What Trader are You ?– Long term Investor/Seasonal Trader

“Most of the time stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble … to give way to hope, fear and greed." – Benjamin Graham (1894 – 1976)

Benjamin Graham, or Ben Graham as he is commonly called is one of the most prolific and celebrated investor of the recent past. He is regarded as the father of two fundamental investment disciplines – Security Analysis and Value Investing.

“A bird in the hand is better than two in the bush” – sounds familiar right ? That is the primary conception of an investor. A investor patiently waits for his turn to get into the market. He doesn’t trade all the time. Investor believes in taking a position with a long term view and almost all the time will stay only on the buying side of the market. Seasonal Trader/Investor constantly avoids the bearish phase of the market and doesn’t get into speculating. In other words, an investor prefers holding positions in the equity market rather than speculating them on the derivatives market.

Usually - retired personnel, People with high paying jobs and less time to focus on the market, those who have a huge stash of money in their accounts and craving to hold a portfolio prefer seasonal trading/investing. This kind of trading has its own advantages and disadvantages.

Advantages:

- Need not worry about daily and short term fluctuations of the market.

- Investments in heavily capitalized stocks and consistent amount of returns.

- Since most of the long term traders go for holdings of a stock, chances are high to obtain yearly dividend in case of exceptional performance of the stock held.

Disadvantages:

- Long waiting time to take up a position.

- Vast amount of research need to be done in order to invest bulk money into a portfolio.

- Positions always susceptible to various industry related conditions and performance of the companies that are held with.

- Money stagnated in the portfolio for months, sometimes for years, until desired returns are achieved.

In order to be a profitable trader in the long term, an investor must be aware of market cycles that repeat over months and years. Either he should be well equipped with the knowledge of stock markets over a 10 to 15 year period of time or should have a good investment advisor at hand to guide and manage the portfolio. Long term investing may backfire at times, given the high volatility and unpredictability of the stock markets in the near term. Nevertheless, an investor should be able to part away with his money for at least 3 to 5 years of time with out any qualms and wait for the company to bloom in order to achieve desired returns over a long period of time. All said and done, A seasonal trader/long term investor needs to believe and follow Value Investing(term never been used by him, nevertheless perfectly describes his principles of investing), according to Ben Graham.

Value Investing - Buying stocks at less than their intrinsic value. An investor needs to have an advisor who can calculate the true value of a stock in the market and find out whether the stock has appropriate “Margin of Safety”, the difference between the true value of the stock and the discount currently provided by the market. If this MOS is appropriate, say 15 to 20% of the true value, then the stock is deemed as a worthy investment.

Knowledge required by an investor to perform value investing varies from a range of topics including Government policies, Company Management’s vision, future forecasting, thorough analysis of past balance sheets, political affiliations of the company and how they interfere with the operation of the company in long term.

Some common value investing methods are to buy stocks with low PE ratio, low price to cash flow ratio, low price to book ratio. A value investing will not give the same amount of returns as that of investing in stocks with high growth forecasting. Nevertheless, the risk involved in value investing is far less than other forms of investments/speculations and provides with a sense of confidence and assurance for the investor/seasonal trader with respect to the heavy amount of money spent in building the portfolio.

The current scenario in the Indian stock market indicates that most of the stocks, if not all – are high valued and none of the big names serve the requirement of the “Margin of Safety”, a matter of concern for long term investors. Best to stay out of holding positions until the market corrects to a lower level.

What Trader are you ?

 

Stock market – a lucrative destination for many with dreams of making money more and better than any other profession on the earth. In India, where a herd behavior is more or less obvious, the stock market has been a point of discussion in every nook and corner, thanks to the recent market developments, aggressive marketing by financial institutions and better returns in the past couple of years. For any individual planning to venture into the industry with lots of dreams about making money from home, it is important to understand what the market asks from the trader in order to give him the returns he expects.

Every trader has his own style, some risk a lot in the hope of getting a huge reward, while some tend to limit their risk and be content with minimal yet consistent returns. No style is wrong in this regard and each type of trader has his own advantages/disadvantages compared to others. What every trader requires is – an edge. An edge that keeps a trader apart from the others, that proves critical in achieving his goals. Developing the edge isn’t an easy task. An introspection needs to be done on the part of trader before he decides on what he wants to be.

On a broader scale, we see two types of traders in the market, Defensive trader, Aggressive Trader.

A defensive trader is one whose prima facie objective is to protect his capital. No matter what the market offers him, the trader will stay put on the safety of the money he owns. Above all, Defensive trader believes that “A bird in hand is better than two in the bush”.

A defensive trader is bound to make money slowly, yet consistently. Defensive trader doesn’t take huge risks and will not be tempted to get into the wild swings of the market. The defensive trader values mental peace more than any thing else, even more than the profits he may gain. Defensive traders stay for a long time in the market due to their careful strategies and the methods that doesn’t expose them to too much risk. If a defensive trader sees risk building upon his account, he liquidates it, no matter in profit or loss. Defensive traders seldom brag about their achievements or profits, because they don’t really have an incredible achievement to brag about. While some defensive traders make it big at times, the number and probability of such a scenario is one in a million. But a defensive trader is content with the miniscule profits he makes, a personality trait that sets him different from others.

Some rare yet gem like qualities of a defensive traders are

- A defensive trader knows clearly about the position he is taking, where to exit and how much loss he can bear and how much profit he is targeting.

- A defensive trader will never jump from trade to trade in search of opportunities and will stop his activity if he met with a loss once. He will retrospect his decisions, circumstances that led to his loss, spends more time on finding out the mistakes.

- A defensive trader will always look for high profitability trades, has the patience to wait for the right opportunity and is reluctant to take a position if all his entry criterion are not met.

On the Other hand, An aggressive trader tries to make the most of every opportunity he observes, often creating himself an opportunity even if the market offers none. Aggressive trader takes pride in risking too much of his money, believes that he can take on the market any given time and will not try to miss even the slightest of the opportunity he observes. Aggressive trader spends a lot of sleepless nights due to the risk taken, money lost due to his aggression, yet he is proud of his battle wounds. Aggressive trader sees wild swings in their trading account and is hell bent upon making money, no matter how the market responds.

Aggressive traders do achieve spectacular results once in a while, that tempts them to take high risks, use heavy leverage.

An aggressive trader doesn’t dwell on his past losses. He is too busy jumping from stock to stock, making trade after trade, searching the market for an opportunity.

An aggressive trader makes huge sums of profit that others envy about, yet he accepts huge losses that only encourage him to be more aggressive.

An aggressive trader will get back to looking at his mistakes only after the day ends and he doesn’t have a market to trade. Until then, he is too busy hunting opportunities.

Aggressive trader commands a huge pile of money in his accounts and will not bother even most of it is lost. Some times they lose all of it and not regret their acts.

It is up to the trader to decide what approach they pursue in their trading career, depending on their financial capabilities, risk taking attitude, mental strength and the stomach for profits.

Once you have decided what you are going to be, then it is time to decide on which of the following categories you want to be in and what you actually fit into.

There are three categories of traders we see in the market. Each category has its own requirements, complications, ramifications and rewards, which will be elaborated in further posts of this ‘Trader type’ series. For now, lets just know what are the categories.

1. Day Trader

2. Swing Trader

3. Seasonal Trader.

Get back here later if you want to know what constitutes in each category of traders. Until then, “Happy Trading”