A Veteran Trader's Dilemma in a Euphoric Market

Hello friends. This is Vijay Bhambwani here. I hope you're enjoying watching my videos, and my videos are able to help you to trade the markets better.

Now this video is about a contentious topic, at least in certain category of traders in the markets and about how these traders may be finding it a bit difficult to comprehend the new age markets.

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You see I'm getting a lot of feedback from a lot of friends and social media contacts. I chat a lot with people all over the place and the kind of feedback that I am getting is, Vijay, this market should have fallen a long time ago. We don't know why it's going up. The charts are overbought. The valuations are very rich. Stocks are overvalued as per value investing parameters. The PE ratios are high, etcetera, etcetera.

On the other hand, a recent survey by a very popular media channel, gave out the results that out of 10 intraday traders or short term traders active in the markets in India today, four are newbies. By newbies, I mean people who had no prior experience of trading in the market and a possibly under 30 years of age.

Thanks to the linking of Aadhaar and pan cards with your demat accounts and your brokerage accounts, it is now possible to a kind of pigeon hole or categorise traders, do a lot of data sort, toggle that data and come out with interesting findings thereof. So was really happening out here?

In the armed forces, old veteran soldiers who fought in more than one war or more than two wars, are called ratty diggers. Ratty diggers are people who, in spite of knowing that wars are dangerous, keep a going in to or volunteering in to a newer and newer war. And this is something that old time veteran traders are also called ratty diggers. So our ratty diggers, out of pace, out of step with the market? Do they have any hope? What are the challenges faced by them? And what do newbie traders the new entrants in the markets need to learn from them?

So, you see, I don't remember which particular year it was, but I think it was between 12 and 15 years ago, when you as old as I am, you tend to be more approximate than actually laser precise in terms of timings, as it happened so long ago that it's not possible. So it was between 12 and 15 years ago, when we had a debate on television. Some of you have been following my work in the television media between 2000 and 2016. Till then I was fairly frequent.

So we had a debate on very popular television channel as to how the markets have changed and how old timers were finding adapting to the new market a little challenging. Remember, this was approximately at the time of the beginning of the bull run which ended in 2008.

So the one thing that came out fairly prominently was and coming from a veteran trader who has been longer in the markets even longer than I am, he said, the one thing that had changed definitively is that he was in the market since the BSE Sensex was trading in three digits. That's correct. It was less than 1,000. So, he said when I've seen the BSE Sensex value of less than 1,000 and in those days, he said, when I'm seeing the intraday movement of 500 points or more, it creates a certain amount of block, a mental block or trading block.

Nowadays, current scenario specific, you are seeing volatility of 1,000 points fairly frequently on the BSE Sensex and on the Bank Nifty, it's almost every alternate day. Even the Nifty is trading between 300, 400, and 500 points intraday range a couple of times a month. So these are things that would be the primary stumbling block to a veteran trader.

Now, does this actually have any kind of a remedy? Or has any kind of a reprieve system wherein you could you basically grant yourself a reprieve and say, okay, I need to prolong my shelf life. So let me do something about this? The answer is yes.

Instead of taking the absolute rupee value in change of prices, for example, if you've seen, if you're used to the idea of seeing a stock trading between Rs 50 and Rs 80 for a couple of years, and suddenly that stock is now trading at Rs 500, Rs 800, Rs 1,000, I am sure it must be very familiar to many of you watching this video, you would be scratching your head as to when the heck that stock is going to fall because it's risen too much.

Now the point is that you and me and nobody to say that the market has risen or fallen too much. The market is the best judge of that. So what is the remedy here? Instead of looking at the rupee value of the absolute value of gains or declines look at it in percentage terms. How much has it changed in percentage terms over the last one day, three days, five days, you know, maybe a month or maybe a year. That lends a calmer perspective.

The other thing about veteran traders is that they have seen a lot in terms of market action. So if you're in the market as long as I have been, I came to the markets in 1986, a very different type of market, a public outcry system, two hours of trading in the BSE trading ring, no internet, no laptops, no cell phones, not even pagers existed then, and you basically had a quote driven market, which means one guy used to give you a two-way quote, one for buying one for selling.

So the next problem that many of the old timers would face is the explosion in volumes and open interest. Now, here again, basically resorting to a percentage change would give you a calmer and therefore a more balanced approach as to what is really happening.

When I say that old timers have seen a lot, they have seen the gulf war, one gulf war two, Rajiv Gandhi's assassination, you've seen earthquakes, we have seen tsunamis. You've seen the global financial crisis. You've seen the LTCM blowing up. You've seen the dotcom bust and a whole lot more. So is it possible that an average old timer could be resorting to or suffering from rather an analysis paralysis or an analysis over kill? The possibility exists, yes, it's possible. So what do you do?

On the other hand, you have an average newbie in his twenties or maybe very early thirties, who doesn't have the hindsight of experience and exposure to the market way back. He is now on the other extreme, gung-ho about being in the market at all times, raging to go into the market every morning with the hope of striking gold every day.

I am also in touch with a lot of traders, newbie traders, who are telling me enough horror stories to make me feel that I would rather err on the side of caution rather than get too aggressive and basically throw caution to the wind.

So there is a balance out here. Is not that the old timers a getting too cautious and the youngsters are right. The youngsters are throwing caution to the wind and of course, it's a part of the learning process. There's an old saying, every trader must go bankrupt at least once. But the idea is to go bankrupt when you're young enough and you have the energy and the willingness to come back and bounce back in the market.

I myself suffered a crunch. A bone breaking, bone crunching losses in the dot com bust. I was far younger then which is why I could basically bounce back. As you basically mature, your risk appetite tends to fall. It's a part and parcel of the growing up process you mellow down as a trader and therefore you try to play a careful hand, which is but natural. But if you try to take this worry a bit too long, it's like sitting on a wooden horse, a rocking horse. You think you're moving, but you're actually going up and down in the same place.

So there could be a possibility that older traders might be resorting to are suffering from analysis paralysis or expectation over kill. But on the other hand, the youngsters are being too careless.

The third aspect is the volatility. Now this is something that I keep pointing out on my social media accounts day in and day out. I don't believe in the VIX index. If you stroll down this a playlist on Equitymaster's YouTube channel, you will realise that last year, or maybe it was the end of 2020, I forget which I have made a video specifically saying why I choose to deliberately deploy statistical beta as a measure of volatility as compared to the VIX or the volatility index.

Now, if you see that video, you know, the kind of logic that I have put forth. Feel free to defer, of course, and comment and let me know what you think about it. But statistical beta is a much, much cleaner and more honest indicator and a gauge of price volatility day in and day out.

Believe me when I tell you this. In many components of the market, in many sectors of the market, volatility or statistical beta is at a decade and a half high. So the kind of volatility that you would have seen in the market in the present market merely two years ago, over a six month time frame we are seeing that kind of volatility in prices in one week. One week. Six months...one week.

Now that is something that older traders may or may not be able to handle very well for the simple reason like I told you, that risk appetite tends to crunch or tends to fall as a trader matures and mellows. Therefore, older traders might be feeling a little more cautious than the youngsters. But believe me when I tell you youngsters, take the metric statistical beta very, very seriously, because if it can make you rich overnight, it can also impoverish you overnight.

So if the old guard or the veterans or the ratty diggers, as they are called in the armed forces, are telling you to be cautious, I think it pays to listen to them. These are battle hardened soldiers, old timers, and like the old saying goes, you can teach too many new tricks to an old horse.

Now, where to from now? And how do you cope with the market that has changed? And it's not going back to the pre-covid era. The volatility is not going back. The valuation metrics are not going back. And the way the markets are becoming knee jerk, sporadic, and high beta is not quietening down very soon. Simple reason. That texture of the market has changed because the participants have changed. Remember four out of every 10 traders is an under 30 trader, who has never seen a bear market.

I would say start using more and more mathematical systems in your trading. Very simple. Basically, just take a calculator in your cell phone and start using percentages. Start looking at things from more analytical and mathematical point of view rather than use subjective studies only.

If you look at only charts, if you look at only PE multiples, if you look at only whatever it is that you use, maybe screen reading, maybe Astro, there are people who believe in astrological aspects of trading. I personally don't but I'm open to the idea of letting somebody else do their own thing. But do not rely only on one standalone study. The market has become a lot more complex. It's changed forever and is not going back to where it was where we were comfortable 5, 10, 15 or 20 years ago. This change is irreversible and it's time to come to grips with it.

So when an old timer tells you to be careful, do remember that these are extremely, extremely spooked out markets. Things are out of whack and volatility has it the roof. It's time to be careful, time to be cautious, maintain stop losses and trade light.

On this cautious note, I bid goodbye to you in this video not before reminding you to click like on this video if you liked what you saw. Click on the bell icon to subscribe to my channel if you haven't already done so. Good, bad or ugly in the comments section, I always welcome your feedback and hey, help me reach out to fellow like-minded investors and traders by referring my video to your family and friends.

I thank you for your patience and being with me and watching my video. I wish you all the safety from the omicron virus. I hope you and your family stay indoors and safe. Take very good care of yourself. Have a very profitable day. This is Vijay Bhambwani signing off for now. Take care. Bye.