June 26, 2008

A question on trading


some more observations from an outsider

- i have generally noticed that the younger crowd is more attracted to trading. that does not mean older people dont trade. just that if you talk to 100 young guys who are interested in stock market, a sizeable numbers would be into trading
- A lot of my friends who are into trading have a bias for action. There is the thrill of being right and knowing that pretty soon.
- there is more sense of company. you get to discuss about it with more people. value investing is pretty lonely. you buy ugly beaten down stocks. who wants to discuss companies no one has heard of ?
- media and the environment like brokers also encourage trading. no one will recommend buying a stock and sleeping on it for 5 years.

if you are a trader, please do not take this as a criticism of trading. These are just neutral observations (maybe incorrect) of an outsider. I may have bias against trading, but not a bias against people who do trading.
I have noticed in general that the number of people interested in trading are far more than those interested in long term investing or value investing. For ex: there are far more blogs on trading than say value investing. There could be an overlap between the two groups too. I however have no aptitude for trading and it does not fit my temprament. I have said so in the past.

I can understand why there are more folks interested in trading. Trading does have an element of excitement. You get to do something quite often, whereas value investing or long term investing is as exciting as watching grass grow or paint dry. So this is my question – What are the average non – leveraged returns experienced by traders over a multi year period ..say 5-6 years (including a bull or bear market) ?

I agree there are several trading strategies and so to lump all of them under ‘trading’ is not smart. But at the risk of sounding dumb (which I am in terms of trading), I was curious to know what kind of returns do most people get ?


Ninad Kunder said...

Hi Rohit

It is a amazing coincidence that I was going to pen down a similar observation on how there are more blogs on trading and technical analysis than on investing, leave alone value investing.

Well I am as clueless as you are about trading and conceptually believe that the odds are loaded against a trader.

But like you said the kick of "instant gratification" cannot be countered.


SageCapital said...

Hi Rohit,

I am a trader and I have generated 70% yoy from 2003 - 2008 period. Of course its a bull market. My biggest drawdown is 15% in one month.

In the last 6 months I hv been generating 15-30% every month with a mx dradown of 8%

- Surya

Rohit Chauhan said...

those are great returns. a few questions - you can choose not to answer
- is trading a full time activity for you ?
- are the returns leveraged ?
- what broad trading strategies do you use ?


Rohit Chauhan said...

hi ninad
agree with your observation. there is definitely more interest in trading as it provides more immediate results.

in my case other than ignorance which can be taken care of, i do not have the temprament. i invest pretty slow and hate to watch the ticker. the fast paced action in trading is somehow not my cup of tea

i guess i got converted to value investing quite early on. it has made a lot of sense and provided me decent returns.

however i am still curious to find out how well trader do ..i assume there must be decent returns for most of the people and not just the adrelaine rush


rmathew said...

You might be interested in the papers of Terrance Odean who has studied and written about this extensively.

Mahendra Naik said...

Hi Rohit,

I got into trading to instil in me the habit of selling. I am very bad at selling stocks I own, even after they have exceeded their fundamentals. I believed that trading could help me overcome this defect in my fundamental investment strategy. The one problem I find with a buy and hold strategy is that I am not able to take advantage of the boom & bust cycles which are an inherent part of every market. So even though the returns might be positive and well in excess of other alternatives in the long term, I often wonder how much better they would be if some timing could be introduced in the process. Anyways I trade with only a small portion of my portfolio and that too over a period of 3-4 weeks. I have laid out some observations of my trading experience on my blog.

SageCapital said...

Hi Rohit,

1. I became a full time trader 6 months back. I started trading in 2000.

2. I do not do leveraged trading.

3. I use different trading systems to achieve diversification of portfolio. I cannot discuss what I use in my trading systems but I like moving averages.

Rohit Chauhan said...

Hi surya
thanks for sharing the info

rmathew - i will have a look at the link. thanks

mahendra - question : trading requires a bit of different mindset. are you able to reconcile it with same stocks which you hold as long term investments and for trading too ?


Mahendra Naik said...

Hi Rohit,

That is exactly what I set out to do. Change my mindset towards selling. I have found that once I mentally classify a purchase as a trade I am more comfortable selling it than those classified as investments even though they may be the same stock. Now I want to see if I can sell my long term holdings when they exceed their fundamentals.

Deepak Shenoy said...

Rohit - I've been both an investor and trader, but not for very long periods. Mostly investor - and fundamental one at that - from 2003. Made market level returns - about 38% CAGR on that.

Trading returns are ridiculously high but I've only been a year into it now. Am using auto-trading systems that I have developed, and I have between 0 and 2.5x leverage depending on the time and opportunity. Drawdowns - too early to calc but I've seen 15%.

Auto trading has no tickers to have to watch, you know when to exit when you have entered, and you have a handle on risk. To me it's more comfort than investing or discretionary trading.

Rohit Chauhan said...

these are pretty good returns. maybe you can manage money for others.

automatic system are dependent on one's temprament. for a lot of people it is diffcult emotionally to let an automatic system make decisions for them.

how are your systems performing in the current bear market and high volatility ?