The Confused Trader

Apurva Sheth
A few days back, I met my friends for the Chai pe Charcha as usual. We were having our casual discussion when we suddenly came across a long lost friend from back in our school days. What a pleasant surprise it was to see an old friend after so many years. We exchanged pleasantries and started to catch up with him about where he has been all these years and what he is doing now.

Once we had all updated him about our personal and professional lives, he asked my views on a particular stock he had in his portfolio. This stock had recently announced its quarterly results and was down about 15% in a short span. According to him, the results were decent and the stock shouldn't have fallen so badly. He wanted to know the reason behind the fall or if there was any 'news' that he was missing.

Then my friend jumped in and asked, 'What is your cost?'

Our old friend gloomily replied, 'Don't ask me that. But I can wait for a year if there's scope for the stock to come back to my cost price.'

'It all depends on company performance. If the company performs well during the year, its price will go up. Else it will languish or may even go down,' my friend replied with authority. But this didn't help our old friend, who looked even more puzzled now.

Knowing where this conversation was heading, I had to step in.

I asked a simple question: 'Is this a trade or an investment?'

'I am an investor but if I am able to make a quick buck, then I don't mind exiting the stock early,' was his reply.

'And what if the stock falls after you have bought it?'

'I generally hold on to it as a long-term investment.'

Our old friend was trying to be a trader under the guise of a long-term investor. And in the process, he wasn't able to do either correctly. This was hurting him financially and emotionally.

He was going against the cardinal rule of trading and investing - holding his losers forever and selling his winners quickly. This led to a pile up of duds in his portfolio.

The main problem is he wasn't able to keep his trading portfolio separate from his investment portfolio. Trading and investing both play a significant role in building long-term wealth. But it's very important to keep them separate.

Investing for the long term helps to beat inflation and build a retirement corpus. Trading helps you generate additional returns over and above your investments. But the higher returns come with a higher risk. If you have the appetite and can manage the risk well, then trading can be a lucrative option.

Since trading is risky, it's better to allocate only a small portion of your overall equity exposure - ideally no more than 5%. The exact figure may vary depending on your personal financial situation and risk tolerance.

Our old friend didn't consider this before investing or trading in stocks. Contrast his undifferentiated block of trades and investments with our Asset Allocation Pyramid.

I asked my old friend to chalk out a plan for how he will allocate his savings to investments and trading. I told him he must decide before buying a stock whether it's an investment or a trade.

If it's an investment, and the rationale for investing is still valid, then he should continue to hold it. But if it's a trade, and the stock has hit its stoploss, then he should exit from it without fail.

I am not sure if he'll heed my advice, but he didn't look so confused anymore.

Do you keep your trading and investment portfolio separate from each other? Share your views in the Club or share your comments here.

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6 Responses to "The Confused Trader"
25 May, 2017
Dear Apurva, You are a good narrator. True we are all confused like your old friend. But money confuses even the most intelligent people. Otherwise there would not be this rampant corruption in our society. When it comes to investment we get more confused when market swings. It requires great discipline to keep quiet with out loosing sleep. Well this is game where you have to go by rules. Though rules may not help you always , it does help most of the times. So I agree with you to differentiate investment with trading to be at peace.Like 
Jamnadas Dayah
25 May, 2017
Normally I buy stock and if price increase in short span by 10-20/. than I sell.Like 
30 Oct, 2015
In my opinion even for all Investments there should be a defined % of stop loss that an Investor is comfortable of booking loss. For ex if a stock corrects by more than 50% how long will an Investor keep adding the stock to the portfolio to average the cost and this where emotions come into picture and they keep holding the stock as long-term investments. There are different ways of investing and others may not agree with this approach as for them long term means buy and forget :)Like (1)
29 Oct, 2015
I always try to maintain the maximum exposure in cetain L.Caps which I earmarked for investment. However, occassionally when the price comes down significantly i add up with the intention of seelling within a short term and book profit whih will enable me to reduce the buying rate of the original holdings. eg: Britania: I hold certain nos. as Investment and keep other numbers for short term trading.Like 
28 Oct, 2015
Tdear sir, these short term long term jargons are all rubbish, in the long term v are all dead. Recommendations of stocks should not see more than 5% downside but I don't think anybody can garauntee that. Currently all stocks in the Indian market are a sell. Simple saying is "buy low sell high"....Like 
28 Oct, 2015
I now know why my portfolio is messed up, "Holding the losses forever and selling the winners quickly". I changed my mindset. Thanks for post.Like (2)
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