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At Yahoo: Frequently Unanswered Questions

I answer Frequently Unanswered Questions in my Yahoo! column:

Over the last few months I’ve received a number of questions over email, for which I will profusely thank you. There are a few that I’d like to respond to collectively, because I have been unable to provide individual answers. I also realized the answers are useful to a broad audience.

I have Rs. 10,000. I want to make it 50,000 in a month. Tell me what stocks to buy.

There are many stocks that you can buy. You can buy[Snip], [Snip] and [Snip].(The stocks names will be released in the next version of Wikileaks.)

Honestly, if I knew that any one of them was going up 5x in a month, a quarter or even a year, chances are slim that I’d tell you. If I did tell you, you should be worried – because if I was telling someone who only sent me an email something as life changing as this, at no cost, I must be up to something. In fact, come to think of it, the only reason I would do it is if I owned the stock and wanted to pump it up before I dumped it. Luckily, I’m not that kind of person, and I recommend you stay away from such people.

Some of you are looking to make down payments on their cars or houses, but have way too little – and think buying a few stocks will make them that 2x or 3x multiple to get there. This is financial hara-kiri. Stock markets are not for short term money. And the short term is not for money you can’t afford to lose.

Don’t get me wrong. There’s a good reason we are all short term thinkers – our governments don’t seem to last too long, we have no real social security, we don’t know what will happen a few years from now. To counter that instability, we think short term – even our tax department decides that one year is enough to be called “long-term”. But when you think short-term, you have to learn to ride choppy waves near the coast rather than sail in the deep ocean – with great short-term returns comes great volatility.

There are many people who have made these kind of returns using instruments called “options”. Options are highly leveraged instruments and can make superheroes through their outsized returns. It can also destroy people much faster. To understand why – it’s not often that stocks go to zero – options, on the other hand, might go to zero every single month. When you work with options, you not only need to be right, you need to be right within a certain time. Additionally, in India, the only liquid options are very short term (one month to expiry or less) which means you have to track them closely. You might hear of people who have double their money trading options, but that’s just survivor bias. If you’re new to this game, I suggest you imagine a 50% chance of doubling versus losing all your investment – and then figure out how much you would invest.

To people who really want the names of the stocks, I realize this doesn’t help, but I can’t find a subtler alternative to what might sounds like, “Are you out of your [insert expletive] mind?”

Can you tell me how to make money trading?

This is a legitimate question, but usually comes with the hidden assumption that this could be learnt over a few minutes on email. It would be highly arrogant of me to suggest that I could, over a few words, make people fat wads of cash. No sir, that skill is reserved only for the political big-wigs of the country, as we’ve noticed recently. By and large, explaining the concepts of trading over email is like learning to ride the bicycle through instructions in morse code. Someone might have done it, but dash.

Trading isn’t complicated, except for the simplest parts. Which are, as borrowed from Ed Seykota’s rules:

1) Ride your winners

2) Cut your Losses Early

3) Manage Risk and Position Size

4) Ignore Friendly “Tips”, Warnings and Rumours

5) Trade according to your stomach lining – your ability to handle losses.

Oh, if you want more, here’s Dennis Gartman’s 22.

No matter how many rules you read, the learning is in actually putting your money in and trading. You can’t learn to swim by reading a book, and you can’t learn to trade by mugging up some rules. There needs to be a better ecosystem out there, bringing traders together and working with ideas; a number of stock investor groups do regular meets, and I do encourage you to check them out (search yahoo and groups groups for investing in India)

What I believe you shouldn’t do is to attempt trading as a side-business when you don’t have enough time to learn it. While that might work initially, it’s more likely to cause serious damage to your pocket and bring on extra stress.

I have bought “X” product or insurance policy. Was this a good idea?

What if I said just “Yes.” Or maybe, “No”?

It’s hopeless to hear these answers, because I don’t say why. But the chances of my being able to give you an appropriate answer are zero, so I might as well say one of the above. And this is not my being arrogant (just a smart alec) – I simply don’t know, and don’t have enough data to know.

If you’re 60 years old and well off, and have a tiny percentage of your money in a silly insurance policy, perhaps the correct thing is to wait. But if you’re much younger, have just put in all your money in it and you’re going to have a baby soon – the answer might change. In addition, certain products morph over time – so what someone has bought three years ago might have been a horrible product when it started, but over the years, due to regulatory changes or market pressure, may be better than currently available products. Like that 7.5% fixed rate loan, no changes ever, that a few people have got – that is such an awesome deal today, but there were people selling 7% floating rate loans earlier.

The correct solution might be to find an appropriate advisor who can take a look at your overall financial status and provide recommendations. Unfortunately, that’s a tough ask nowadays – with advisors largely keen to push products instead of providing advice – still, I believe there are enough people out there with the credentials, skill and inclination to help. Going with a “yeah” or “nay” over email achieves very little. All it will do is either play on your “confirmation bias”, where you involuntarily seek positive feedback to reinforce your decision in your mind, or it will introduce jitters about a decision from someone who doesn’t really know what you need.

I would like to give you a lot of money.

For some strange reason, I actually get a lot of such mails. But only from relatives of ex-Generals in Africa, unfortunately, and you know how that scam goes.

But if you really want to, I accept all forms of payment, except Zimbabwean dollars and, you guessed it, stock options.

 

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