Making sense of the Stock Market — A New Investor
Stock market was always elusive to me. Coming from a lower middle class family, the values of ‘savings’ and the hate towards gambling was in-built in my DNA. Growing up, I saw my family struggling to meet ends with the meagre salary of a government servant . With such a background, dreaming about making money in the “Satta bazaar” (Stock market infamously called in the by lanes of Bombay), was scary, as well as a stupid thing to do. Stock market was the place where the whales were waiting to devour small fishes of the ocean. Losing money was more fearful than making money. Belief was to be more prudent in money matters by saving little and doing basic investments in FD and PPF accounts. Stock market was for Gamblers or Rich people.
By the time I started earning, starting at the age of 22 , I had too many goals to achieve in life, each requiring more money than I had. Like buying a flat, sisters wedding , education etc. ‘Savings’ to cover these responsibilities was my only option and earning more money to save more was the only choice. ‘Investment in a business’ as a concept was alien to me. Folks around me lost lot of money in the Local Ponzi schemes, lottery tickets and daily lottery systems and cards game. The thought of making easy money is not easy, was well ingrained in my mind. Friends and the people I met, who were investing in the stock market, usually boasted about making quick money from the market which looked like a lucrative opportunity. But once I started digging a little deeper in to the conversation with them, realized that the average Joe didn’t made much. As if these reasons weren’t shaping my mind enough, the Stock Market scams of 1992 which rocked the Bombay stock exchange, courtesy Harshad Mehta and Ketan Parikh, made a lasting dent on my mind.
After years of climbing the social and professional ladder, at the age of 38, when most of my primary goals were nearly fulfilled, I thought to take a fresh look and remove my biases & beliefs about the market. I wanted to genuinely understand the functioning of the stock market. There were multiple factors which made me focus in this direction but the primary driver was the concept of ‘Financial Freedom’.
Financial independence is the status of having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others. Income earned without having to work a job is commonly referred to as passive income.
It is not about being rich and having tons of money, but having enough to cover your expenses so that you can spend your precious time doing what you like rather than doing things just to earn money.
Investing in stock markets is just one of the ways to achieve Financial freedom. All these years, I never took the pain and effort to understand the market myself, it was always perception based, and never a first grade understanding. Thus started my quest to understand the Stock Market — As a starter, I was primarily seeking answer to following fundamental questions
what is it for real ?
Is it the biggest organized scam ?
Is it the biggest gambling house run by the government ?
Of course I started with a negative connotation, but that's exactly what I secretly wished that my myths be busted. To put my journey in order, will be taking through the steps I took in the investing journey.
Step 1 — Making sure I start and stick around
Creating a Zerodha Account. Yes, as we( software engineers) usually do, pay for the certification fees and then start the preparation for the certification :) , else it doesn’t get done. Without a trading account, it will all be theory. I wanted some implementation and action.
Step 2 — Start with the Basics.
After account creation, I wasn’t desperate to start buying stocks to get rich. I wanted to understand the basics, so started with some research online on how and where to start. Based on my google searches, Facebook took the lead and popped an AD on my timeline about an online course from an investor ( Kundan Kishore) who had a pretty extensive videos tutorial covering the market basics and advanced topics. Bought it without getting any second thought. Putting some money seemed to work. To make most of my invested money, I went through some 10–15 videos, but found them to be too slow for me. My thirst was increasing, but the speed was a limiting factor. I am not a fan of using videos for learning, as I find it is a very slow learning process. Videos works for me only when the topic is really complicated and difficult to comprehend via blogs/articles. Just when I was feeling frustrated to read bits and pieces here and there on google, fortunately discovered “Zerodha Varsity” and boy, I was so amazed by the quality content put by those angels and gods. Fully curated step by step learning modules was nicely done by Zerodha. Started with the fundamentals like stocks, shares , P/E ratios, EBITDA , balance sheets etc. which were very well explained with examples. In short, Zerodha Varsity helped me immensely as per my needs. Kudos to the folks who built such a quality material for Financial education.. for free !!.
Step 3 — Go Advanced.
After understanding the basics, started on the Technical lessons which was even more interesting. Technical lessons basically teaches you how to understand the pattern of stock movement and make predictions. Based on historical data as well as past recent data, one can build strategy for buying and selling in the market. The Candle bars , Moving averages , indicators etc hooked me for another week. By this time, I realized that it is not so easy to make money in the market. One has to be well versed with so many Technical strategy and 100s of indicators to do well. Fortunately, this bothered me for only a small amount of time. I was feeling there has to be some easy way out here. This is when I realized that there are basically two school of thoughts which drive people in the market. You are either an Investor or a Trader. which further complicated my mind.
Step 4 — Reflect back on what you learned.
This was the most toughest and the most difficult phase for me. In this phase, armed with some basics and Technical knowledge, I started to make sense of what really happens in the market. The more I started to make a pattern of how market works, the more jittery I was getting. The volatility of the market made me doubt this whole game even further. The uncertainty of what could happen next day was not a comfortable feeling and the way traders operate was equally demoralizing( buy target, sell target — is it a game for you? ). Why can’t one just invest and relax? This question baffled my mind till date and it again pulled me back in the overarching question, which I always feared -
Is Stock market another government sponsored Gambling sport ?
To make myself comfortable with participating in the stock market, I had to clear this doubt for once and all. Did some more research and understood that Gambling has lesser odds to win and it is sheer luck but if one comes with an investor mindset( not trader), the odds are always in your favor. This was not easy to digest. But let me elaborate more on why I felt it was still a gambling?
My reasons
- Predicting the market move is next to impossible and predicting future is also impossible, then how can one can say if a stock will dump the next day due to a bad news or due to fraud conducted by the promoters— Yes bank.
- Traders do not care about stocks and fundamentals, all they do is use news and understand the charts and buy and sell based on the behavior of the market. If a stock is going up due to good news, they will sell it to make a meagre profit of 5 –10 % and pull the price down again. Shorting and other approaches also used, as if one is not investing in business but playing a card game with money.
- Companies have been cheating on balance sheets and often found to be jacking up their margins. This is not a hidden fact. SEBI has rightly put lot of procedures in places to contain such illegal activities , but frauds do happen. Companies which timely posts their quarterly results have less to hide then companies which gets fined who delays share the results.
- Reverse psychology of Traders always made me more fearful. A trader is in the market for making quick bucks doing intraday trading. If one literally looks at trading, it is nothing but gambling using technical charts. They care least if the stock is good , if they achieve their said target as per charts, they sell. 100s of people following the same strategy take the same actions and this further compounds to falling or rising of the share. This is more behavior driven action than fact based. Everyone has to pay the penalty of buying at highs.
- Out of 100% , retail investors make only 20–25 % of the stock market contributors. So who moves the market? Big fund houses & Investors . If a Fund house dumps their thousands of shares for some reason , you have no way of predicting it. The lesser the control, the more fear one has.
- Changing business models and disruptions - A company being market leader could see a 10–15 % fall in its prices just because a stronger competitor enters the same market. Predicting success of the companies is always based on historical data which is good but never perfect. There are many examples of companies falling from their highs and companies rising from the ashes. Corona, budgets, government regulations, so many factors can change the business and therefore the stock.
- Operators — These punks are infamous for riding the stocks to highs and lows and manipulating the charts which is another big worry. Few youtubers always caution and point instances of operators manipulating the market. One cannot easily identify their plans and games , so retail investors are usually at the mercy of these operators.
- As if above issues weren’t enough, Luck and risk are one of the most important factors of making wealth in the Stock Market. You might hate to believe it, but this is how it works as per the experts. An average decision can make you rich and a well calculated decision ( 80 %) odds of going in your favor might tank as the other 20% of the events happens for real.
- News and Media cannot be trusted either. All the anchors and Big Investment bankers , financial advisors have their own vested interests and biases for their prediction. It has been called out by experts to not trust anyone but ‘oneself’. Because if a stock doesn’t perform , only you are to be blamed.
To Pacify myself with all above issues, I went back to further more studies on how to deal with all these issues.
Step 5 — Deal with your fears
“Ignorance is the parent of fear.”
- Herman Melville
Only way to deal with fears was to reduce the unknown and kill the ignorance. Reading books on Investments was the best option. Wanna know the perspectives of people who had actually played with fire.
‘The psychology of Money’ by Morgan housel was my first choice. I was looking to first start with basics.
As I started reading, page by page, my anxiety finally started to settle. Loads of wisdom on how going ‘Long’ started making sense to me. It was not easy to digest it when you suddenly see your favorite stock losing 20 % in 3 days. In this case, traders sold it based on Technical pattern to book profit and using the same charts , re-entered at lower levels .Here I am, seeing a 20% loss on my profit for doing nothing , but waiting. Based on the wisdoms of long term investors, I felt foolish. I was back to square one. Swallowed the fact that in the long term, the stock will continue to see a SEE-SAW patterns, but overall it will grow if the company consistently does well. This faith has kept me holding on it.
Step 6 — Choosing stocks
Choosing stocks is actually easy and hard both. One needs a handful of tools to do the fundamental analysis of a company . Screener. in , Ticker tape are good portals for a newbies, rather, even professional youtubers uses these sites. Once you get the hang, go for paid versions for richer capabilities. Before investing, checking the fundamentals helps in building a strong conviction of staying ‘Long’ in the stock. If you are an aspiring Trader, then it may matter less. There are tons of articles how to choose the right stock, so won’t go in to it.
Step 7 — Buying and keeping your ass at one place
“Investing is where you find a few great companies and then sit on your ass”
-charlie Munger
Have heard it hundred of times that any investment needs a timeline of few years to decades. Grin !!
Final thoughts :
The dilemma of ‘Trading’ vs ‘Investing’ is not yet over in my head. It has taken years for people to learn the nuances of the market and for a beginner like me, few falls & highs will give me my own teachings. A calculated middle path is not a bad idea .
Stocks with high conviction can go ‘Long’ and potential multi- baggers could be handled like a Trader. Swing trading is also an option wherein one holds for a period of 1–2 months for gains. A mixed bag of strategies is what one needs to make if they are impatient. Serious Investors argue that staying invested for long term takes out all the pains and gives handsome returns, wherein the magic of compounding works for them. Trading - zero downs the chances of magic of compounding. One can earn few bucks in few trading sessions, but in the longer run, they don’t make much unless one is really an expert.
Road Ahead …
I am just a small boat trying to paddle through the ocean based on my amateur skills. Whether I reach from one continent to another, or get stuck like CAST AWAY, only time will tell. But, I have the conviction to survive like PI ( Life of PI movie/book) with Richard Parker ( Stock market) :). Am all in, to take this ride and pretty sure its going to be exciting ,thrilling and one hell of a ride.
If you liked this post, please share your experiences and views on how do you see the stock market ? Are you thinking to enter, already a pro ? Any inhibitions or wisdom , please do share.
