Investing & Trading lessons from Ant

 

Even Tiny Ants teach us Great Lessons!!!

What is the connection between the might man and a tiny ant?
A tiny insect too tiny to be seen is nothing to compare it with a man. But an ant can give a trader or investor many important lessons

 

  

1. Discipline:-

The sense of discipline among the ants is really amazing. Without lat mistake they march one after another in a line. How pleasant is their marching sight! Without any dispute or accident they move about in order.

 

Discipline is the foundation of all functional trading strategies. Without discipline, you will be harmed by the risks of active trading. These risks include fear, greed, and missed opportunity. Only by holding yourself accountable and remaining disciplined at all times will you be able to achieve your trading goals.

If you focus on your trading strategy before learning discipline, the details of your strategy will not really matter. Discipline is what makes successful trading strategies possible. Discipline is why technical indicator, risk management techniques, and trading principles pay off in the end.

 

2. Flexibility:

Any obstacle that put in an ants way, it is so flexible that it can either go underneath it, over it or around it. Flexibility is one of the great virtues of Ant.

 

 

A fundamental mistake many traders make is to forget to assess what type of market they are working with and adjust their approach accordingly. You must be able to quickly change your bias on price direction as new information (i.e. economic report, political events) arises.

Flexibility to adapt not only leads to survival in nature, but in the markets as well.  A single trader is not stronger than all the aggregate forces in the market.

 

3. Future anticipation & Planning:

Ant has tremendous planning ability with future anticipation. In summer, it starts planning for winter, like building up the anthill, collecting food and so on.  You must have read the story of ant and the grasshopper in your childhood

Trading is a game of anticipation with proper planning. Having a plan to be successful in any field of endeavor is highly recommended, but trading the market or any other financial instrument without a plan is almost a sure recipe for failure. Having goals set in advance and knowing when to get out of a trade make up an important part of successful trading.

 

4. Patient:

When winter arrives, Ant patiently waits for it to pass by and waits for summer

Patience is a virtue that is vital to success in trading. A large amount of patience is required in order to go through the learning curve. You need patience to wait for a trade where all the variables from your system align. And then patience is needed when in a position, in order to maximize profits.

“Everyone dreams of owning the Buffet portfolio but few have the patience.”

 

5. Never Give up:

An ant never quits. It struggles to the best of its ability and exhibits the attitude of ‘Winners never quit; quitters never win.’

Early on, new traders will want to give up. Particularly when they figure out that the first few years are more about studying and paying tuition in losses, than in making money. Trading is a two-sided competition, and you have to be on the right side of the trade to make profits. Not only does this not happen all the time, but many profitable traders only have 60% win rates. Half of the battle of successful trading is never giving up.

 

Power of exponential growth

 RAM and SHYAM both get two offers from the king of United Compoundland.

Each of them gets to choose only one.

Offer A: They can start getting 1 paise on day1, that will compound to double every day till the next 30 days.

OR

Offer B: They will start getting 100,000 ( 1 lac ) every day, till the next 30 days.

Without a second thought, SHYAM picked offer B. He knew that 1 paise will never be 30 lacs in 30 days.

RAM had to choose OFFER B. He was not very happy though.

Anyway, our story starts “compounding”.

 

Day1: 1 paise

Day2: 2 paise

Day3: 4 paise

Day4: 8 paise

Day5: 16 paise

Day6: 32 paise

Day7: 64 paise

Day8: Rs 1.28

Day9: Rs 2.56

Day10: Rs 5.12

Day11: Rs 10.24

Day12: Rs 20.48

Day13: Rs 40.96

Day14: Rs 81.92

Day15: Rs 163.84

Day16: Rs 327.68

Day17: Rs 655.36

Day18: Rs 1310.72

Day19: Rs 2621.44

Day20: Rs 5242.88

Day21: Rs 10485.76

Day22: Rs 20971.52

Day23: Rs 41943.04

Day24: Rs 83886.08

Day25: Rs 167,772.16

Day26: Rs 335,544.32

Day27: Rs 671,088.64

Day28: Rs 1,342,177.28

Day29: Rs 2,684,354.56

Day30: Rs 5,368,709.12

 

RAM and SHYAM were flabbergasted to see how 1 paise compounded and outpaced lacs in just 30 days.

Conclusion :

You should stick to a long-term strategy of saving and investing, partly because it allows the power of compounding to do much of the heavy lifting as you build wealth. “An average investor with a longer time horizon is going to have better results than an amazing investor with a shorter time horizon.

Taking advantage of compounding is relatively easy: Start as early as possible, make regular contributions, and avoid tapping your account if you can avoid it. That will help you stay on track to meet your future goals.

Power of Compounding

 

Many hundreds of years ago an inventor of chess board game introduced the game of chess to a wealthy king. The king was so pleased to see the beautiful game, he asked the traveler to name any reward.

The traveler said ‘All I ask for is some wheat. Just one grain on the first square of the chess board, two on the second, four on the third and so on, for all the squares on the board’.

The king, thought this was a modest request and quickly granted it and amazed that the man had asked for such a small reward – or so he thought.

 After a week, his treasurer came back and informed him that the reward would add up to an astronomical sum, far greater than all the rice that could conceivably be produced in many many centuries! the king soon realized that there was not enough wheat in his entire kingdom, or even the world, to meet the agreed reward.

The number of grains of wheat on the last square can be written as “2 to the 63th power”, or “2 times itself 63 times”, or                                         

                             18, 446,744,073,709,551,615 grains of wheat!!! ( 1200 times of global wheat production)

 

The tale be it factual or not , is often used by mathematician to explain the power of compounding

 

The wonder of compounding (in investing terms) is to make your money work, to transform it into a state-of-the-art, highly powerful income-generating tool. Compounding is the process of generating earnings on your asset's reinvested earnings. Compounding works on two basic premises: re-investment of earnings and time. 

 

Simply put, the longer time you leave your money to compound, the higher is the wealth you generate.

How our emotions changes with Market movement

 Investors are prone to make the same mistakes over and over again. Securities are bought high out of greed and sold low out of fear, despite knowing it nullifies their profits.

Investors want to make profits quickly and bull markets provide a great opportunity to make profits in a short period of time. When price keeps rising, more and more people invest more and more money in stocks. Stock prices follow the law of demand and supply. With higher demand (more money), prices keep rising further and profits grow. Growing profits fuel more greed and more money get invested raising prices to excessive levels. When asset prices get overheated it eventually corrects. Bear markets (falling markets) can be triggered by a number of factors but the most common factor is fear. When prices fall sharply, investors fear that it will fall more and sell in panic. As mentioned earlier, stock prices follow the law of demand and supply. In a bear market, supply of stocks is high since most investors want to sell in panic. Panic selling causes stock prices to fall sharply. Ultimately, prices fall to such low levels that stock valuations become attractive (cheap) and the markets eventually bottoms out.

 

The Cycle of Investor emotions:-

Below Picture describes all the different emotional states typically experienced by the majority of market participants:-

 

 

 

 

 

Optimism

Everything starts with a positive outlook towards the future that leads you to buy a stock.

Excitement

Markets start moving up towards your expectations and a feeling of anticipation and hope arises inside, you start to see the success.

Thrill

Market continues to go up, you are already earning and start to feel very confident of your investing decisions.

Euphoria

“You can’t miss opportunities”. Market grows, investments turn into quick and easy profits. Everyone wants to jump in: Who doesn’t want to make a ton of money risking as little as possible? The market is rising, isn’t it?

At this point, the financial risk is at it maximum, like the possible financial gain.

Anxiety

Things start to turn around, markets show the first signs of weakness but overall the sentiment for the long term is still bullish and you convince yourself that it is just a short correction.

Denial

The market correction is taking longer than you originally thought. Doubts start to arise and confidence in the long-term bull market turns into a strong hope for a short-term improvement.

Fear

At some point you have to compare your perception with the reality, maybe you haven’t been that smart. You would like to get out taking a small profit or even a small loss but you don’t act because you don’t know what to do, uncertainty is at its maximum.

Desperation

All chances of making a profit are lost at this point, you are really concerned about your investment and you strongly hope for anything that will bring our positions back into gain territory.

Panic

This is the period with the most emotional impact, where you feel helpless and really don’t know what to do, feeling without any degree of control on the situation, on your investments and on markets.

Capitulation

You sell your position at any price because you reached your breaking point. In a certain way, you are happy to get out of the stock market in order to avoid bigger losses.

Despondency

Your expectations have been disappointed, you got a strong loss from your investments, you feel bad and you don’t want to buy a stock ever again. This is the point of maximum financial opportunity for investors that are aware of what is going on and are willing to be contrarians.

Depression

This is the beginning of the aftermaths of the crash. You start thinking about what happened and ask yourself how you could have been that stupid. The key that makes the difference among investors here is if you start to look back to what happened and analyze what went wrong and start learning from from past mistakes.

Hope

Things start to gradually improve, the overall situation gets better and you realize that financial markets have cycles. You got some experience and you start to look around for new investing opportunities.

Relief

Markets are turning positive once again, you start to be faithful again and you convince yourself of your ability to invest your money. The cycle starts all over again.

Conclusion:-

 

• Overall investor sentiment frequently drives market performance in directions that are at odds with the fundamentals.
• The successful investor controls fear and greed, the two human emotions that drive that sentiment.
• Understanding this can give you the discipline and objectivity needed to take advantage of others' emotions.

 

 

How to overcome fear in stock market

 All market timers, traders, and investors in every kind of market feel fear at some level. Turn on the news one day and hear that a steep, unexpected selloff is taking place and most of us will get a queasy feeling in our stomachs and mind as well.

But the key to successful, profitable market timing—in fact, in all trading—is in how we prepare ourselves to handle trading fears. How we prepare to deal with the risks inherent in trading

There are four major trading fears. We will discuss them here with our fact check

Fear of losing : 

It’s a scientific fact that people will do irrational things to avoid loss. And one of the biggest fears people hold to is the fear of losing money.

The fear of making losses tends to make investors hesitant to execute their strategy with regard to timing. This can often lead to the inability to take timely action with respect to new entries as well as exits. The focus should ideally be on minimizing losses, as this allows investors to stay in the game, both financially and psychologically. Investors must have the ability to bear losses. However, in the event that they cannot guard their capital against potential losses and choose to remain

FACT Check :  Trading is dealing with probabilities never certainties, risk management & money management is the key to your success in stock market

"If you can’t take a small loss, sooner or later you will take the mother of all losses" – Ed Seykota

Fear of missing out:

Fear of missing out or FOMO is a situation where a trader is afraid of missing out on a huge trading opportunity in the market. FOMO is a common issue in financial trading and can affect anyone — both new traders with retail trading accounts and professional traders working for big institutions can experience fear of missing out.

The fear of missing out can be characterized as greed, largely owing to the fact that investors are not acting based on a desire to own a stock, but with a view to be a part of the market’s upside momentum. This has proved to be very risky for investors who take positions when the uptrend is mature and nearing its end.

FACT Check : 

Even expert cannot catch all moves in the market. Depending on your trading approach, some market conditions will be favorable to you,  and some will not.

Fear of letting a profit become a loss:

There is no reason to fear a loss, but one major sin is allowing a profit to turn into a loss.  We've all done it and every one of us have regretted not pulling the trigger earlier.  Oh, why didn't I sell it yesterday when I had a gain?

Unfortunately, most investors and traders choose to adopt a stance that is in opposition to the principle “let your profits run and cut your losses short.” Instead, they opt for making quick profits, while letting their losses spin out of control. Very often, they tend to equate their net worth with their self worth, and opt for making a quick profit that makes them feel like winners.

FACT Check : A trader must have a trading plan which clearly defined entries and exits, instead of trading based on emotions.

Fear of not being right:

The desire to focus on being right rather than on making money is a function of the investor’s ego. To be successful, this tendency should be avoided at all costs. Investors should strive for excellence and financial gain over a sustained period of time, rather than focusing on the fact that each buy or sell order they give should be an accurate one

FACT Check : There is zero correlation between your winning % and your profitability. Likewise, there is zero correlation between your IQ and your success as a trader.

Checking the performance of investments very frequently increases the chances of receiving negative news in the short term. This is not likely to play a major role in the process of investors attaining their long-term goals. If they react irrationally to this kind of news, as humans tend to do, they can seriously damage their long-term plans or goals.

Why Traders or Investor tends to hold onto loosing position and selling their profitable one

Investors or traders tend to feel twice as bad about a loss as they feel good about a gain of the same size. As a result, they end up holding onto (not “disposing” of) a losing position, hoping that it will regain its value.

Similarly as profit grow, fear of losing the gained profit also grow and ultimately an investor/trader ending up with selling profitable position and holding onto loosing one.

This happen due to loss aversion affect

What is loss Aversion ?

Loss aversion is common in cognitive psychology, decision theory, and behavioral economics. In our everyday lives, loss aversion is especially common when individuals deal with financial decisions.

An individual is less likely to buy a stock if it’s seen as risky with the potential for a loss of money, even though the reward potential is high. 

Research on loss aversion shows that investors feel the pain of a loss more than twice as strongly as they feel the enjoyment of making a profit

Example of loss aversion:

1.     Investing in low-return, guaranteed investments over more promising investments that carry higher risk.

2.    Not selling a stock that you hold when your current rational analysis of the stock clearly indicates that it should be abandoned as an investment.

3.   Selling a stock that has gone up slightly in price just to realize a gain of any amount, when your analysis indicates that the stock should be held longer for a much larger profit.

4.    Telling oneself that an investment is not a loss until it’s realized (i.e., when the investment is sold).

How to avoid  loss aversion :

    The answer is simple & of one line

RISK MANAGEMENT

1.    Calculate your risk before entering into a trade, determine your maximum loss before making any investment decision

2.    Try practicing Stop loss while trading or hedging your investment

3.    Take only calculated risk which you you can digest

4.    Purchase investments with relatively low price volatility

5.    Consciously remain aware of loss aversion as a potential weakness in your investing  decisions

These sayings carry important lessons about the markets

These sayings carry important lessons about the markets.

Many trading advice expressions have been coined to describe the dynamics of the stock market. These adages remind us to avoid traps and seize opportunities. Here are some of the most common ones that reflect important insights about the markets.

The trend is your friend

Some traders believe they need to behave differently in order to make smart investment decisions. The challenge is that the trend is reality. It represents the collective actions of all market participants.

When the broad market is trending higher or lower, so are most of the stocks in it. Rather than bucking the trend, acknowledge the direction of the overall market and plan your trades accordingly.

Don't try to catch a falling knife

This saying applies to buying a stock that is falling sharply. Just as it is dangerous to try and catch a knife falling to the floor, it can be just as risky to buy during an aggressive sell-off. If your analysis indicates that now is a good time to buy it, act accordingly. But, don't buy just because it is "on sale." We've all seen that item in the store that is marked down 10 percent and three weeks later is marked down 25 percent or more. Purchasing these "sale" items early on can put a dent in your trading account.

Buy the rumor and sell the news

This adage reminds us that rumors can drive a rally or a sell-off in a stock. People speculate on the impact of a rumor, and this speculation gets baked into the stock's price. If the rumor is proven to be true, then the impact might already be reflected in the price. If the rumor isn't true, then the stock is still likely affected. In short, remember that stocks often move on speculation and then adjust when the news is official.

 Be fearful when others are greedy and greedy only when others are fearful

There are long-term uptrends and downtrends but at a certain point the market pendulum will change direction. Timing is difficult but it is worth noticing when a company can seemingly do no wrong or do nothing right. During these times, think like a contrarian and don't become complacent.

This expression is counter to the idea that "the trend is your friend," but it is really more of a reminder that every trend will ultimately end, and it often seems to happen just when it feels like it will go on forever.

Bull markets climb a wall of worry

This expression highlights how markets often trend in spite of how people are feeling. What keeps a market moving higher is that there are more buyers entering the market. The opposite is true when a market keeps moving lower. If you're waiting for everyone to agree on the market, you could be waiting for a long time. Markets can go up when people are still queasy and can fall apart during seemingly good times.