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Building experience & trusting your intuition

Building experience & trusting your intuition
By Zerodha Varsity • Issue #2 • View online
Hello people, we have a really interesting issue this week.
In this issue:
  1. The importance of building your experience and trusting your intuition
  2. How stress from active trading impacts your physical and mental health
  3. Integrated Financial Modelling module Chapter update: Dealing with debt
  4. How to think about investing in new-age age high growth but lossmaking businesses
  5. When should you stop trading?
  6. Market manipulation and stop-loss hunting

Gain experience and trust your gut
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:
Don’t Confuse Brains With A Bull Market
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.
Going Your Own Way – Varsity by Zerodha
More important than money
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.
Karthik Rangappa
Thanks to the modern-day lifestyle, everything seems to be a source of stress. From mundane daily activities like driving, shopping, cooking to others like socializing and holidaying (holiday stress is real) can be a source of stress 🧵(1/13)
This reminds me of a quote I’ve heard Nithin use often and something that’s worth repeating:
Stock markets are the toughest place in the world to make easy money.
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.
Varsity chapter updates
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.
Debt Schedule – Varsity by Zerodha
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.
A brave new world
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.
Investing in high growth, low profit businesses? – Z-Connect by Zerodha Z-Connect by Zerodha
A few interesting things
Nithin on when one should stop trading, market manipulation and stop-loss hunting.
Oh, and if you missed reading the first issue of the newsletter 👇
How much capital do you need to start trading? | Revue
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.
Did you enjoy this issue?
Zerodha Varsity

Markets, Trading, and Investing

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