R for Risk, Not Returns

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Higher the risk, higher the returns.” Absolutely wrong. Beware! This is the advice only fools or the cheaters will give you. Higher the risk only mean higher risk, and nothing else. The first stanza of the song by the Canadian singer Leonard Cohen written in 1988 portrays the bleak reality about the state of affairs in every sphere of life including stock markets everywhere in the world.

      Everybody knows ……. the fight was fixed;
      The poor stay poor, the rich get rich;
      That’s how it goes; Everybody knows”

No matter where you were born and how raw you may be in the investment business, the stock market offers opportunities to make a fortune. But make no mistakes. Neither is it simply a gamble, nor is it for the fools relying on this or that do-it-yourself formula. It is indeed a risky venture of a volatile nature, and you must learn to live with it.

The past may have worked when it was present. Today’s past, and even today’s present may not work in the future, when the future manifests itself as present. Past is a guide to the future, but the present is not modelled completely on the past. And, certainly not at all the times for everything that is useful in life. Fascism, Marxism, Communism, Socialism, gold-based monetary system, Sterling and then the US Dollar as reserve currency, iconic corporations – all products of the past that were once full of fury may no longer be relevant. Present is always different, bigger and monstrous than the past. So will be the future when it arrives as present. Be aware that the investment strategy based only on the past, is no more reliable than the coin toss and can easily lead you to bankruptcy. For a strategy to be successful, it must continuously evolve as do the markets.

Eighth major axiom of The Zurich Axioms by Max Gunther urges you not to drag God in this risky endeavour, as He may care as much for you as for other seven billion people, as also the animals, fish, birds, butterflies and what not on this planet. He makes no distinction of wagers and is not concerned about the size of your bank account.

How do you know that you are indeed getting the “Best Buy” when you buy a top rated stock by a top rated analyst? Often you find the stock price drops the very next day of your purchase. The trick in the stock market is that you can’t even ask for a refund or upgrade to a new version like in the case of a computer, mobile phone or a washing machine, if the company came out with a new improved version. Just relate your experience with department stores when they announce end-season discount sales and put up the banner “Best Buy” before stock lasts. The stock market is no different business. Brokers have to sell what is in their “stock.” The only difference being that these lads and lasses have business management degrees, some are even laced with PhDs and are licensed. You may wish to call this cunning as brokers would not tell you when they were buying the stock. There always is a contradiction between the interests and the values inculcated by education, and sought to be imposed by the market regulator. That may not be fair. But then nothing is fair in life. Stocks could go down after you bought into them and they could go up after you sold short. Accept that as the reality in markets, instead of denying or fighting it.

Upon close scrutiny, the record of these self-styled stock market Nostradamus isn’t any great than yours or mine. Most of them have unfailingly failed to foresee the future, or generally predicted the opposite. Nobody can predict human behaviour correctly, more so in crazy stock markets. The years and decades in the past have consistently proved the prophets wrong by wide margins.

Economists, oracles and shamans live by the principle: “If you can’t forecast right, forecast frequently.” Something, some day would turn out to be right. Don’t recommend five or ten stocks. Such a small basket can be tracked easily by some brainy cynic. Recommend fifty stocks for Diwali, or still better, hundred stocks for the New Year and keep revising the estimates. Some will go right as some will definitely go wrong. Surprisingly, though not quite unexpectedly, they turn out to be right sometimes, and that is what makes them dangerous. In order to succeed, a trader must distrust them all.

About the author: Ashok Jainani

(MA, MBA) is an independent market strategist and investment professional on devising multi-asset class market strategies and also advises on branding and corporate strategy. He uses proprietary trading tools in formulation of investment strategies using macro-economics, fundamental and technical analysis. He is also involved with a large social infrastructure project. He has wide academic knowledge in behavioral psychology, economics and financial markets and professional wisdom acquired over 29 years working in various capacities with well-known institutions, including UTI, SHCIL, The Economic Times and Mumbai-based stock brokerages heading research and market strategy. His periodic reports have been accessed by US Federal Reserve, has been interviewed by business channels and his views and articles have appeared in local and foreign media. He led an analyst team at a Mumbai brokerage to win ET-NOW StarmineThomsonReuters Awards and ZEE Business Awards 2009. A guest faculty at leading management institutes, he is widely travelled and visited several factories across diverse industries. Authored book titled Market Myths; MacMillan Publishers India (May 2011).Author can be reached at [email protected]

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