Thursday, May 15, 2008

Is It Possible To Be An Investor and Trader?

Several times people ask me if I trade besides just investing for the long term. People want to trade so that they can have a regular cash flow, which can be used to fund their investing. I understand that very well.

It is possible to trade and invest at the same time. Rakesh Jhunjhunwala is one of the few rare people who does it quite well. However it is not something everybody can do without having the necessary discipline to keep trading and investing separate.

Most people end up mixing the two based on the way their investments are doing and that is one of the worst things that can happen. They enter with a trading mindset in a stock, and when the stock doesn't move up or falls 15-20% they end up telling themselves and everybody around them that the stock was meant for the long term.

On the other hand people who call themselves investors, enter a given stock and as soon as it goes up 15%-20% in a few days they end up selling. Only to see the stock growing exponentially in the next 3-4 years.

I have made the mistake of being both a trader and investor in the past and learnt from it. I am glad I made those mistakes, because they taught me a lot. I learnt that my mindset was built more for the long term. I learnt that I have many other things to do and can't sit hours in front of a trading terminal for the rest of my life.

Those who plan to do both, i.e. trading as well as investing must keep two separate accounts. I know investors who also trade, very clearly maintain that they have separate trading and investing accounts. Another thing you need to know as a trader is that you need to spend time understanding technical analysis and also keep your emotions under control. You need to know when to book your losses and when to book profits. It can get very stressful and very few people can do this for several years. Most people do it for sometime and then move on to other things with the money they have made.

As a trader it also helps to have internal contacts besides just technical knowledge. I'm sure all of you understand what I mean.

Personally I have someone who is very good with technicals trading for me with a small part of my capital. This keeps my head clear and lets me study companies just for the long term most of the time. Of course sometimes a few trades do come in that are too tempting to miss.

Trading isn't for everybody and you should trade only if you have the time, dedication and emotional strength to handle the volatile nature of markets. Your broker might encourage you to trade more even as a beginner and will tell you how you can buy now and exit in the next two days to make a quick buck. But please remember that the main goal of a broker is to make brokerage and not to make you wealthy. Of course not all brokers are this way - but many are this way.

If you are somebody just starting out in the markets, please note that markets are unpredictable and it isn't the best idea to depend only on them for a regular cash flow. You need to have some other source of income- at least till you make sizeable amounts of money.

What do you think? Do you trade and invest? Have you traded and invested in the past? How has the experience been? I would love to hear from you. Feel free to share your ideas in the comments section.

Happy wealth creation!

Yogesh Chabria


Anonymous said...

I agree Yogesh. Even when I started the broker made me trade, until I discovered your blog and realized my broker was making more than me in brokerage. Now I have slowly started getting good returns and am more at peace.

Anonymous said...

I agree with you Yogesh. It is good idea to trade as well as invest. I do both. Doing so helps in hedging your risks and some time helps in funding your investments. I have learnt from my mistakes in the past. I do not trade in operator driven stocks or stocks with no fundamentals. It is good idea to trade in midcap/smallcap scrips bearing good fundamentals. One caveat to all my friends-Do not get greedy and trade to become rich overnight. Many people I know got ruined in recent downfall. Trade only 10-20% of your capital. Happy Investing

Anonymous said...

During my initial days I used to trade heavyly in intraday and my first few trades were quite profitable, as I continued i made some and lost some at the end of my first month I had made close to 30000 rupees, but during the subsequent months I started to loose money and finally when I calculated, I found that I had paid 50000/- as brokarage to ICICI bank and stoped trading. I have not traded for the last one year. I have though long term investment in stocks.
Trading is not worth its salt, there are not long term winners in trading and the stress is to much for any trader to take, I have not known any great trader who has made money only in trading.
My advice to investors is to look long term and forget the short term.

Anonymous said...

I also trade and invest, but trading is a very small percentage.
I have 85% of my portfolio as investments and trade with the remaining 15%, mainly because i enjoy the process, use it as a learning curve to understand many features including technicals, etc, and of course not to mention the chance to make some extra pocket money! :-)

Anonymous said...

Trading to me does not mean intra day, BTST or 2-3 days buy/sell calls. All these require a lot of active involvement in daily stock market activities. Invest for short term for little longer horizons say 1-3 months.

Bharath said...

I have been an active trader and an investor, when i reviewed my earnings in both trading and investing, I have found that the returns from Long term investment has really outnumbered Trading results. Infact over the last 6 months, i am still in a net loss in trading though i made hefty money in trading in the begining. And I beleive it is worth it to stay long and buy fundamental stocks on big corrections. It is only the stocks i got in Jan-Feb saving me out from Trading losses.

Hence, I would advice to invest for long term (or 3 - 6 month) for better returns. Trading and investing can be done together if one can really afford the time and stress it entails, i.e if one can really take markets as full time job, ideally with heavy back-up cash for future.

Siddique Ahmed said...

Thanks Yogesh for taking up a very important subject. I had the same idea to have separate trading & investment accounts. The only difference was that I opened my trading account at Ameritrade (TD Ameritrade)to trade in the US market with 1 grand.
Not having sufficient and lacking trading skills, I have lost profusely. I have stopped trading now even though there is no other to way to recover my losses.

The Happionaire™ Blog said...

Bhargav, please remember that the broker's bread and butter depends on your trading. As Sravana pointed out that his broker made much more than him.

I agree with what both of you say Abhishek and Vivek. However it must be noted that almost 90% of people lose money on the whole in trading. There are millions of other people like Bharath and Siddique, however both of you should be happy that you have realized the benefits of long term investing. Millions of others simply become addicted to trading and gamble their money away.

The successful traders I know are highly skilled and have dedicated lots of time to learning technicals. They have the power to sit for hours together in front of their laptops monitoring stock prices. Something I find very stressful. I would rather spend the time with a bunch of friends near the sea side or with a cup of coffee.

Keep smiling and have a great weekend!


maxi said...

i traded jp associates and icici bank when sensex reached 5100 and made quick bucks.I repurchased them at lower price and made my cost of my portfolio lil lighter.I aim to keep these stocks for long time in my potfolio.Isn't it value investing?

Anonymous said...

I agree that trading is stressful ..however the process can be enjoyable and really makes you feel connected to the market all the time. If I feel the stress from trading then I have a cool-off period of couple of days studying companies for long term investment...However I feel that everyone must trade for some time at least with a little part of their portfolio to understand the dynamics of the market ...I have certainly grown in my understanding of the market by trading ...
Happy Investing/Trading :)

Anonymous said...

maxi, Value investing is about buying
stocks at prices which is much below the inherent value of the stock and holding on till the value gets unlocked over a period of time. What you did was more of a opportunistic trade in a downfall.

I agree with dhawal that some trading will allow you to understand market dynamics better, but that dosent mean that everyone should do it. If you have the time and interest, and some money to lose ;-), you can give it a try, otherwise stick to long term investing.

madhu saraf said...

excllent.......Wonderful U given words to the plight of maximum no. of Stock investors/traders.Who r unable to express their feelings or experience.I m one .But still in search of some well wisher who can guide,advice or can take care of my portfolio,of about 27L.
Note-this a 50% part of my bread & butter. My great regards to Yogeshji.

The Happionaire™ Blog said...

Yes, trading does keep you in touch with the markets, but after sometime I'm sure many of you will find out for yourself if there is any particular advantage in staying connected with the market or not. Constant touch with the market could lead to you being influenced by other views which might not be correct.

Just because you do what everybody is doing, doesn't make what you are doing right. Similarly just because you do something that everybody else is not doing, doesn't make what you are doing wrong.

Do let me know if any Happionaire has had a major success in trading.

Keep smiling!


Chirag Joshi said...

You are right yogesh.
But what is your advice to the my kind of people who dont have enough time to spend on market watch or analysis but want to take advantage of indain growing market.

Anonymous said...

Chirag, Isn't that what happionaire investing is all about?
I would love to pick long-term multi-baggers, without spending time on analysis/research - but remember "No pain, no gain".
Few years ago when I started serious investing in equity, I chose Equity Mutual Funds, due to my time crunch. I have found as the best resource for MF Investing and still subscribe to their magazine MF Insight.
I plan to spend more time now in knowledge, learning and research as advised by Yogesh. The returns from knowledge-based investing will definitely outperform equity mutual funds.

Happy Investing !!