A personal experiment

I was recently talking to a friend and he made an interesting comment after looking at my blog.

‘Why do you target beating the market by 2-5%, when you can make 80-90% per annum by trading? I recently started trading and have been making almost 7-8% per month. You should do that too!’

I have heard this comment from a lot of people in the past. The only common feature is that such people trade for a few months, make good returns and extrapolate it to annual returns. Ofcourse, the very same people after losing money in the market make a hasty retreat and are never heard of again.

The quants
I am currently reading a book – The quants. It is quite an entertaining book, though I doubt there is anything to learn from it. The book is about various kinds of traders who use mathematical models and high power computers to trade in the market. It talks about a few hyper successful traders at various firms such Goldman sachs, Morgan Stanley, deutsche bank and hedge funds such as renaissance technologies and citadel investment group.

Some of these trader/ investors were pioneers in their fields, the best of the best and achieved in excess of 30% annual returns over 10 years or more. The best returns were posted by renaissance technologies, which seems to have posted annual returns of around 40% over 2 decades.

The point of the above commentary is this – If you can make 30-40% annual returns for a few years and prove it, there are people who will be ready to handover millions to you to manage. You will be rich and can retire soon. If you can make 40% or more, then you will be considered a god and there is will be books written about you – think of George soros and others.

If you think you can make 70-80% per annum for the next 10 years, then you are day dreaming. If you think you can make these kinds of returns, as my friend suggested while working in a full time job, you should meet a psychiatrist and get a mental health check done.

I think the chance of 1 crore rupees dropping on someone from the sky while walking on the road is higher than making 70-80% per annum for the next 10 years. A 75% return for ten years will give you 269 times you starting capital and 73000 times your capital in 20 years.

A personal experiment
Let me come back to title of my post. If you are new to the blog, let me say it outright – I am biased against short term trading. I do not believe it is the right approach for me. It may work for others, but not for me.

I have said this more out of a general belief and not based on any specific experience, atleast till now.

So, this time around I tried an experiment. I decided to experiment with trading in the last few months. I bought some stocks for day trading, did some momentum buys and sell and did some news based trading too.

At the end of the experiment, I tabulated my results and found that I had made around 18% on my capital in around 3 months. The maximum loss was around 6% and the highest gain on a single position was 11%. The average holding period ranged from 2-3 days to around 15 days.

A success?
If I annualize, then the returns come to around 72%. Should I declare it a success and start trading actively?

I do not term the experience as a success and do not plan to trade ever again. Let me tell you why.

I typically check my long term positions once in a month or a quarter. My broker is one unhappy guy as I have very few orders in a month and my account is generally a sleepy account.

The above experiment seems to be a success only in terms of the returns. What is not obvious is the effort and the pain behind it. I found myself scouring the internet and bse website for news and tips. In addition, I found myself checking the stock price several times in a day. There was definite change in my thought process as I found myself more anxious, stressed and reacting more and more to daily news.

I realized that my short term approach started infecting my long term though process too. I started looking at my long term holding frequently and started getting more anxious about them. One fine morning, I just plugged the plug and stopped all the trading. Life is good now and back to normal :)

A typical experience?
So does it mean long term investors should not trade? No, it only means that I should not trade because I do not have the temperament to do it.

The point of the post it this – One should invest based on one’s own temperament. Some people like fast paced action and the adrenaline rush, so trading may the right approach for them. I prefer a slower and more sedate approach where I will analyze a company for a long time and then slowly build my position. Now if that nets me lower returns, then so be it! Atleast I will sleep well at night and not check stock prices continuously during the day.