July 14, 2007

Trading v/s Value investing mindset

It must be quite apparent that I have mental block to trading. I had written a post on other blog on the same topic in 2004 which I posted again here. The post was written in jest. I do not look down on trading or consider value investing superior than any other form of investing. It is just that the mindset required for each of the approaches is very different.

Let me illustrate with an example

I typically invest in stocks which are undervalued due to some short term sector issue or due to investor apathy. The near term outlook is generally weak and there is no momentum behind the stock. As a result most of the time the stock drops after I start building a position. This happened almost 70-80% of times I have invested in a stock like concor, blue star, KOEL, asian paints, Gujarat gas etc in the past.

If I operated with a trader’s mindset, I would first not get into the stock and even if bought the stock a stop loss or similar such approach would cause me to exit the stock.

However a value investing mindset results in an opposite approach. I typically buy a stock which is selling at 40-50% discount to intrinsic value with a 2-3 year minimum time horizon. So if the market drops or the stock drops for non-fundamental reasons, I re-evaluate the stock to see if my thesis is intact and sometimes increase my holding.

I personally feel that it is difficult to have the two mindsets at the same time (atleast for me). It may not be impossible, but is fairly difficult and only a few investors would be great at both approaches (rakesh jhunjhunwala is one such investor whose name comes to mind).

I had a major mental block to trading in the past. I have started opening my mind to that approach to see if I can incorporate some aspect of trading into my value investing approach. I know for sure that I do not have the temperament of a trader and frankly would not be going down that path.

As deepak has put in the comment below, I think it is important for every investor to figure out his temperament as that has a major impact on every aspect of investing .

momentary lapse of reason said...
also some interesting statistic related to your trader/investor blog.for a trader to make a higher return than an investor over a long term( say 5 yrs) the trader should predict the market more than 70% of the time.. this is highly impossible unless your an oracle..and a piddly 20% pa is better than a 100% profit the first year and a 50% loss in the second. a 20% pa compounded for two years will give you a 44% return on initial investment. in the second case you'll end up where you started. no gain.
7/11/2007 12:05:00 PM
Deepak Shenoy said...
Trading is a profession and usually involves going full time on it. Investing, on the other hand, tends to have inflows from other income sources. But yes, psychological traits make the trader or the investor. Trading is a mind-game rather than an "art" - it requires a different kind of mindset. Some people thrive in it - some people who run hedge funds have returned more than 100% every year for the last five years. Many others leave it for other stuff - even Wikipedia's Jimbo Wales was a trader before WP.But intersting thoughts on this. Everyone has to make that call one day or the other.
7/13/2007 01:20:00 PM
Rohit Chauhan said...
yes it requires a very different mindset to be a trader. also i remember reading somewhere that there are very few successful long term traders than investors.i think trading is inherently more difficult and time consuming. very few individuals like rakesh jhunjhunwala are good at both due to the differing mindsets required

No comments: