Saturday, August 1, 2009

The Perfect Investor

I should point out that the perfect investor does not exist. Investors and traders must face volatility, drawdowns, flat periods in their trading/investing. The perfect investor will adjust to each of the adversities with agility, adapating quickly to new surroundings. But, the relity is likely to be different.

A lot of investing/trading performance has to do with management of expectations. We base our expectations of returns on previous history.

Returns on the Nifty
Let us assume that the perfect investor bought the Nifty right at the bear market low of 850 in September 2001. Almost 8 years later, the investor is looking at Nifty 4650, a gain of 3800 points, giving a return of 26.7% compounded annually. This is when the purchase was made at the absolute low.
Now, 26.7% is better, much better than interest on bank FD's.

If the Nifty were to continue growing at this rate (26.7%), after another 8 years, the Index will stand at 30879 (This is the Nifty, not the Sensex!). This is also the magic of compounding. This also assumes that you are not taking any money out of the profits, everything is getting compounded.

Here are some thoughts for us:
1. What are our expectations from investing? 26.7% per annum or more?
2. Are we compounding our gains?
3. Will the next 8 years see the same kind of gains as the past 8 years. In 2001 we started off with a low base. In 2009, we start off with the 'India Story'.

Personal experiences
I receive many visitors who wish to trade. I talk with them, trying to find out their reasons for trading. In most cases, it is the urge to make 'easy and quick money'. Often, they really need the money. My advice is: if you have a passion for trading, then trade small to get the required experience. For your monetary needs, please do not expect trading to meet them.

And expectations? Someone invests Rs three lakhs and wishes to meet the monthly expenses of Rs 25,000. This is really 100 % return per annum!

I always explain that trading is not meant for them. Many people listen, but many others go away to get the services of someone else. For those who insist on trading, the end result is always a substantial loss of capital.

Trading must be done always with spare money which is not needed by the trader to meet his regular expenses.In the initial years, there is a learning process so there should be no expectations.


microashish said...

wht indicator generally works for day trading ???? in case of moving average crossover wht shud be the period one shall take for looking intra-weekly-monthly

wht you think abt the market sir in august do you think we are moving towards 5000 or correction is likely till 4050???

men said...

Mr. Sudarshan, long back you gave us a sample portfolio, now with the markets at new highs could you please give us one again, for the medium(3-9 months) and LONG TERM(3-5 years).
Thanking you in advance.


Really a good piece of advise for traders.Whatever u said are true but its looks like bitter.

Truth is always bitter.

Warm regards.

@nubhut! said...

if i were to set aside three lac and trade four lots of nifty(about 60% capital deployed and rest to cater for drawdowns/M to M adjustment) as per a mechanical trading system(e.g trade vinayak), am i not likely to get about 1200 nifty pts in a year (which ur system is likely to get as per the results so far). after paying subscription of 90 thousand for the year, i still get about 1.5 lac . now that is 50% return . i have never traded but follow ur blog of late. am i wrong or too theoretical. but if i am correct, then the returns are much more than what you generally advice to expect. is there a caveat in it which i cant see

s.k said...

One of the best opinions I have come across.Gambling instinct attracts many to try their luck but in most cases market sucks.

Manoj said...

atleast 10 years of trading experience required before one reads the trend and make money

Ankush said...


There is nothing like spare money in this world. You cannot spare the money and feel that did not exist. But I agree that trading is compulsion to get good profits


vaibhav said...

HELLO Sudarshan ji -- i m regular reader of this blog and a subscriber of TRENDMECHANIC software -- devoloped by you -- what a real gem of advice for novice traders -- i congratulate u for such words of wisdom == WITH REGARDS -- DR VAIBHAV PUNE

Student Of Market said...

Trading must be done always with spare money which is not needed by the trader to meet his regular expenses.In the initial years, there is a learning process so there should be no expectations."

while I agree with the note of caution in the initial years, how can one trade with spare money if one is trading for a living?

Or do you not recommend trading as a living? In that case who is a professional trader and what kind of money does she trade with?

In my mind, if you are a professional trader, then the capital you are dealing with is your working capital and as in any business, you have to manage working capital. If the professional traders fails to generate surplus income out of that working capital, she professionally goes out of business.

Would like to understand your view on this.