him better at assessing the possible future of the company. And he wanted to do so by betting against the poor current business AND the poor current stock performance. Thankfully, he sold it off after understanding himself that it was a mistake.
It really makes you understand - however smart people are; emotions can still make their decisions for them, and their intelligence can only serve to try to justify it.
I can vouch for them being smarter and wiser about business and nation-wide macroeconomics far more than I, and yet, I have begun to sense that emotional factors can easily rule it out. You see, I had recently taken over my aunt's DEMAT account, and I found with a little dismay that a few stocks had been dumped into it from an year ago. This account had never been managed, and had been simply left be. Now, all those stocks had a total unrealized loss of Rs 53,000.
My first decision was to sell off these shares, and start building the portfolio back from scratch. In my mind, it seemed the only sensible thing to do. Atleast my aunt would get back some cash in her portfolio, those losses would be realized and cut off, and the portfolio can be now built over again with some rational perspective and with more regular management and efficiency.
I was opposed on this decision by both men. "Some of those were good stocks! How can you sell them off?" I explained that when my purpose was to start improving the portfolio, I can hardly start off by just trying to find rationalizations to hold on to the existing stock. The loss on those shares had already been made. My aunt's Rs 179,000 has had a loss of Rs 53,000 for over a year; a stunning 29.6% loss. To hold on to the hope that I will miraculously make a 42% gain on these existing shares so as to break even and then sell them off is like gambling on the unlikely. Further rationalizations were made by them, that I should have held on the Reliance Industries stock because it is an infrastructure company and will receive support from the government, that BHEL might receive disinvestment, and so on.
However, my father's friend to start this discussion on a fresh basis, and posed the question, "What are your goals with the money that you want to invest?" It was then that my father coolly said, "If I may speak on my son's behalf, I seek to have a 40% annual return on my investments." Turning to my father, I said, "40%? Would that be 40% by the end of this very year and then for each years after, or is that 40% annual average for the next few years?" He told me that he wished the former. Sitting back and curious to listen to how they felt they would achieve it, I asked them how they would intend to do this.
They told me that they wanted to ride market sentiment and get those shares at their peaking times, but they also wanted to start buying them at downtrends when their stocks were falling, so they can average down on the share price. Their hopes on seeing these downtrending stocks go up was based on their belief of how the public sentiment might change on those stocks later on; the said beliefs being based on how they'd predict the new government would make the new policies for different industries.
That's when I responded, "Gentlemen, you wish for entirely contradictory things. You hope to to follow the uptrend and make money by following where the market goes, and yet you also want to do so by betting against the market? So you'll be buying for stocks that would going up AND you'll be buying them because they are going down? It's one thing that the fundamentalist would go and buy cheap stocks when nobody else wants it, but solely on the basis that the basis that he understands the business better than most people, and that he sees something in the company that the others don't, so that sometime in the future, he'll reap the rewards for it. And it's another thing that the trend-trading technicalist would see which stocks are on the uptrend, buying them as they go up and then selling on the first sign of downtrend. He is not seeing the business here, he is seeing the numbers and doing the math, so that he'll get the rewards in the short run. Somehow, you think that you'll be able to do both; that you can you can shift your goals between wanting to buy a company for the business it is doing and yet also for the price trends on it." It made no sense to me; that you are to be turning a trade into an investment, and then an investment into a trade; that you want to make money by having a weak stock for the good business behind it, but then changing your plans to trading it on its swings so that you can quickly make a 40% return every year. If it were possible to be that sort of genius techno-fundamentalist who can successfully keep betting against two standing odds to always make big money, then you'd be rather working as the world's best hedge fund manager than an ordinary individual investor, who has no control over market fluctuations.
Of course, more rationalizations were made; rationalizations based not on actual situation, but on HOPE, on the idea that the market will do what they want to do based on how they pin their hopes; hopes such as hopes on the government's new unannounced policies and whatnot. It is in these situations that I start realizing that old men can not accept failure; that they have had so many failures in life, that their hearts try to block it out. And they must achieve nothing short of absolute miracles to get what they want. Quite recently, my father was insistent that we must hold on to the Tata Teleservices stock, a company doing terrible business, and also bad in stock performance, and yet my father wanted it, because he thought that his knowledge of telecom made him better at assessing the possible future of the company. And he wanted to do so by betting against the poor current business AND the poor current stock performance. Thankfully, he sold it off after understanding himself that it was a mistake.
It really makes you understand - however smart people are; emotions can still make their decisions for them, and their intelligence can only serve to try to justify it.