Given the velocity with which people are opening accounts with brokers and trading, it will be worth my while to share my own experiences with trading / investing, whatever you call it.
By R Venkataraman
Given the velocity with which people are opening accounts with brokers and trading, it will be worth my while to share my own experiences with trading / investing, whatever you call it. As a smart aleck once told me, a loss making trading position becomes an investment position. I have my own opinions on this statement but will leave it for some other time.
Till I joined ICICI Ltd (then a development finance institution) in 1991, I had no idea of stock markets or investments. I grew up in Ranchi and my father has never bought a single share in his life, and this holds true till date. He never ventured beyond PSU bank FDs, PO schemes and Provident Fund. In recent times, my mother has been tempted to take more risk by investing in non PSU debt, but events at regular intervals like chit fund defaults, swung the pendulum back to PSU paper. Equities have been diligently avoided.
Taking a course on investment management during MBA does not really prepare you for real life financial management or even if it did, maybe I did not pay enough attention then. The Harshad Mehta -led bull market was gathering momentum. The great reforms were yet to be unleashed. The million dollar question was how to decide what stock to buy or sell?
In those days, it was very difficult to open a broking account. There were no forms to be filled. If you are lucky, a sub broker of a sub broker of a broker will condescend to do a trade for you. Talking to a main broker during markets hours was impossible. There was no SEBI no NSE only BSE. The markets used to trade only two hours. And trades were settled physically. No investor grievances.
Thanks to the reference given by my hostel junior, I opened an account that meant that I had someone who will buy and sell shares for me. My friend effectively had given a guarantee for me. If I wanted to buy a share, I had to call my friend the previous night. And trade confirmation used to come the next night.
I was all set to trade but unfortunately did not know what to buy. ICICI was full of super smart people. Most of the young executives used to stay in company quarters in Malad where life was fun. You could discuss anything – from Milan Kundera’s Unbearable Lightness of Being to Ravi Shastri’s great batting skills. Any sector, any company, anything of economy – anything you wanted to know – you could call on intercom and depending on the counter party, spirited discussions were held over tea, cigarettes or at times, something even stronger.
This is how I made my first trade – ABS Plastics. I did not know EPS. I did know revenues, but basically I did not know anything. All I knew was my friend Mr G is buying the shares because finished goods prices were rising. I too jumped into the bandwagon and bought. Luckily for me – the trade was profitable.
The second trade was Jindal Iron and Steel Company Ltd, a company that has got restructured into many entities. The rationale if you could call it was a CA, who knew the company told my friend Mr D that it is a good bet. The pattern was – you had to know someone who knew someone who will give some tit bit but about the company.
By then the bull market was in full swing. And everyone wanted to not just get rich but importantly get rich fast.
Life was good. Portfolio value was rising. I thought I was very smart.
Then tragedy stuck. I had gone to attend a wedding in the family. By the time I came back, Harshad Mehta scam had unfolded. We didn’t have real time updates in those days. The stock markets were closed for fifteen days or so and when they opened, prices were in a downward spiral. From a position of profit a few days earlier, I was now staring at losses beyond my imagination.
The broker helped me because he did not wait for my decision. I would have bravely held on but since I did not have funds, the broker sold everything and sent the bill to my friend who introduced me. I made my biggest borrowing from the same friend and started monthly loan repayment.
The subsequent bear market gave me time to reflect. My key learnings were:
Rule No. 1: Never invest more than what you can afford to lose. You will see many Warren Buffet inspired posters, which say the fundamental rule of investing is not to lose money. This is impossible. If you don’t want to lose money you have to buy Government of India bonds and nothing else. Since you have entered the equities market, however smart you are, you still carry a probability of losing money. My take on the rule is – never invest more than what you can afford to lose.
This is like sitting in a teen patti game and losing your capital in first round itself. You are out of the game and if you are out, even lady luck cannot smile on you. Hence you have to ensure you are in the game for the longest possible period and for that you have to avoid bankruptcy situations. When I mention bankruptcy, I mean your mental state should be able to safely tide through the situation. Big losses scar you mentally and you have to avoid that situation.
Rule No. 2: Know why you are doing what you are doing. Be honest. If you are buying a share, be clear that no one has put a gun on your head and made you buy. Did you buy because person X told you or a business channel anchor recommended or is this your own idea? If you are honest, you will be able to analyse your trades and avoid mistakes. In stock markets, every mistake costs you money, and repeating mistakes can erode your capital, which affects your staying power. Remember Rule No. 1.
Rule No. 3: Own your trade – both profits and losses. Most of us tend to own profits and blame losses on brokers, friends, or any one in the horizon. Many times I have heard this line – I wanted to sell when Nifty was 12600 but my friend/ broker/ dog/ TV expert dissuaded me and hence I made losses.
With the above three rules, I plotted my comeback. I was clear – I wanted to make money to repay my loan.
(R Venkataraman is the Managing Director of IIFL Securities Ltd. The views expressed are the author’s own)