Here's a thought. Suppose Sachin Tendulkar or Michael Jordan wanted to be doctors. This was their long lost wish, that never got fulfilled not because they were bad in school, but because they chose a different profession to specialize in namely sports.
Now having retired, they have a lot of free time on their hands. With all the money and the free time, they decide to become surgeons. They read books on how to perform surgeries. They see youtube videos on it, they read blogs of famous surgeons, talk to their doctor friends. Heck they even attend 30 day classes that teach them how to safely cut open a body and remove the heart. They even get to practice this on a few dead frogs. After doing this for a few months, after reading every single book ever read by a surgeon, after watching countless surgery videos, after practicing hundreds of dissections on frogs, rats. They feel they are ready. They are ready to perform surgeries on humans. All they need now is a willing patient.
Now, would you get a surgery done by them?
The answer from any sane person would be no. Here's another story, one that's more real, one that happens with ordinary folk.
Adam is a 25 year old software engineer by profession. Zack is a 50 year old doctor. They are really good at what they do. Adam is a rising start in his company while Zack is a well respected doctor. After reading my blog on "The Power of Power(^)", they realize, their profession can make them linearly wealthy but now they want to be exponentially wealthy. They scratch their heads look around to see how they can achieve this. In the media, they see examples of entrepreneurs hitting it big, but that's a lot of hard work. They then come across examples of people dabbling in the stock market who have made millions for themselves. They read about Warren Buffet, Rakesh Jhunjhunwala, they hear stories of their friends who have bought and sold a stock at the right time and have made a lot of money.
"Hmm....Why don't we invest in the stock market?" they ask themselves. They go to a library, buy all the books on stocks. They buy every book written on Warren Buffet, subscribe to all the blogs on stock picking, watch youtube videos, watch the news, they even attend a 30 day crash course on the stock market. They go through all this information diligently, read everything two times over, like their life depended on it. They practice this new skill by opening a brokerage account. They start with small sums of money, buy a few stocks, sell them and make money. They get confident, read some more, buy few more stocks, make some more money.
This looks easy they think, if I am able to double $1000 in a month, imagine what I can do with my life savings. They decide to go for it.
Here's the question, would you trust your life savings with them or how many of you have tried to be an Adam or a Zack?
What I want you to understand is, picking stocks is a profession. It is not a hobby (unless you are okay with losing all your money). It is not like a game of golf that you try your hand at. It is like being a surgeon. You cannot just become a surgeon. You cannot practice a few dissections and start operating on a human. Anyone who says they can teach you to be excellent stock pickers in a few months or even years is lying, anyone who thinks they can be excellent stock pickers by reading a few reports, watching the news is fooling themselves.
Investing in the stock market is a serious business, it is definitely lucrative, and addictive. The thrill of easy money is what lures millions of people to gamble away their hard earned money.
The problem arises, because it is so easy to open a brokerage account (an account needed to trade stocks) and it has become very convenient to buy and sell stocks either through mobile applications or through a browser. Think about it, you need to attend classes and pass a test just to get your driver's license. You need none of these to open a trading account.
I remember, when I first opened an american trading account. The first thing I did was buy $1000 worth of paper gold. Paper gold is essentially like a stock that tracks the price of real gold. This stock cannot be exchanged for real gold when you sell it. I saw the value of this purchase go up to $1300. Then I bought more, $2000 worth of it.
When I had to buy 20 grams of 24 karat physical gold which is about $700, I researched about the best Jewelry store in Dubai. I asked 3 different people about it, I checked 4 different locations of that store, I haggled with the sales person, I came back the next day after getting a second opinion and then bought it. I spent a week in trying to buy $700 worth of physical gold, while I would have spent a total of 30 seconds to buy $3000 of paper gold.
The online world is pretty dangerous, we don't have a sense for how much we are spending if done electronically. That's why trading stocks online is very dangerous. At the blink of an eye you can gamble away your savings on a stock.
The stock market is a playing field where the novice play against the experts. Amateurs who try to pick winners, trade for short term are essentially playing a basketball match with Michael Jordan or bowl against Sachin Tendulkar. Sure you might score a few points or bowl a few dot balls but at the end of the game, you will get creamed. (Note: if you are in the stock market for the fun of playing a match with the best and don't mind losing the game (money), I am all for it. But if your financial life depended on winning the game, then the stock market is not for you.)
Who are the Michael Jordan/Sachin Tendulkar's of the stock market you ask. These are investment professionals working on Wall Street, in hedge funds incorporated in tax havens, investing geniuses like Warren Buffet working from their home. These institutions spend thousands, hmm ... make that millions, actually make that billions of dollars to obtain information, technological advantages, to get the edge to beat other professionals and primarily amateurs like you.
Did you know that hedge funds hire journalists to snoop on companies, to get information about new products or failures before the general public knows about it? Did you know that satellite imaging is used to take photographs of Wal-Mart parking lots to see how their business is? Did you know that thousands of stock prices and news events are being analyzed by algorithms in nano-seconds and they make thousands of trades in milli-seconds? Hey amateur, you have no chance. Absolutely none.
If the stock market was an ocean, you are a blind, fin-less juicy fish floating among sharks.
Friends, you have specialized in a different field. You might be a doctor, an engineer, a pilot, a school teacher, a lawyer. If I told you, I could be better at your job than you in a month or year's time you will laugh at me. So don't try to do the reverse. Don't think that you can be an expert Stock picker (not that I am one), it won't happen. You might win a few games against other amateurs like you in the field. But sooner or later there will be a Michael Jordan whom you will play against and you know what will happen.
Am I telling you to avoid the Stock Market. Hell No, that's where the money is. That's where I hope to keep majority of my net worth. That's where the rich really create their wealth. There are safer ways to invest in the stock market than for amateurs to buy and sell stocks. (More on that in my next blog). That's my point.
1 comment:
Nice post.
I think you are right insofar as day trading or short term trading is concerned. If your goal is to make profits in a week, or a month or even a quarter and sell out, you'll probably be hopelessly outgunned by the algos and hedge funds.
But most of the so called 'smart money' is still smart only in the shorter end of the time horizon.
Traditional value investing over the long time frame is still seen as an art, probably because these new hi-fi techniques have only just come about in the last few years and haven't yet developed that kind of advantage. The smart money does have information advantage, but the very nature of long term investing means information advantage counts for very little. And that means there is plenty of scope for the individual investor to get their share of future growth, if done in a rational, unemotional, disciplined manner.
I take your Warren Buffet and Rakesh Jhunjhunwala examples - they aren't trained like the surgeons or like Michael Jordan. They were common people who made it big without getting any of the specialized training that you mention. They are sharks now, but they were once finless juicy fish for the ruthless wall street / Dalal street traders.
If anything, the individual investor isn't shackled by the constraint of liquidity or market cap. That leaves plenty of food on the table for the finless fish to grow eventually into a shark.
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