iCharts Discussions

[NFTrader]

[rk_a2003]

What is this NFTrader?. Vinay never claimed authorship; besides he clearly mentioned Author Unknown.

In case you are aware of the origin/ author you should have mentioned it simply. Instead of it you commented that the article is" lifted from equitymaster" thus forcing Vinay to throw explanation again despite he being stated Author unknown.

Ragarwal expressed her view just focusing on 'gaining knowledge'.Though her comment might have ignored copyright aspect.

You could have mentioned that her comments are ignoring copy right aspect. That part would have been fine.

But what right do you have to label her as chamcha?. It's disgusting to see such an attitude....I am really sorry to say this.

[amitagg]

NF trader

Do you even know u has copyright over the article and who if at all at enforce - the website owner or the author. And since Icharts is not owned by Vinay where is the expectation of commercial exploitation duplication reverse engineering copying etc of the literary work.

Let's not get into unnecessary squabbles in Icharts every time.

It is often the first post commenting on someone else's post that creates a chain reaction.

Regards

[NFTrader]

It was you na amita, who was crying in many different thread recently

[amitagg]

[ragarwal]

NF Trader,even if i am a chamcha,chammach or chamchi,its none of your business.I think I alone have the exclusive right to decide who I am.Right?

[pkholla]

[amitagg]

[SwingTrader]

My suggestion :

Those who don't want to contribute to the thread and want to just point out irrelevant mistakes or argue can stop posting. If anyone has any complaints they can email us or post in "Problems & Complaints" forum. Hitting out against other participants of the discussion or bringing up arguments is not welcome.

Again, if anybody has any issues related on the content posted on our forum, please contact us instead of posting here and messing up the discussion.

Any further arguments here will result in posts being deleted and/or IDs being blocked. We want to avoid this so please let the discussion continue and accept that we are just helping each other here.

[vinay28]

Author unknown

DISPOSITION EFFECT

Disposition Effect: It’s a tendency to close a profitable position early and hold on to a losing position longer, hoping that prices recover.

Researchers working at the Centre For Analytical Finance at Indian School of Business, after examining terabytes of data pertaining to trading behaviour of retail and institutional traders, found that trading done by behaviourally biased and short-term oriented retail traders leads to wealth transfer from individuals to institutions.

Retail investors are mostly dubbed as “noise traders”, who adversely impact the price efficiency of the market. Some have argued that such excessive short-term trading scuttles the functioning of arbitrage mechanism by increasing the deviation between actual price and the expected price. However, others have argued that presence of retail investors provides liquidity to the market and hence, is useful. The recent spurt in behaviour finance research has led to a careful examination of consequences of short-term trading on an individual’s wealth. One of the findings that has emerged is that excessive retail trading leads to transfer of significant amount of wealth from individuals to institutions.

Sankar De, Naveen R. Gondhi and Subrata Sarkar, in a paper titled Behavioral Biases, Investor Performance, and Wealth Transfers between Investor Groups, investigate the impact of trading on a retail investor’s portfolio in India. Specifically, they tested if there is wealth transfer from individuals to institutions in India. For the purpose of this study, the researchers used tick-by-tick trading data given to them by one of the exchanges. In total, they examined 1,346 million trades done by 2.5 million traders/investors. The monetary value of trades examined was about Rs.37 trillion. Retail investors were involved in 831.5 million trades that they studied.

The purpose of the above description is to show that these results have come forth through a careful analysis of a very large data set and not based on casual observation of a few wise men. The study covers a period of 18 months between January 2005 and June 2006. This time period is relevant currently because the market was in a bullish mode even then. In fact, the CNX Nifty recorded positive returns in 15 of the 18 months that were studied.

It was found that when an investor with low degree of expected bias (read, mostly institutions) trades with an investor with high degree of expected bias (read ,mostly individuals), then the price of the stock traded moves in favour of the former. In other words, price of a stock usually goes down after retail traders buy it from informed institutions, and vice versa. Interestingly, such a pattern is not visible when both sides are likely to be informed or uninformed. Wealth losses of individual traders get accentuated when financial instructions happen to be on the other side of their trade. Financial institutions seem to be more informed than other institutional investors such as companies.

The economic magnitude of the losses experienced by Indian retail traders is large.

The researchers estimated that, in their sample period of 18 months, retail traders lost Rs.8,376 crore, a run rate of Rs.5,584 crore a year. They also estimated that the loss due to wealth transfer equals 0.77% of India’s savings during 2005-06.

It is important to note that the above figure only includes trading losses. If other expenses such commissions, taxes and so on are added, then the total loss easily exceeds 1% of the savings. The paper also indicated that behavioural bias shown by individuals in India is much higher than the same for developed countries.

This is not to say that retail investors should not invest in stocks. Careful research has clearly established that disciplined value investing generates positive abnormal returns. Such studies have also shown that equities tend to outperform other asset classes significantly in the long run. However, very few retail investors sustainably follow this approach. Many of them get attracted to short-term speculative trading and end up losing money even when it’s a bull market.

The findings of the above mentioned paper has two clear messages for the retail investors in India.

First, it is futile to try to outsmart the smart money in the short term. When buying a stock sold by institutions, it is important to investigate the reasons for such a sale. Second, those investors who do not have time and energy to do such an investigation are likely to do better if they chose to invest systematically either in a professionally managed fund or simply a passive index. Adventurism in stock markets can have serious consequences for wealth accumulation.

[kishjk7551]

Great article Vinay , seems to out line issues very well especially "excessive retail trading leads to transfer of significant amount of wealth from individuals to institutions" , all new traders should read this article and have a system to trade otherwise they know where their money is going.

Regards

[swamy@20]

Thank u vinay. I should be an eye opener.

[vinay28]

An article that I received a few months ago. Author unknown

Terrorism in Financial Markets

Historian called Yuval Noah Harari talked about what everyone likes to talk about these days i.e terrorism and the society's ways of dealing with it. What took us by surprise was the kind of treatment Harari gave to the whole issue and the fantastic insights he had to offer.

Sample this. Everyone remembers September 11, 2001 as the day when the World Trade Centre was flattened by one of the deadliest terrorist attacks ever. However, how many of us can recall that the very same day, there were four planes that were hijacked? While two of them crashed into the twin towers of the World Trade Centre, there was another one that crashed into the Pentagon, the headquarters of the United States Department of Defense!

Now as per Harari, during a conventional warfare between two countries, the attack on Pentagon would have been way more significant. Simply because it would have meant destroying central headquarters of the enemy and leaving its planning and coordination and a quite a lot of its infrastructure in total disarray.

But the fact that the World Trade Centre was at the front and centre of everyone's attention points to the fact that we just walked into the trap laid by the terrorists! And what is this trap? Well, Harari calls it the 'Theatre of terror'.

Its modus operandi is simple. Terrorist organisations know that they just don't have the resources to enter into a conventional war with the powers that be. Therefore they hope to change the political situation by spreading fear than by causing material damage. And what better way to create fear than to raze to ground some truly symbolic buildings and structures like the twin towers of the World Trade Centre.

Now the mistake those who fight terrorism make is that they start thinking like army generals and not theatre producers as per Harari. As a result, these attacks lead to revenge and retaliation. And while the terrorists are crushed in most cases, every once in a while the political storm created by counterterrorist campaigns does indeed work to the advantage of the terrorists. And this is certainly a big victory for the terrorists who by and large have very little to lose.

Consequently, the right way to deal with terrorism as per Harari is not to fight it with raw brute power but to keep doing one's homework intelligently and efficiently and then striking when the time is right. Allowing our natural instincts of replying drama with counterdrama of more smoke and fire would be the worst possible mistake one can make. It can actually end up benefiting the terrorists.

Now, even as we were going through this article, we couldn't help but draw huge parallels with the terror of the financial kind. The one that erupts every now and then on the stock markets. We are referring to big, violent corrections where the bottom literally falls out of the market.

And if you think of it, most of the people react to this terror exactly the same way they would do to an act of real terrorism. There is a lot of fear and panic as prices fall 40%, 50% and even 60% and beyond in a lot of cases. Just as with real terrorism people mistake this carnage to be much, much severe than it actually is. However, in reality, what go down a lot are stock prices and not their long term intrinsic values. Yes, a lot of companies which are highly leveraged and have weak competitive positions deserve the treatment they get. But running away from and having doubts about the long-term prosperity of many sound companies makes no sense.

This is where the shrewd investors just as the shrewd people who combat real terrorism can come in and make a significant difference. They can simply scoop up beaten down assets at attractive valuations and enjoy great returns over the long term.

And what is their modus operandi? They quietly go about doing their homework about the good companies they want to buy. And when the time is right in terms of valuations, they just go for the kill.

Consequently, be it financial or the terrorism of the real kind, one should not let one's natural instincts to take over.

Instead, a sensible and a rational way of dealing with it backed by basic data analysis, would yield much better returns over the long term.

[opportunist]

[vinay28]

true oppo.