Psychology

1000 ways to lose, 100 ways to earn!

A lot of people think there is only ‘one’ right way to make money in the stock market.

Successful long-term investors strongly believe and also tell others – money can only be made by buying stocks and holding them for 10-20 years. That’s the way Warren Buffett made his money, and that’s the only hope you have too.

Successful option sellers say, “If you trade in futures, you have no future”.

Future traders do not like the volatility and time decay in options.

And there are many others who advice people to stay far away from futures and options.

Then, there’s the constant battle between fundamental vs technical analysis.

Those obsessed with fundamentals think Technical Analysis is nonsense.

Technical analysts believe looking at past performance of a company is silly. After all, past performance does not guarantee future success.

ITC is a great example of this. Think of a person who bought ITC a few years ago, just because someone with a ‘9-digit’ net worth believes it will be a future wealth creator. He is able to sustain his lifestyle just from the dividends of ITC.

But when an investor with 1 lakh to invest, gets into ITC and holds it for a decade. He loses precious time if the stock does not perform. Wouldn’t he be better off investing the same money in mutual funds or some other companies?

Even if ITC does eventually double or triple, there would be high quality growing companies which become 5-10x.

100 different ways to earn

What a lot of people do not understand is – there could be 1000s of ways you could lose money in the stock market, but there are 100 different ways to make money.

Even Rakesh Jhunjhunwala and Radhakishan Damani, arguably two of the most well-known investors in India, first accumulated their capital through trading.

Speaking about his first few years in the market, Jhunjhunwala recently said “To invest, you need capital. So how do I get capital? The only way was to borrow or trade. Therefore, I studied trading. Trading is at the heart of all my wealth. If I didn’t earn in trading how would’ve I invested?”

No right or wrong way

Understand this. There is no right or wrong way to make money in the stock market. You do not need to search for that ‘one path’ or ‘one strategy’.

Think of it like this. You are travelling from one destination to another. There are several roads which will lead you there.

You have to just pick the one which suits you the most.

The final destination or goal is the same for all – to become wealthy in the long run. To make money, to not lose a lot of money.

As long as you don’t blow up your account, as long as you learn how to manage your risk – you can choose the path which you believe suits you the most.

This could also mean choosing multiple paths. I have a core portfolio of high-quality compounders, to this I have allocated 70-75% of my total capital. Here, it’s a buy and hold for a long period of time until the story changes.

The other 25-30% goes into medium term trades. This could be metal, sugar, other cyclicals. Why not? There is a LOT of money to be made from cyclical stocks, if you know when to enter and exit. This comes with experience.

Do not close your mind towards anything in the stock market. Learn everything, give it time and then find what suits you the most.

I know quite a few people, whose psyche or mental structure simply does not allow them to hold stocks for a long period of time. They realized this early, built their skill around other opportunities and are now successful.

At the same time, I know people who never look at fundamentals. They depend entirely on price action and charts, they say it gives them all the information they need to confidently deploy large sums of money. And they are successful too.

There are some who only invest in IPOs and have made more money than long-term investors.

Difficulty Level

One point that’s worth mentioning here. It’s a lot harder to make money from derivatives (futures and options) than it is to make from investing in stocks.

There are many reasons for this. But the main reason is, derivatives is a ‘zero sum game’. If one makes money, the other has to lose.

In fact, it is not even a ‘zero sum game’. If one person loses 100 and the other person makes 100, both have to pay brokerage. The net result is negative.

Only with time, effort, and exceptional skill; can a person become a successful derivative trader. The odds are stacked against you. The difficulty level is very high.

In the cash market, when you buy stocks and hold it for a longer period of time – if the company does well and the share price rises – every shareholder will be richer. The difficulty level is lower. But even this requires time, patience, and skill.

Conclusion:

The market is a large ocean and its very dynamic. Learn about its different parts. Try working in small quantities. Find out what works for you.

And remember, it’s a ‘capital’ market. You need capital to earn more capital. If you lose your capital by the time you gain knowledge. Your knowledge will be worth nothing.

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