It’s all in a day’s trade, but hey, get your timing correct
Stockmarkets, like women, can be addictive. Bhavik Rasikbhai Shah is mad about the stockmarket. He is into day trading and in spite of the fact that he had made losses in the past, he cannot give up on it. Every morning he gets up, logs on to the internet, and starts trading.
He generally closes his positions by the end of the day and starts every day on a clean slate. On the days he make money, he is happy. On the days he lose out, he looks forward to the next day.
In other words, he is an optimist, hoping that the best is yet to come. In the recent past, with the market going up most of the times, Shah has had a good run in the market and made some decent money. But will that continue? Well, your guess is as good as mine.
John Maynard Keynes, one of the greatest economists of all times, equated short-term investors like Shah to that of readers participating in newspaper beauty contests, which were very popular during the time Keynes lived -- the early part of the 20th century.
The contest required readers to pick the five prettiest women from a long list. Those readers who picked up the five prettiest women were rewarded by the newspaper.
But the readers based their choice not on what they thought were the prettiest women, but on those women other readers were likely to vote. As Keynes rightly put it, the readers had to figure out, "what average opinion expects average opinion to be".
Similarly, for a day trader to make money successfully every day, he has to have a feel of where the prices of stocks he has invested in are headed for at the end of the day.
Day traders have to time the market. In order to be successfully on that front, they are always on the lookout for innumerable predictions and rumours that keep appearing in various business dailies.
Every day, they have to have an opinion on where the stocks are headed towards the end of the day. Now, doing this successfully day in and day out is next to impossible. But then, day traders like Shah are addicted to trading, and come what may, they have to trade.
For people like Shah, Benjamin Graham, the guru of Warren Buffet, had some sane advice, "Mr Market has another endearing characteristic: He doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option".
Graham further said, "Mr Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.
"Indeed, if you aren't certain that you understand and can value your business far better than Mr Market, you don't belong in the game".
But like most things in life, an entire industry, whose only job is to satiate the information-hungry day trader, has sprung up.
So, the good part is that someone is benefiting from the activities of the day trader. Also, day traders bring liquidity to the market.
If every one in the market decide to be a long-term investor, and hold on to stocks, it would be particularly difficult to execute trades, as sellers would not find buyers and buyers would not find sellers.
(The example is hypothetical)
