Building experience & trusting your intuition

Hello people, we have a really interesting issue this week.

Barring the last couple of weeks, we are still in a raging bull market. When things are good, pretty much everything goes up in a straight line—both quality and junk. It’s a case of a rising tide lifts all boats. Even a monkey throwing darts will look like a genius in a bull market.

But we have to be wary because such environments tend to bring out the worst in us. The biggest risk of a bull market is that it inflates our egos and makes us feel invincible.

But just because you made some money in a bull market doesn’t make you a genius. It reminds me of this famous quote attributed to Humphrey Neill:

The other risk of a bull market is that it’s easy to get swept up in the delusions of the masses. Trading by listening to others isn’t a strategy. You can’t trade based on borrowed conviction.

IRCTC was a recent example. The stock was going up sharply, and it was the talk of the town. Retail investors piled into the stock. But on the back of negative news, the stock is down by nearly 35%. Now, if you haven’t developed your conviction about this stock, it’ll be hard to make a hold or sell decision.

This week’s Innerworth post is on the same topic. It’s about the importance of staying grounded, building your trading experience, and learning to trade by trusting your intuition. Things that most traders don’t think about.

We don’t think about it much, but we lead very stressful lives. The thing about stress is that it builds up over time, so most people don’t take it seriously. But stress is a real killer, and that’s not an exaggeration. Stress affects not only your mental health but also your physical health. But due to a misguided and frankly dangerous understanding of mental health, talking about it or seeking help is a serious taboo even to this day.

The reason why we wanted to write about stress is because Karthik wrote a brilliant and prescient thread last week about just how stressful active trading is.

This reminds me of a quote I’ve heard Nithin use often and something that’s worth repeating:

A lot of people start trading with returns targets like 2-3% a month. Given that we’re in a bull market, people even expect 1-5% a day. Once these people lose money and realize just how hard trading is, a lot of them tend to double down by borrowing money and trading by taking excessive leverage.

In doing all this, what most people don’t realize is just how stressful trading is. Every time your P&L is red, every time you have a losing trade, you might not recognize it immediately, but you’re under immense stress.

So if you want to trade actively, you need to ask yourself if it’s worth it. 90% of the time, the answer is no! You are better off investing in mutual funds and focussing on your career. If you still want to trade, there are safer ways of figuring out if you are cut out for it without blowing up your account—Karthik had shared some tips recently.

And if you’re an active trader, please don’t ignore stress. It can be as debilitating as any other medical condition. More importantly, trading can be infinitely more stressful when you’re in a drawdown, along with the risk of overtrading and blowing up your account. Take periodical breaks so that you don’t burn out. This is why we introduced the Kill Switch feature.

In the previous chapters on the Integrated Financial Modelling module, we looked at building an asset schedule. In chapter 9, we move on to debt schedules and look at how to deal with secured and unsecured borrowings of a company. If you have any questions, leave a comment in the comments section.

Over a period of time, we’ll likely see a wave of IPOs of these new-age companies in India. So we need a better way of thinking about these new-age businesses. So, how should you analyse such companies? Nithin recently wrote a post about how to think about investing in the new age, high growth but loss-making businesses.

There have been an increasing number of new age, tech-driven IPOs like Zomato, Paytm, and Nykaa. Most of these companies aren’t profitable yet, and they’ll continue to spend heavily. By any traditional financial metric, none of these companies are worth investing in, but that may not be the right way to think about these businesses.

To set some context, old economy stocks dominate Indian markets compared to the US markets where new-age tech companies like Facebook, Amazon, Apple, Microsoft, Netflix and Google (FAAMNG) companies are dominant. There’s a near-universal consensus that these US tech companies are overvalued, but they’ve been the biggest wealth creators in the last decade.

Nithin on when one should stop trading, market manipulation and stop-loss hunting.

Karthik on using technical indicators.

Oh, and if you missed reading the first issue of the newsletter 👇

Thank you for reading this issue of The Varsity Newsletter, and we hope you found it helpful. We’d love to hear your thoughts 😀 Tweet at us; we’re @zerodhavarsity on Twitter.