Zerodha founder Nithin Kamath has some sane and simplistic advice for stock market investors. Kamath believes that everyone should attempt to trade the market because it teaches a “very important life skill”. He also pointed out the one mistake investors often make and how to keep that in check.
Kamath, who has been trading since 2000, spoke about trading along with its pitfalls in the SparX podcast with Mukesh Bansal, founder of Myntra and Cult.fit. “The thing about trading is that people don’t stop and it is not…as a stock broker my incentive should be telling everyone to keep trading…but you know, I mean everyone should attempt to trade the market because I think it teaches a very important life skill. I think the most important thing about trading is to know when to stop.”
The Zerodha founder explained that full-time trading is a full-time profession and it is hard to do something else along with it. The biggest reasons people lose money in the market, Kamath elaborated, are leveraging and going against the trend.
“In the last 25 years of being in this…if I blew up in 2001, it was essentially that. You took leverage, which is borrowed money and you wanted to go against the trend because people inherently like to go against the trend. When something’s going up, you think ‘oh it won’t go up anymore’. If something’s going down you think ‘oh it is falling too much’. You want to do the opposite and in Zerodha we have tracked so many traders and these two are by far the biggest reasons you lose money in the markets,” he said on the podcast.
According to Kamath, there are two kinds of people – one, investors who buy the stocks with no intention of selling. Within traders too, there are people who get into trading because of the momentum, who stay in it because the markets go up or want to sell because the markets are going down. Then there are the short-term traders who trade for a week, and 70-80 per cent of the trading volumes come from them. “Their view on the market is constantly changing,” he explained.
Kamath cited the example of Yes Bank stock that dipped from Rs 400 to Rs 200 and a lot of people bought it, and then it dipped to Rs 100 and more people bought it, and then it dipped to Rs 50 and even more people bought it. He wrote a blog explaining why it was not the best trick, he said.
“This whole thing is called a disposition effect, which gets you to sell things that are making you money and buying more of what is losing. You don’t want to accept the loss, you want to throw good money at bad money. That’s a problem most humans have,” he explained.
“What you need to do in the market is hold on to your winners and get out of your losers. But people generally tend to do the opposite. They get out of their winners very quickly to average down on the losers,” he said.
Leveraging, going against the trend and averaging down are the three top reasons why people lose money in the markets. “These are lessons I also learnt after blowing up. It is very easy to say but when you blow up with borrowed money and you have interest payments, life teaches you a lesson. I have become far more conservative in terms of risks, it was a life-lesson I could not forget,” said the Zerodha founder.
He said that trading is like getting on a tightrope and the more times one gets on it right, the higher the chances of falling right. “The ones who have survived are the people who think of risk very differently,” he said.
Also read: Diversification makes portfolio stronger, believes Zerodha’s Nikhil Kamath
