How to be a trader, as well as investor

Psychology to seek out good deals is an intrinsic quality that cannot
be taught to potential future traders. Investors need to decide,
whether they are in the stock market for excitement or to make money.

CEO of Marathon Trends Atul Suri told CNBC-TV18 that successful
traders used a fair amount of psychology to seek out good deals for
themselves. It's an intrinsic quality which cannot be taught to
potential future traders but it does determine how much risk they may
chose to take or a while striking deals. Investors need to decide,
whether they are in the stock market for excitement or to make money.
Excerps from the interview given to CNBC-TV18

Q: We keep talking about excel sheets, fundamentals, P/E ratios. How
much of it is beyond the screen and in your mind?
A: One of the best ways to actually study trading is to study
successful traders and the more you hear about them and the more you
talk and read about them, (you will find) that increasingly in their
careers, they have moved away from just the mechanics of trading,
which most of us struggle with and into the whole area of psychology,
into the whole area of risk management, which most traders or most
investors who are at a very basic level do not think exists. In fact,
I think it counts for about 80% of the success of fairly advanced,
mature and successful traders.
Q: Is that the lesson got from many of the great success stories of
the world's greatest traders?
A: Certainly. For example someone like Ed Seykota has been featured in
Market Wizards and there are a lot of other good traders who are
featured in this very good book called Market Wizards. In the book,
Jack Schwager has really gone about and interviewed these traders at
the psychological level. He has not just covered mechanics and
increasingly what has come about in each one of their cases, has been
the importance of psychology. This is something which unfortunately,
unlike mechanics cannot be taught. You can teach someone on excel
spreadsheets, you can teach someone how to calculate earnings per
share, EPS, but you can't teach someone how to take away greed and
fear from their mind. It is the Waterloo for anybody, at any point in
time - how successful or how good a track record he has.
Q: How important is it to start off by knowing your own mind, when you
are getting into the market? Are people fundamentally conservative,
highly risk averse or highly risk prone?
A: This is something people have spent hours discussing and I think
it's worthless because at the end of the day, what matters is what
works for you. There is no real prescription. There is no holy grail.
What you really have to do as a trader is - fundamentals and
technicals all works, information works, astrology works - but you
have to make it work for you and for that I really think that there
are two basic components, one is your intellectual mind and the second
is your emotional self.
As far as the intellectual state goes, you really find that everyone
is bestowed with different intellectual capabilities and a lot of it
is also genetic. You inherit a lot of it and a lot of it you develop.
If you find that you are good in numbers, a lot of people have very
good numerical abilities and very good analytical abilities. You will
find that something like fundamentals comes very naturally to them.
But if someone who doesn't know anything as far as numbers go, to ask
him to work on excel spreadsheets and to remember EPS, P/Es etc, it's
very difficult for him. So definitely people with good numerical
ability will gravitate towards fundamentals.
And people with good intuitive abilities, artistic ability, who can
read patterns well, who have that little bit of psychic ability, you
will find that they will be more successful in technicals. 80% of
people trade in this country on information. Even there you need
intellectual capacity, you need to be a networking person, you need to
know the right people and you need to be able to extract information
from them and then use that information. So what is really going to
happen is that each one is going to have certain intellectual
capabilities and you are most likely to succeed, if you have a system
or a method which suits you. The question is can you it work for you?
I think that is mportant.
Q: Can you be both - a trader and an investor?
A: Yes. I also had these doubts till I met some successful people,
where I found that they were able to keep a very different mindset as
a trader, as a investor. I really think that's a really fairly
advanced stage in the whole mental makeup, maturity, intellectual and
psychological. For example, as a trader you may be short but as an
investor you would be having some long-term bets. So the conflicts
that are there within you, would really come up. So you have really
been a very good evolved person psychologically to be able to have
this conflict. It's possible but definitely very challenging.
Q: How important is it to just concede that the market is always
supreme? Do you have to start by saying whatever I am seeing on the
screen is a right price and I am often wrong?
A: I am a great believer in that. This is very much a technical
analyst's or a trader's mindset. But yes, there are lot of fundamental
analysts who search for value. Let's say, they look for a stock, say
Reliance. They assume that the value of that stock is Rs 1,000. Today
it's below Rs 1,000, so they think that the stock is undervalued,
sooner or later the value would take it to the price and what would
happen is, they would make money.
Similarly, if the stock price is above the value, lets say if they
find that the value of Reliance is Rs 400. Today it is above that, so
they feel that sooner or later it will come down. So as a value
investor, as a fundamental investor if you have that kind of time
horizon or that kind of mindset, then they would approach it in that
manner. But if you are a trader, where you are looking to make short
and quick gains, then there is no need to struggle about values
because discovering value can be a very long-term procedure and it'll
also require deep pockets.
So from this point of view, it is best to accept that the market is
right. The market is factoring in the fundamentals, it is factoring in
the greed, the expectations. Now days, you know what liquidity can do?
It factors in liquidity, it factors in inside/outside information.
There are so many variables to the market. You cannot put them on a
spreadsheet. So for a trader, it's best to accept that 'price is God,
I am going to trade on the price, make money on the price, lose on the
price, being right and wrong is not important, making money and losing
money is important'. So that really would be a great premise for a
trader.
Q: So one should have that ability then - to say that 'I am wrong, I
accept it and I'll have to cut my losses' and move on?

A: Yes. But then the ego comes in. The ego is a very big thing. We all
say that we come in this market to make money but at a basic level, if
you look within, there is a lot of ego that goes in. It is terrible,
you know there is something wrong when your stomach churns.  So that
is the problem about taking a loss and accepting that you are wrong.
The fact is your ego will get hurt.
We must remember that this is a game of probability and you cannot be
right all the time. Stop losses are a must and they are a reality, but
the big problem is ego. Accepting that you are wrong hurts you
emotionally. So it's a real big challenge. People think trading is
easy but it's really not easy and you require great emotional maturity
to be able to trade successfully.
Q: Is averaging a dangerous concept? Have you seen that go wrong with
a lot of people?
A: I personally do not believe in averaging. If I buy something and
the stock goes down, I am wrong at that point in time. So I really
wouldn't go on an average. I like to average upwards, what I term as
pyramiding, which is if take a trade, the stock is right, the call is
right, it's making money. I may take more of that and in this way I
try to build a pyramid in a particular stock, that is a case of
rewarding your winners.
Q: What about the other way around when you are making money, we often
hear that people bought at Rs 100 and sold at Rs 110 and the stock
moved from Rs 100 to Rs 200, they made small chunks of it but could
not hold for the entire rise or doubling of the stock. Is it also to
have that maturity to say that I am not playing for small gains and
maybe something good is happening out here and I will play for a
bigger game?
A: Yes exactly, they need to define, at the end of the day you have to
define yourself, you have to define your system. Just as when people
trade for Rs 10 and are able to take Rs 50 hit on the downside,
similarly it should not be the other way round that I am ready to
stand for Rs 50 on the upside, but my stop losses are very thin, so
immediately the stop losses get triggered or there about. You really
have to have great perspective in terms of time, in terms of entry,
exit, stop losses and there's always this ratio. You cannot have a
stock that is a sure short and risk-free. Then why are you in the
equity market? You should be having money in FD because that's the
only sure short method. So there has to be a balance and there has to
be the risk-reward profile and it maybe 2:1 or 3:1 but the ratio
always has to be there.
Q: Do you work with preset systems and over a period of time have you
become a more disciplined trader?

A: Yes. Our human mind tend to break everything down in systems, have
it beautifully structured, because when you have a discipline and a
structure, there is a greater chance of success. I use technicals, so
its much easier for me because there is nothing relative about it.
Price is a reality and some of the great traders have said that have a
discipline or have a system that is so simple that you can virtually
programme it because when you programme something there is nothing
left for intuition or interpretation. So make it so simple that
whatever system you follow, technicals/fundamentals or whatever, it is
so well defined that there is no chance of your mind playing games.
So it is very important to have discipline because it gives you a
system and takes away the influence of emotions and all the external
factors at that point in time.
Q: How important is it to know our limits?
A: Management of risk and risk controls are very important. There are
some areas where we have to come up to some critical points, critical
decisions. One is, what trade size? Trade size is very important. Just
as a sort of intuition, we say okay buy 5,000 or 10,000, depending on
the person's capacity. Why do we take these numbers? It is just
intuitive, it is just by habit. You feel too bullish, you say okay buy
20,000 and if you are little unsure then you buy 5,000. Very often we
do not know what the stock price is? What is the volatility?
So it is very important that one decides when one enters a trade where
is one's stop loss. How much hit can I take? So based on what my stop
loss is, assuming that I get it, I should then take a trade size
equivalent to that. The recommended thing is that I should not trade
more than 5% of my capital risk on a single trade. That means if an
idea goes sour, my stop loss gets risky, my portfolio or my capital
should not come down by more than 5%.
So if we look at it in the inverse manner, when you first calculate
risk and stop loss and then decide your trade size, this is how your
whole size of trade will remain under control. So this would be a very
important clue. Look at it the other way round, first look at how much
loss I can take and then decide how much I should buy.

 Read sectoral signals when trading

Asit Koticha says there is no substitute for understanding and knowing
the companies or sectors one choses to invest in.
2005-04-07 15:38

Managing Director at ASK-Raymond James, Asit Koticha says that he's
learnt from experience that trading entails speculation and
speculation does not leave much room for profit margins because you
pay a high price for correctly timing stock movement. He added, that
while timing is of essence when investing, it does not work well for
speculative positions.
Excerpts from an exclusive interview given to CNBC-TV18
Q: When and how did you first get interested in stocks?
A: Actually speaking, it's a bear market which brought me in. My
father used to invest in the stock market and he was a hardcore
believer in equity. But in the mid-70s, around  very rough patch in
the market, that time he lost considerable value on his portfolio and
that jittered him. Around that time, I had just joined college and he
got so frustrated with the stock market. He told me to just go to the
market, talk to the broker, sell off all these investments and put
this money into fixed deposits.
Q: Was Mahendrabhai Kampani at JM Financial the first person you worked for?

A: My father introduced me to Mahendrabhai Kampani and Mahendrabhai
introduced me to Himendra Seth, he used to be portfolio manager in JM
Financial. Actually Seth is my guru and he taught me how to read
annual reports.
Q: When you started as a trader, were you an active trader?
A: I used to trade along with investment ideas. In investing, I was
much more disciplined, much more focused. But trading happened just as
a side activity.
Q: But at the end of the day, one makes money in the trading part of
the activity?
A: Sometimes yes, sometimes no. But I think in 1999, when I evaluated
my portfolio. There were two observations I could see. One, I did not
make a lot of money in trading because some did extremely well and
some did horribly. So that was when I thought that this is not paying,
while in investment I made a lot of substantial profits and I could
retain them. The second thing was that, with short-term fluctuations
in a leverage position or in a forward position, I had to pay the
margins, I had to pay the differences and for short-term fluctuations
I had to sell some of my gems.
Q: You were the first person perhaps on Dalal street to turn bullish on cement.
A: I was one of the early ones because the stocks were available at
throwaway prices. Something like Madras Cements was available at Rs
300-Rs 400 when equity over capital was Rs 3 crore. 100 paid up shares
and the market cap was Rs 12 crore and they had 18 lakh tonnes of
cement and was one of the best management companies and at highly
profitable locations.
Q: Were you the first to predict a coming boom in ACC?
A: Absolutely, I think ACC was one where I took a forward position.
Madras Cement used to be my investment position and ACC was my forward
position. Now in investment, when you go wrong or for a time being you
are going wrong, it doesn't hurt you. At the most you sacrifice some
of the returns while in the forward position, every fortnight you pay
badla. For a short-term fluctuation you have to pay the difference and
for ACC, the experience was not very good.
In fact, when I took my first position, ACC's price went up
substantially in the first few days only. But later on it corrected
and it remained there for a long time and my badla cost was going up,
my interest cost were rising and my purchase cost was rising. So in
the end, I didn't make the kind of profit that I would have made. For
a short-term fluctuation I had to sell a lot of Madras Cements stock,
which was a classic gem, and fortunately I had a substantial position
in Madras Cements but I had to sacrifice quite a good portion of it
for paying the difference.
Q: Did the ACC experience make you stay away from trading because you
had learnt an important lesson?
A: Absolutely. I made two observations, which were that you don't make
enough profits in  speculations because you pay a very high cost on
timing and while timing is a good friend in investment, it's bad in
speculative positions.
Q: In 1992, did you sense a scam in the making?
A: Lot of people were raising that kind of alarm. Lot of
industrialists were also raising the alarm, that from where is this
money coming in from, but we never realized.
Q: Warren Buffet talks about a circle of competency, about having some
sectors that you like. Did you follow that philosophy? Did you invest
in areas where you were comfortable or across sectors?
A: In the early days of my life, I had read a book on growth phase. As
defined in that book, growth phase was any company or any sector which
goes through a substantial change and which has a substantial impact
on the profitability and where the valuation goes up.
Q: You missed the rally in Infosys, Wipro and Satyam, was it a trying
time for you?
A: This was very trying period because we were focused on the entire
economy, especially in small and mid-cap companies and all of those
companies went through a very rough patch and the market ignored them.
The market rather focused on technology companies and here we were not
in the IT companies, which was a very difficult period.
Q: Give us some recent example where you saw sectoral changes
happening? Was it in banking or steel?
A: I think the steel industry went through a very rough patch. With
almost 5-7 years of falling prices, lack of enough demand, no capacity
coming up. It was a typical business cycle value, where you see that a
lot of the companies go into losses after such a long rough patch and
when demand revives, you will see steel prices as well as steel stock
prices going up. But the main thing is that you have to understand
those cycles very well - that at what phase the cycles would turn down
or where do you see the signals.

Q: You said that two people influenced you in the Indian market when
you were young - Radhakrishan Damani and Nimesh Shah?
A: You can't beat Nimesh on numbers. He is so perfect in arithmetic,
he knows his company very well. He would go through the annual report
minutely and he will develop his understanding, meet the people and
would argue to a great extent even with the management because he
knows his numbers. And Radhakrishnan, his mind used to work in
compartments, he used to speculate with one and he used to use another
compartment for investment. Both compartments are absolutely separate.
Q: Which style do you follow?
A: I think one develops their own style. In my investment philosophy,
I would say that I  always try to look at the companies or the sectors
which are going through those kind of changes and what impact it can
have over those companies in the near future.
Q: Who is the global investment giant, who has influenced you?
A: I think Warren Buffett. Hee is the ultimate in the investment business.
Q: What would be your advice to the people who want to make a career
in the investment business?
A: You have to develop your own understanding about the companies and
do your homework. Second, you don't have to be greedy in this market,
I mean, as Buffett puts it, "you have to be fearful when others are
greedy and you have to be greedy when others are fearful."
Q: The logic being that even at 18% compounded interest, you will make
a huge sum of money at the end of your career?
A: Absolutely. You don't have to aim at very extraordinarily high
returns but even if you make good returns, you will be able to reach
your goal steadily. Know your business, know your investment, that is
the one major thing.
Q: The ability of the management, is that important when you are a
strong numbers person?
A: I am very sensitive to management. A particular trait is they have
to be fair to all stakeholders and wherever we see any stakeholder has
taken advantage of, or has been treated unfairly, I am very sensitive
to it.
Q: You are also very sensitive with regard to management issues, to
the companies in the South. You tend to prefer them as opposed to say
companies in the East or North India?
A: I think in the earlier days, I would say so because a lot of these
companies were managed conservatively but more than that, I think they
were lesser known, lesser researched and that is why the valuations
were available to our advantage. But later on, I would not say so
because now most of the companies are known and well researched, as
well as they have high debts and what we have also found was that they
are not very investor- friendly.