Why Everyone Must Learn to Trade

Years ago Citibank used to have a catchy advertisement being aired on CNBC Asia that featured Clark Winter its chief global investment strategist.

It went something like this:

• "At Citibank we believe in focusing on our core competencies and hiring the best in the industry to do what we don't know."

It sounds like a robust strategy. But like almost everything in life it comes with pros and cons.

Can you depute someone to trade on your behalf and care for your capital as diligently as you would yourself? What about "human aspects" involved. Allow me to elaborate on the human aspect in greater detail.

When I address a gathering of people, the first question I ask them is - what is the mathematical probability of asking someone for buy or sell advice in the market and getting the right advice too?

Knowing that the outcome of the advice can either be right or wrong, most people say the probability is 50%

As Mr Bachchan would ask the contestant in KBC - lock kar diya jaye? (shall we lock the answer?). Most would still say yes!

But is it really so? What about the "human element?"

When you ask for buy or sell advice from someone, you are faced with three (not two!) outcomes -

1. Your advisor is competent and honest and delivers the right advice.
2. Your advisor is honest but just plain mistaken. You get wrong advice.
3. Your advisor is a certified crook and wants to offload his stock. He deliberately gives you misleading advice.

No matter which way you look at it, your odds of getting right advice don't seem better than 33.33% at best. Thanks to the human element.

As per behavioural finance, given an opportunity to benefit from taking "short cuts," human being will succumb to temptation and short change someone else. It happens everyday in financial markets. This is the "human element" that I was referring to.

You may say you know a friend who is a great analyst and gets his investments and trades right more often than wrong. You trust him. So you will take only his advice. You think your odds will improve substantially?

Not really!

He maybe a good pharma and automobile sector analyst but you maybe asking him about technology stocks. Refer to outcome number 2 above. Ouch!

We have all heard the cliched saying - trading is a game of probabilities and not certainties. It's all about getting a small edge over the crowds and you win big time.

If you really want a 50% probability of success in your trades, flip a coin! Think about it. A coin only has two sides to it so if you keep betting on "heads" every time the coin is tossed you have a 50% chance of winning.

Yet that is not how you would like to place your trades in the markets. You are right if you feel that is equivalent of playing Russian roulette with your money.

The problem with Mr Clark Winter's theory is that it assumes the "human element" does not exist.

The best thing to do is to learn to take your own trading decisions. Nobody else will look after your money as well as you can. No one else will feel the pain of a monetary loss as much as you will. No one else will be motivated to earn higher trading profits than you will.

I would go to the extent of saying - it's like exercise. You cannot depute someone else to do it for you.

If you don't feel too confident about trading on your own, do note that it's a skill that can be learnt. I will provide you ample anecdotal evidence about this in my next piece.

Trading is combat. Instead of guns and bullets, we use computers and keyboards. I would rather feel the ecstasy of winning and the grief of losing due to my own actions. That way I know I have put in my best efforts and there was nothing wanting in my endeavour.

Trading is about control. And you cannot retain control by deputing someone else to trade like Mr Clark Winter suggested.

Do check out the below video where I present my case about why you should at least consider making trading profits along with your long-term investments.

Have a profitable day.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...