When Chicken Farmers become Stock Pickers (Why 99% people fail at the Stock Market)...

Ever since I can remember, I have been surrounded by people who 'are in stocks'.

These are uncles, colleagues, friends, parents, enemies and strangers who do 'something' in the stock market - a la trading, speculating, short selling, derivaties, puts, calls etc etc.

Funnily, 99 of the 100 people I meet have huge emotional highs and lows.  They are high when then make some money and low when they lose all their earnings.

For example, I started trading when I was 16 years old. It was of course what was expected from a good Marwari Boy. I steadily traded (bought and sold over days and sometimes weeks) and saw my Capital grow gradually. Then, in the downturn that came thanks to Harshad Mehta, I lost all my gains and even part of my Capital.

The lessons learnt then, combined with the hard knocks of being an entrepreneur have made me realize the following:

- If I can barely understand how to make money in a business I run day in and day out for years (say my own Internet Gaming business), then how can I even remotely 'bet' on a Company and a management team I have never met? 

Hence buying 'individual' companies just on reading what they do or some random analyst report seems to be the most foolish thing to do. Do get involved in buying Stocks of a Company if you aren't running the Company yourself. 

- Even if I do zero in on a Company, how do I track what's going on inside and outside? Is that my business?

Definitely NOT

This applies to the old so called 'Widow Stocks' - Companies that Widows could buy and sleep at night. Today, with the volatility of competition in the world, anything can happen; that can wipe out 100's of old Companies.

For example, could a Widow predict that Lehman Brothers would be liquidated and closed down?

- How do I CONSISTENTLY build Capital over the years rather than losing and gaining in bits and pieces? 

Its NOT possible if you attempt to be a 'Stocks Trader'.

You have to have patience, patience, patience, and more patience. You have to have the ability to SIT AND DO NOTHING on Good Stocks (which by the point above are impossible to identify and then track). 

About 20 years ago, I was told by a good friend (Sandeep Loyalka) that the Fortune Magazine had interviewed veteran New York Stock 'Ticker' Traders ( these were folks who had traded stocks daily for 30-40 years) and quizzed them about their financial progress.

NONE OF THEM had made it big. At the best they had survived. 

I believe day traders are unemployed folks who cant get any other real job. Day on day trading is their way to feel 'busy' and employed.

Unfortunately, the Capital of these folks pays a heavy price of their disguised unemployment.

Other Conclusions:

- Bankers are the biggest crooks of them all. All these High Net Worth Account managers want is CHURN of your portfolio, so that they earn continuos commissions. 

I have yet to see any 'Trading Account' managed by a bank that has made a Millionaire a Billionaire!!??

Finally, let me share the best known secret in the whole world. 

Let the experts do what they do best. If you know how to run a Chicken Farm, do just that. Think of eggs and chicken feed and chickens hatching.

Let your Mutual Fund manager think of the HDFC Bank Stock - if it should be bought, sold, or kept. 

 

 

 

 

Don't be a Chicken Farmer pretending to be a Stock Picker.

 

  

If you do try, your chickens will die and the stocks you pick will kill you.

Last but not the least - check out the absolute returns made by the Top 15 Mutual Funds in India in the past 5 years.

If you know ANYONE who has beaten these returns (20- 27% CARG!!) then point him or her to me.

I will hatch an egg and eat it too.

RETURNS OF MUTUAL FUNDS IN INDIA - PAST 5 YEARS.

COURTESY - Mutualfundsindia.com 

Rank Scheme Name Date NAV (Rs.) Last 5 Years %
1 Reliance Banking Fund - Growth  Apr 8 , 2011   108.9979 27.6249 
2 UTI Banking Sector Fund - Growth  Apr 8 , 2011   45.43 22.9368 
3 Reliance Pharma Fund - Growth  Apr 8 , 2011   54.8012 21.5293 
4 Bank BeES  Apr 8 , 2011   1171.444 20.9374 
5 Reliance Regular Savings Fund - Equity - Growth  Apr 8 , 2011   30.9398 20.7751 
6 IDFC Premier Equity Fund - Plan A - Growth  Apr 8 , 2011   32.7873 20.4109 
7 Reliance Diversified Power Sector Fund - Growth  Apr 8 , 2011   73.3983 18.7777 
8 HDFC Prudence Fund - Growth  Apr 8 , 2011   216.488 17.5811 
9 Quantum Long-Term Equity Fund - Growth  Apr 8 , 2011   22.85 17.1876 
10 HDFC Top 200 - Growth  Apr 8 , 2011   216.276 17.0827 
11 HDFC Equity Fund - Growth  Apr 8 , 2011   286.24 17.0283 
12 Reliance Regular Savings Fund - Balanced - Growth  Apr 8 , 2011   22.4433 16.9018 
13 UTI Dividend Yield Fund - Growth  Apr 8 , 2011   33.26 16.7353 
14 Birla Sun Life Frontline Equity Fund - Plan A - Growth  Apr 8 , 2011   90.44 16.7158 
15 Reliance NRI Equity Fund - Growth   Apr 8 , 2011   40.6158 16.1612 

*Note:- Returns calculated for less than 1 year are Absolute returns and returns calculated for more than 1 year are compounded annualized.

 

*****

 

Tags: 'Chicken, 'Mutual, 'Sandeep, Bankers, Farmer', Funds', India, Loyalka', Stocks

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@Jyothi - Nice comment !

 

But isn't there is a difference between *understanding* a field and *having a training* in the same field ?

 

Alok might not have had any training in online gaming - but he might have had a good understanding of the market (and given that the field was relatively young at that time, his lack of training was not a disadvantage).

 

On the other hand, stocks have been around for hundreds of years - without the correct financial exposure and training, it is hard to make your way around.

 

Even the iconic Warren Buffet has a business degree and financial background - as do virtually all of the successful investors who come to my mind (exception: Carl Icahn, who was a dropout from medical school !).

 

Jyoti, lets put things in context:

 

- The greatest stock picker of all times and also one of the richest individuals in the world is WARREN BUFFETT. He is a STOCK PICKER

 

If you see the whole crux of my article, it is 'IF YOU ARE A CHICKEN FARMER, then dont be a STOCK PICKER!

 

I never said never be a STOCK PICKER as an individual profession!!!

 

The world is WAITING for the next Warren Buffett (whose Bershire Hathaway incidentally is the MF that has made millions and billions of dollars for investors) or Peter Lynch or Templeton etc.

 

All I am saying is:

 

- TRADING never made money (would love you to prove it otherwise to me with any example)

 

- STOCK PICKING AND WAITING is the only way to go - now it depends if you want to do that yourself or via a Fund House.

Read my related post here - So you want to be the next Warren Buffett?

 

The truth is that trying to become the next Warren Buffett isn’t just foolish, it’s also dangerous!!

 

-Vishal

Ditto. I too can't figure wht stocks to buy/keep/sell. & its tough to believe someone with ur hard earned money. Its also amazing to see these stock prices move daily....can't think of wht these companies do everyday tht their stock prices move daily. Satta Bazaar as its rightly called.

It just shows that you should only deal with areas you understand in - whether as an entrepreneur or as an investor.

 

A very close relative of mine is a leading businessman in Sri Lanka. He built up his fortune from scratch and is acknowledged as one of the leading experts in his field.

 

Unfortunately, he decided to branch out into a different market segment (related to agriculture) which he had absolutely no exposure to (and probably little understanding).

 

After sinking in a large amount of time and money and spending half a decade dealing with all sorts of messy situations (ranging from government regulation to mass worker strikes), he decided to throw the towel in and sold out most of his stake in the company.

 

Admittedly, he did sell it for US$ 10 million (which is a payday I can only dream about !) - but given the time and resources he put in, he probably could have earned much more if he focused on a market he understood.

 

Maybe I'll try and write a post about what I've learnt from observing him, i.e. 'What a new entrepreneur learnt from his rich uncle !'

Alok this is a very well written article and I agree with most of what you say except for the last bit where you show the list of the top 10 funds for the last 5 years . Looking at the funds these appear to be actively managed funds. 

Investing in an actively managed mutual fund is also a fools over the long term. The reasons for this are numerus, not the least of all is simple arithmetic of the financial markets. Most funds underperform the market when expense ratios are taken into account. Every year (or period of time) there will be funds that beat the market. Indeed there will always be names that adorn a top 5 or top 10 list.  The key is to know apriori which fund will beat the market in the next 5 years which is hard to do (how much would you wager on the conviction for the top fund for the next 5 years?). Worse still you have to have faith that the managers of fund that one has invested in, continue to have unique insights so as to generate above normal profits. This gets harder because as money pours into a fundthe law of large numbers kicks in. In addtion one needs to consider not only the return but also the risk. A fund can show great returns when markets are doing well by making risky bets, which will only be uncovered in a down cycle. JOHN BOGLE, the father of index funds has written some really good articles on the folly of investing in actively managed funds  hereand here. Maybe in India the envioronment is different and it is wise to invest in actively managed funds .  I dont invest in India so I dont know. Maybe someone explain this?

While I am on my soap box, one more point, I think it is extremely unwise that the government has allowed corporate houses to be players in the financial markets. In other countries like South Korea and (ofcourse) the US, this has led to large scandalswhere where investors get seriously burned. So I would stay away from funds being run by corporate houses, however tantalizing their returns maybe in the short term.

 

I did that for 6 months many years back and lost 1 lakh rupees.

I think the best way is to have a long term view only after researching the fundamentals of a company very well. Not investing in on paper stuff like R-Power.

sirji mark my words rpower is comming cheap buy it as much as you can.. this will singlehandedly make up for all you retirement funds.. at the time of ipo it had no installed capacities no business at all just an idea and the company...but now things have changed ..there will add 33000 mw of capacities over next three years ..

@alok If you take it as Serious Business then you can make money , like you should have understanding of market , Risk management & money management of your capital what you trade in market. IF you follow this things strictly then you can easily make money with above rules. I as A Full time Trader making 7-8 % monthly on my capital. Yearly i was making around 75-80 % return on my capital. IF you dont mind then we can have One Artical how to trade in Stock market with Low Risk High Return Strategy. It will helpful for Our Readers. Let me know I can Share my Trading Contract Note also for Reference.

please do it sir ..it will be great help

Hi Alok,

Well written and my favorite topic!

While on the stock market - I cannot figure one thing. How are some stocks - mostly B and C group able to hit 52 week high ?(refer ET 52 week stocks column) They rally for 1 to 5  days and then new stocks are added !!

Good Morning. I am predicting India and China are going to benefit immensely, on long term, because of US losing its AAA credit rating. Wrong? Thoughts..

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