Learn from Thy
Self examination is perhaps the biggest virtue an investor should possess. During assessment instead of focusing purely on stats we should delve into details to understand reasons that led us to make that ‘Investment’ or ‘Trade’ or ‘Buy’.
The inspiration to write on this topic came when I was evaluating my F&O (F&O is derivative segment of capital markets, to know more click here) trades over last three years (2010-12). I do most of my trades with a single broker apart from few large ones with another broker based in Mumbai. Over last year and half I observed that I was getting overconfident with my F&O trades ( largely on account of few big gains with my Mumbai based broker in one particular industry)
The time was right to open excel and start seeing the reality (back of my mind I always knew that I was better at Equity side of things than derivatives). I enlisted all my non Mumbai trades related data and respective profit and loss for each trade.
Here are some Inglorious stats !!
- To my disbelief I had lost two out of every three trades (It was even worse that my expectation)
- The total losses was almost three times total profit
- The biggest loss on a trade was 4 times my biggest win
It is no denying fact that we over rate ourselves and tend to undermine our mistakes, So did I..
I paused for a moment thinking that I was more of a macro market player – No Respite – lost more than 70% (thud!!!) time in broad market based trades. Am I a Niche stock player? Big No out of 11 stocks that I traded in I lost in 8 (a whopping more than 70% failure rate)
Gosh!! Why I am even doing this was the feeling I was getting when I was peeling this off. No Justification whatsoever seemed to sober me down.Took a day’s break to sleep over the data (Best trick when you get Overwhelmed)
My real learning came out when I started unraveling the reasons for entering & exiting trades.
# Most of trades where I won or lost were made with absolutely no information base or news / event.
# I had lost only two times on being on the wrong side of information (Stocks not reacting or reacting adversely to an event/news)
# I was closing winning opportunities earlier and holding onto losing positions longer
# When browsing my Mumbai based trades – I found that I have made almost two times the profit of my entire loss amount with my larger broker –> this happened because I traded in an industry of which I have sufficient working knowledge and understood their dynamics
Three years is a fair term and final conclusion was F&O is no cup of cake especially if you are making haphazard trades with no substantial event/information/news to back them. This exercise also helped me in resolving that I should be picky and choosy with my stuff even in derivatives segment. (Like I am in equity Investments 🙂 )
Can we draw any parallels of this in our day to day activities, Yes one thing we can do is to keep a PDR (Purchase decision register) and note everything thing we buy along with rationale. Keep this excel in your cell phone and note every time your are buying beyond a pre defined threshold (in my case 5 % of my take home pay) You will start finding that many a times purchases can be avoided as they are result of impulse to act ( Like most of my F&O trades)
Research your Purchase / Investment before putting money
Log your Purchase / Investment in PDR
Review Quarterly to learn
Read of the Fortnight