I was talking to my friend & investor over the weekend – and he says “I never carry tension home. I purchase & sell the same day. Even if the stock is good and made me returns I do not keep it over the weekend. I just sell it and again buy next week if need to.” No wonder he does not invest in mutual funds. He wanted my validation but I could not offer him pleasing words!

The scenario made me think – DECIMATION. I will explain to you what it is.

Just notice the point in my conversation with my friend – He is justifying DAY TRADING or CHURNING.

His point was simple – he never suffered a big loss by this strategy. The losses did not carry over the next day and he could trade with a “free mind” and sleep over the weekend. Isn’t it what is needed in a good investment strategy – being stress-free?

Let us leave it here! and go back in history – the Roman History of War & Politics.

Decimation

Decimation was a strategy used by Roman Generals to discipline or punish their soldiers. Often the soldiers broke rank, command, or were involved in a mutiny.

Now think as a general… you are thousand of miles from your country & you have an unfinished war in hand. You cannot kill your entire legion or army. So what they did was – Practised Decimation.

In Decimation, the deserters will be made to draw lots. Normally 1% would be chosen to embrace punishment. One who got unlucky from this draw will be prosecuted by the same men who are lucky or survived the day. And this will not be an easy death – the unlucky ones will be beaten with crude sticks & weapons to draw blood and cause a barbaric scene.

This means you are at guilt too but will have to kill a person standing next to you. This may be, one who may have saved your life on some occasion, one who may be your brother or friend.

But even if you survived – DID YOU SURVIVE BECAUSE YOU WERE STRONG or JUST LUCKY?

Trading

Legendary Investor & Fund Manager Bharat Shah in his book “Of Long Term Value & Wealth Creation” says – Price  (action) is the slave of Earnings Growth.

James O’Shaughnessy the legendary investor and the Founder, Chairman & Chief Investment Officer of O’Shaughnessy Asset Management LLC (OSAM) says –

“Investors who use actively managed strategies make two major mistakes:

• React emotionally to a selloff in the market, which leads them to liquidate investments at the very wrong time.
• Sell out an active strategy that is doing worse than its benchmark, often in periods of less than three years.

Often, the second mistake occurs even when the investors may be earning positive returns on the strategy.

While both active and passive investors make the same mistakes by selling during volatility and challenging market conditions, only active investors fall into the second trap.

Great value investors like Warren Buffet, Benjamin Graham, Peter Lynch, Joel Greenblatt, have different views on how to look at stocks & markets but they all have one common trait – Patient & Persistence.

Pain in Holding

I have tonnes of data that shows trading has made very few returns against long-term buy & hold. But I am not making it a number game. But in life point is:

Most beautiful things you love – YOU HOLD.

Be it your work/job, your relationships, your investments, and even your favorite vacation in form of pictures & memories.

You hold on to your child’s innocence by clicking his notorious activities.

If you keep juggling between assets you are losing the last good thing you had in your hand. This is wrong conditioning of the mind that – HOLDING SOMETHING is a cause of unrest, stress & risk.

You just need to calibrate the thinking.

To Simplify:

You can make returns when corporate earnings appreciate and you are holding that corporate.

If you are just guessing price or rate – you are in the wrong league. When you trade frequently or churn, you are a part of a daily mass decimation. Surviving (make small profits) this decimation (the market is a zero-sum game -someone is making money when someone is losing) or getting bruised (making small losses), but this does not mean you are winning. You are just Lucky – I pray your luck continues.

Some More Readings for the Informed Minds