The Hindu Business Line : Know the market

What happens when, as a trader, you do not set up a basic strategy and are bereft of a sound philosophy of what the market is doing and why? You will be at the mercy of every panic, boom, rumour, tip, and every wind that blows, cautions the ninth edition of Technical Analysis of Stock Trends by Robert D. Edwards and John Magee ( www.visionbooksindia.com ). They add that you can be constantly torn by worry, uncertainty, and doubt, and as a result drop your good holdings for a loss on a sudden dip or shakeout, all since the market, by its very nature, is a meeting place of conflicting and competing forces.

Here is a brief description of such traders: “They can be scared out of their short commitments by a wave of optimistic news; they spend their days picking up gossip, passing on rumours, trying to confirm their beliefs or alleviate their fears; and they spend their nights weighing and balancing, checking and questioning, in a welter of bright hopes and dark fears…”

If you are a speculator, your job is to provide liquidity in the market, and to counteract the irrational excesses of market-in-motion, the authors advise. To novices the wise counsel is to make haste slowly.

“Some writers have pointed out that it usually takes about 2 years to gain enough practical experience to operate safely in the market, that during the 2-year apprenticeship period, many traders come in, gradually lose their capital, and retire permanently from the field, leaving their money behind them.”

Recommended study.

Keep emotions in check

Mastering your investments means mastering your emotions, reads the title of a chapter in The Bogleheads’ Guide to Investing by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf ( www.wileyindia.com ).

The authors identify greed and fear as the two primitive emotions that drive many investors as individuals and the stockmarket in general. “Thanks to greed, investors excitedly chase performance and buy when the market is up. Thanks to fear, they panic and sell when the market is down and lock in their losses.”

The book instructs that when it is time to make investing decisions, check your emotions at the door, because this is one area of life where acting on emotional impulses will likely lead you down a path of financial wreck and ruin.

The paradox of money, as the authors explain, is that while most people are very emotional about acquiring it, behaving emotionally about money is a recipe for losing it.

Valuable insights.
B-plan, what next?

Justin Herald, an iconic Australian entrepreneur and motivational speaker, is aghast that some people live off their business plan and business forecast instead of the actual money that is coming into their bank account from their business turnover.

“They look at their business plan instead of their bank statement, which I guarantee will be two very different figures,” writes Herald in So You Have a Great Idea for a Business… Now What? ( www.vivagroupindia.com ).

Spending in anticipation of forecasts that your business plan paints can be too risky, he warns.

“It is best to wait until you have the money in your hand before you go and spend it.”

Also, when starting to flesh out your business idea financially, make sure you overestimate the start-up costs needed, Herald notes.

“The reason for this is, since this is probably the first time you’ve done this, you will have no real idea how much you need for what.”

Talking from experience, he says that it may be pointless to bank on banks to lend money for starting a business.

“Banks don’t seem to understand the potential of a business idea; they only want to talk to you when you don’t really need them.”

Where to raise money from? Ask your family members if they are supportive of your idea; perhaps they want to invest in, Herald suggests.

It is best, however, to use your own money, he adds.

“That way if things don’t go according to plan you can only be upset at yourself and no one else has lost anything. This is why it is best to save up before you start. Rushing into the business without capital will create money constraints that will just set the business back later.”

Ready takeaways.
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D. Murali

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